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NEONODE, INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included in this Annual Report. Overview Neonode develops and licenses MultiSensing™ touch user interfaces and optical multi-touch solutions. Based on zForce®, our patented touch technology, Neonode has developed a variety of features that sense an object's size, its pressure on a surface, its depth, its velocity and even its proximity to any type of surface. Neonode licenses MultiSensing touch technology to Original Equipment Manufacturers ("OEMs") and Original Design Manufacturers ("ODMs") who embed our technology into devices that they produce and sell. Our technology licensing model allows us to focus on the development of solutions for multi-touch enabled screens, and thus we do not manufacture products or components. We license the right to use zForce and Neonode MultiSensing software which, together with standard components from partners, create an optical touch solution. During the year ended December 31, 2012, we had seven customers using our touchscreen technology in products that were shipping products to customers. We had an additional seventeen customers with signed license agreements currently in the product development stage. In most circumstances, our target customers will have to successfully integrate our technology into their products and then sell those products to their customers before we will receive any cash from our technology license agreements. The number of customers shipping products has increased in 2012 compared to 2011 and 2010 as customer products incorporating our touch technology complete the design phase and are released to the market. The majority of our license fees currently earned in 2012, 2011 and 2010 are from customer shipments of eReader products. In the fourth quarter of 2012, Oregon Scientific began shipping its MEEP children's tablet. We expect to have other customers to begin shipping products such as mobile phones, printers, tablets, GPS devices, children's tablets and automotive infotainment systems in 2013. License fees earned from customer shipments of eReaders are expected to decrease as a percentage of total revenue as other customer products are introduced to the market. In the fourth quarter of 2012, Amazon discontinued shipping its Kindle e-Readers that incorporated our touch technology. Amazon accounted for 32% of our total net revenue in 2012 and 40% of our total net revenue in 2011. We don't anticipate receiving any future near-term revenues from Amazon. As of December 31, 2012, we had twenty-four signed technology license agreements with global OEMs. This compares with twelve and four signed technology license agreements with global OEMs as of December 31, 2011 and 2010, respectively. Seven of our customers are currently shipping products and we anticipate others will initiate product shipments as they complete their final product development and manufacturing cycle throughout 2012. In the first quarter of 2013 to date, we signed technology license agreements with four new customers in the mobile phone, automotive and tablet markets. In addition, we are currently developing prototype products and are engaged in product engineering design discussions with numerous global OEMs who are in the process of qualifying our touchscreen technology for incorporation in various products such as printer products, GPS devices, e-Readers, Tablet PCs, touch panels for automobiles, household appliances, mobile phones and games and toys. The development and product release cycle for these products typically takes six to eighteen months. 17 -------------------------------------------------------------------------------- Current and future drivers of the touchscreen market include mobile phones, printers, automotive, household appliances, tablet PCs, e-Readers, navigation screens, etc. The proliferation and mass market acceptance of touchscreens have prompted new applications and uses for existing and new offerings, thus making the production and utilization of these modules one of the fastest growing tech segments. The typical sales cycle is six to eighteen months with new customers while existing customer lead times are typically six to nine months. During the initial cycle, there are three phases: evaluation, design, and commercialization. In the evaluation phase, prospects validate the Neonode technology using a Neonode evaluation kit and may produce short runs of prototype products. During the design phase, true product development and solution definition begins. This phase tends to be the longest and delays typically occur which may extend the term of the overall cycle. In the final phase, commercialization, the customer enters into full production mode, ships products to the market and Neonode earns its license revenue. Critical Accounting Policies and Estimates The preparation of our consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of Neonode Inc. and its wholly-owned subsidiary based in Sweden, Neonode Technologies AB. All inter-company accounts and transactions have been eliminated in consolidation. The accounting policies affecting our financial condition and results of operations are more fully described in Note 2 to our consolidated financial statements. Certain of our accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. The historical experience and assumptions form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenue and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following are critical accounting policies and related judgments and estimates used in the preparation of our consolidated financial statements. Estimates The preparation of financial statements in conformity with GAAP requires making estimates and assumptions that affect, at the date of the consolidated 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. Significant estimates include, but are not limited to, collectability of accounts receivable, recoverability of long-lived assets, the valuation allowance related to our deferred tax assets and the fair value of options and warrants issued for stock-based compensation. Revenue Recognition Engineering Services: We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue. Generally, we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers. Licensing Revenues: We also derive revenue from the licensing of 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. The IP licensing agreements generally include a nonexclusive license for the underlying IP. Fees under these agreements may include license fees relating to our IP and royalties payable following the production 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. 18 --------------------------------------------------------------------------------Accounts Receivable and Allowance for Doubtful Accounts Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of our customers when determining or modifying their credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer's account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer's operating results or financial position, or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors, including the length of time the receivables are past due and our historical collection experience with customers. Product Research and Development Research and development ("R&D") costs are expensed as incurred. R&D costs consist mainly of personnel related costs in addition to some external consultancy costs such as testing, certifying and measurements. Stock-Based Compensation Expense We measure the cost of employee services received in exchange for an award of equity instruments, including share options, based on the fair value of the award on grant date, and recognize it as compensation expense over the period the employee is required to provide services in exchange for the award, usually the vesting period, net of estimated forfeitures. We account for equity instruments issued to non-employees at their fair value. The measurement date for the fair value for the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached, or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instruments is primarily recognized over the term of the consulting agreement. The fair value of the stock-based compensation is periodically re-measured and income or expense is recognized during the vesting term. 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. Foreign Currency Translation and Transaction Gains and Losses The functional currency of our foreign subsidiary is the applicable local currency, the Swedish Krona. The translation from Swedish Krona 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). Gains or losses resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations and were ($50,000), ($44,000) and ($23,000) during the years ended December 31, 2012, 2011 and 2010, respectively. For the years ended December 31, 2012, 2011 and 2010, our foreign currency translation gains (losses) totaled ($8,000), $76,000 and $33,000, respectively. 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 period. 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 year ended December 31, 2012, 2011 and 2010, respectively, exclude the potential common stock equivalents, as the effect would be anti-dilutive. 19 --------------------------------------------------------------------------------Comprehensive Loss Our comprehensive loss includes foreign currency translation gains and losses as a result of consolidation. The cumulative amount of translation gains and losses are reflected as a separate component of shareholders' equity in accumulated other comprehensive income. 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. The weighted average exchange rate for the consolidated statements of operations was 6.78, 6.5 and 7.21 Swedish Krona to one U.S. Dollar for the years ended December 31, 2012, 2011 and 2010, respectively. The exchange rate for the consolidated balance sheets was 6.52 and 6.92 Swedish Krona to one U.S. Dollar as of December 31, 2012 and 2011, respectively. Deferred Revenue As of December 31, 2012 and 2011, we have $2.1 million and $1.5 million, respectively, of deferred license fee revenue related to prepayments for future license fees from three and one customers, respectively, and a total of $0.6 million and $0.4 million, respectively, of deferred engineering development fees from thirteen and four customers, respectively. We defer the license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed or licensed by the Company's customers and the engineering development fee revenue until such time as the engineering work has been completed and accepted by our customers. New Accounting Pronouncements In January 2010, the Financial Accounting Standards Board ("FASB") issued guidance that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for gross presentation of activity in level 3 which is effective for annual periods beginning after December 15, 2010, and for interim periods in those years. We adopted the guidance for new disclosures for fair value measurements and clarification for existing disclosure requirements as of January 1, 2010 and there was no material impact on our consolidated financial statements. Additionally, we adopted the guidance regarding level 3 activity on January 1, 2011 and there was no material impact to our consolidated financial statements. See Note 7, "Fair Value Measurements" to our consolidated financial statements included elsewhere in this Annual Report for additional information on the fair value of financial instruments. In May 2011, the FASB amended fair value measurement and disclosure guidance to achieve convergence with International Financial Reporting Standards ("IFRS"). The amended guidance modifies the measurement of fair value, clarifies verbiage, and changes disclosure or other requirements in U.S. GAAP and IFRS. The guidance is effective during interim and annual periods beginning after December 15, 2011. We adopted the guidance as of January 1, 2012 and there was no material impact on our consolidated financial statements. Results of Operations Net Revenue Net revenue for the year ended December 31, 2012 was $7.1 million, compared to $6.1 million and $440,000 for the year ended December 31, 2011 and 2010, respectively. Our net revenue for the year ended December 31, 2012 included $6.2 million from technology license fees from product shipments from eight customers and $925,000 in non-recurring engineering services related to our touchscreen solution from fifteen customers. Our net revenue for the year ended December 31, 2011 included $5.8 million from technology license fees from four customers and $287,000 in non-recurring engineering services related to our touchscreen solution from six customers. Under the terms of one of our contracts entered into in 2010, the customer prepaid $3.0 million of technology licenses prior to shipment of its first product. The $3.0 million pre-payment was included in deferred revenue and was amortized to revenue as units were licensed or distributed. For the year ended December 31, 2012 and 2011, $536,000 and $1.5 million in license fees related to units licensed or distributed under the $3.0 million prepayment have been recognized as revenue, respectively, and as of December 31, 2012, $1.0 million remained in deferred revenue from this customer's prepayment. Our net revenue for the year ended December 31, 2010 was $440,000 and includes $387,000 in fees for engineering design services from five customers, $50,000 for the sale of components to one customer, and $3,000 from technology license fees related to our touchscreen solution from one customer. 20 --------------------------------------------------------------------------------As of December 31, 2012, we had twenty-four signed technology license agreements with global OEMs. This compares with twelve and four signed technology license agreements with global OEMs as of December 31, 2011 and 2010, respectively. Seven of our customers are currently shipping products and we anticipate others will initiate product shipments as they complete their final product development and manufacturing cycle throughout 2012. Gross Margin Gross margin was $5.7 million for the year ended December 31, 2012 compared to $5.2 million and $172,000 for the years ended December 31, 2011 and 2010, respectively. Our cost of revenues includes the direct cost of production of certain customer prototypes, costs of company employed engineering personnel and engineering consultants to complete the engineering design contract. Our gross margin has increased due to the increase in our total revenue particularly our license fee revenue. The gross margin related to our license fees is 100% and when license fees as a percentage of our total revenue increase our gross margin will increase. Product Research and Development Product research and development ("R&D") expenses for each of the year ended December 31, 2012 were $5.7 million compared to $1.9 million for both the years ended December 31, 2011 and 2010. R&D costs consist of the cost of prototypes and other materials, consultants, and the amount of time our engineering department spent engaged in customer specific activities. We continue to pursue and expand R&D expenditures on the development of our touchscreen and other technologies. We have a development roadmap based on our touchscreen and other technologies. As of December 31, 2012, our R&D department had twenty-six full-time employees. Our R&D department had eighteen full-time employees compared to eight full-time employees and one part-time consultant at December 31, 2011 and 2010, respectively. Included in R&D expenses are approximately $315,000 of non-cash stock option and warrant expense for the year ended December 31, 2012 compared to approximately $11,000 and $0 for the same periods in 2011 and 2010, respectively. Sales and Marketing Sales and marketing ("S&M") expenses for the year ended December 31, 2012 were $4.4 million, compared to $1.8 million and $566,000 for the years ended December 31, 2011 and 2010, respectively. This increase in 2012 as compared to 2011 and 2010 is primarily related to an increase in sales personnel, marketing, trade shows and travel expenses. As of December 31, 2012, our sales and marketing department has twelve full-time employees compared to nine full-time employees and three employees at December 31, 2011 and 2010, respectively. Included in S&M expenses are approximately $1.4 million of non-cash stock option and warrant expense for the year ended December 31, 2012 compared to approximately $99,000 and $140,000 for the same periods in 2011 and 2010, respectively. Our sales activities focus primarily on OEM customers who will integrate our touchscreen technology into their products. Our OEM customers will then sell and market their products incorporating our technology to their customers. 21 --------------------------------------------------------------------------------General and Administrative General and administrative ("G&A") expenses for the year ended December 31, 2012 were $4.7 million compared to $3.5 million and $3.6 million for the years ended December 31, 2011 and 2010, respectively. The increase in the year ended December 31, 2012 compared to 2011 and 2012 is primarily due to an increase in headcount and legal fees, particularly legal fees related to patent filings. As of December 31, 2012 we had seven full-time employees in our G&A department fulfilling management and accounting responsibilities compared to three employees and one part-time consultant as of both December 31, 2011 and 2010. Included in G&A expenses are approximately $1.8 million of non-cash stock option and warrant expense for the year ended December 31, 2012 compared to approximately $439,000 and $2.1 million for the same periods in 2011 and 2010, respectively. The slight decrease in 2011 as compared to 2010 is primarily related to a decrease in non-cash fair value of warrants issued to employees that was partially offset by an increase in patent related legal fees and financial consultant costs. Amortization of Fair Value of Stock Issued to Related Parties for Purchase of Neonode Technologies AB On December 29, 2008, we entered into a Share Exchange Agreement with Neonode Technologies AB and the stockholders of Neonode Technologies AB: Iwo Jima SARL, Wirelesstoys AB, and Athemis Ltd (the "Neonode Technologies AB Stockholders"), pursuant to which we agreed to acquire all of the issued and outstanding shares of Neonode Technologies AB in exchange for the issuance of 19,800 shares of the Company's Series A Preferred stock. Pursuant to the terms of the Share Exchange Agreement, upon the closing of the transaction, Neonode Technologies AB became a wholly owned subsidiary of the Company. The Neonode Technologies AB Stockholders are or were employees of us and/or Neonode AB, and as such were related parties. The fair value of the conversion feature of the 19,800 shares of Series A Preferred shares issued to the related parties to acquire Neonode Technologies AB that were converted into a total of 9,516,447 shares of our common stock was $9.5 million based on our stock price on March 31, 2009, the date our shareholders approved the increased conversion ratio. Because this transaction was essentially the issuance of shares to key employees for their continued service to enhance the Company, the $9.5 million revised fair value of the common stock has been amortized to compensation expense at the rate of $1.6 million per quarter for six quarters beginning January 1, 2009. The amortization of the $9.5 million in compensation expense related the value of the stock issued to the related parties to acquire Neonode Technologies AB was completed on June 30, 2010. For the year ended December 31, 2010, $3.2 million has been recorded as compensation expense in our consolidated statement of operations. Interest Expense Interest expense for the year ended December 31, 2011 was $288,000, compared to $179,000 for the year ended December 31, 2010. The increase is primarily due to an increase in the outstanding debt balance from $2.8 million at December 31, 2010 to $4.2 million for the majority of the year ended December 31, 2011. We did not have any interest expense for the year ended December 31, 2012. Foreign Currency Translation and Transaction Gains and Losses The functional currency of our foreign subsidiary is the applicable local currency, the Swedish Krona. The translation from Swedish Krona 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 loss. Gains or losses resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations and were $50,000, $44,000 and $23,000 during the years ended December 31, 2012, 2011 and 2010, respectively. Foreign currency translation gains (losses) were ($8,000), $76,000 and $33,000 during the years ended December 31, 2012, 2011 and 2010, respectively. 22 --------------------------------------------------------------------------------Non-Cash Items Related to Debt Discounts and Deferred Financing Fees and the Valuation of Conversion Features and Warrants Non-cash items related to debt discounts and deferred financing fees and the valuation of conversion features and warrants for the year ended December 31, 2011 was $14.7 million, compared to $20.0 million for the year ended December 31, 2010. The amount in 2011 includes $8.6 million in net change in derivative liabilities, $4.3 million of debt discount and debt issuance cost amortization, $1.5 million in excess amount of debt discount recognized as interest expense associated with derivatives, and $0.4 million associated with the fair value of shares issued for bonus interest related to the automatic conversion of the Senior Convertible Secured Notes - 2011. The amount in 2010 includes $16.3 million in net change in derivative liabilities, $2.7 million of debt discount and debt issuance cost amortization, and $1.0 million in excess amount of debt discount recognized as interest expense associated with derivatives. Loss on extinguishment of debt Loss on extinguishment of debt for the year ended December 31, 2010 of $2.4 million was primarily the result of the warrant repricing and debt extension financing transaction. During September and October 2010, all of the holders of the convertible notes and the holders of the stock purchase warrants issued in the 2009 and 2010 Senior Secured Convertible Debt Financing Transactions agreed to extend the maturity date of their convertible debt from December 31, 2010 to June 30, 2011. In addition, holders of 2,766,857 stock purchase warrants also agreed to exercise their previously granted three-year warrants for a discounted exercise price. In accordance with relevant accounting guidance, the transaction qualified for debt extinguishment accounting. Income Taxes Our effective tax rate was 0% in the year ended December 31, 2012, 2011 and 2010, respectively. We recorded valuation allowances in 2012 and 2011 for deferred tax assets related to net operating losses due to the uncertainty of realization. Net Loss As a result of the factors discussed above, we recorded a net loss of $9.3 million for the year ended December 31, 2012, compared to a net loss of $17.1 million and $31.6 million for the years ended December 31, 2011 and 2010, respectively. 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 noted above. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support; or 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. 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; our actual versus anticipated operating expenses; the timing of our OEM customer product shipments; the timing of payment for our technology licensing agreements; our actual versus anticipated gross profit margin; our ability to raise additional capital, if necessary; and our ability to secure credit facilities, if necessary. 23--------------------------------------------------------------------------------At December 31, 2012, we had cash of $9.1 million, as compared to $12.9 million at December 31, 2011. Working capital (current assets less current liabilities) was $7.7 million at December 31, 2012, compared to an adjusted working capital of $13.6 million at December 31, 2011. Net cash used in operating activities for the year ended December 31, 2012 was primarily the result of (i) a net loss of approximately $9.3 million and (ii) approximately $1.9 million in net cash provided by changes in operating assets and liabilities, primarily accounts receivable and deferred revenue. Cash used to fund net losses is reduced by approximately $3.6 million in non-cash operating expenses, mainly comprised of depreciation and amortization and stock-based compensation. Accounts receivable decreased approximately $1.3 million at December 31, 2012 compared with December 31, 2011, primarily as a result of net revenues of approximately $2.3 million in the fourth quarter of 2012 compared to approximately $4.0 million in the fourth quarter of 2011. During 2012 and 2011, we were successful in collecting cash from sales to our customers substantially in accordance with our standard payment terms to those customers. Deferred revenue increased approximately $0.8 million during 2012 primarily as a result of additional license technology agreements and engineering projects entered into during 2012 as compared to 2011. Net cash used in operating activities for the year ended December 31, 2011 was primarily the result of (i) a net loss of approximately $17.1 million and (ii) approximately $1.6 million in net cash used by changes in operating assets and liabilities, primarily accounts receivable and deferred revenue. Cash used to fund net losses is reduced by approximately $15.3 million in net non-cash operating expenses, mainly comprised of stock-based compensation and discounts and deferred financing fees and the valuation of conversion features and warrants. Accounts receivable increased approximately $3.2 million at December 31, 2011 compared with December 31, 2010, primarily as a result of net revenues of approximately $4.0 million in the fourth quarter of 2011 compared to approximately $81,000 in the fourth quarter of 2010. During 2011 and 2010, we were successful in collecting cash from sales to our customers substantially in accordance with our standard payment terms to those customers. Deferred revenue increased approximately $1.4 million during 2011 primarily as a result of additional license technology agreements and engineering projects entered into during 2011 as compared to 2010. Net cash used in operating activities for the year ended December 31, 2010 was primarily the result of (i) a net loss of approximately $31.6 million and (ii) approximately $0.04 million in net cash used by changes in operating assets and liabilities. Cash used to fund net losses is reduced by approximately $5.4 million of non-cash stock-based compensation, $2.4 million of loss on extinguishment of debt and $20.0 million on discounts and deferred financing fees and the valuation of conversion features and warrants. In the years ended December 31, 2012, 2011 and 2010, we purchased $310,000, $114,000 and $14,000, respectively of fixed assets, consisting primarily of computers and engineering equipment. Net cash provided by financing activities totaled approximately $200,000 during the year ended December 31, 2012 from the exercise of warrants for shares of our common stock. Net cash provided by financing activities for the year ended December 31, 2011 was approximately $15.5 million, which consist of net proceeds of approximately $4.2 million from issuances of convertible debt, net proceeds of approximately $500,000 from exercise of warrants and net proceeds of approximately $10.8 million from issuances of common stock. Such increases were offset by repayment of convertible debt of approximately $30,000. Net cash provided by financing activities for the year ended December 31, 2010 was approximately $4.1 million, which consist of net proceeds of approximately $1.6 million from issuances of convertible debt, net proceeds of approximately $50,000 from exercise of warrants and net proceeds of approximately $2.4 million from issuances of common stock. 24 --------------------------------------------------------------------------------Historically, the majority of our cash has been provided by borrowings from senior secured notes and bridge notes that have been convertible into shares of our common stock or from the sale of our common stock and common stock purchase warrants to private investors. During 2011, we raised approximately $15.5 million through debt and equity offerings. We believe we have sufficient cash to operate for at least the next twelve months. 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 credit line facilities from financial institutions, additional private equity investment 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 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, if funds 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 subsidiary is the applicable local currency, the Swedish Krona, and is 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 will impact Neonode's future operating results. |