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NEONODE, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some forward-looking statements by the use of words such as "believes," "anticipates," "expects," "intends" 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 uncertainty of growth in market acceptance for our technology, a history of losses since inception, our ability to remain competitive in response to new technologies, the costs to defend, as well as risks of losing, patents and intellectual property rights, a reliance on our future customers' ability to develop and sell products that incorporate our technology, our customer concentration and dependence on a limited number of customers, the uncertainty of demand for our technology in certain markets, our ability to manage growth effectively, our dependence on key members of our management and development team, our limited experience in conducting operations internationally, 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'' contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and in our publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the date hereof. Actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. We do not undertake any responsibility to update or revise any of these factors or to announce publicly any revisions to forward-looking statements, whether as a result of new information, future events or otherwise. The following Management's 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 ended December 31, 2012 included in our Annual Report on Form 10-K. 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 three months ended March 31, 2013, we had six customers using our touchscreen technology in products that were shipping 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. As of March 31, 2013, we have signed twenty-eight technology license agreements with global OEMs. Subsequent to March 31, 2013, we signed one new license agreement with a global OEM to develop a multi-sensing touch solution for their banking Automatic Teller Machines ("ATM"). 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 2013. 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 laptop computers, printer products, GPS devices, e-Readers, tablets, 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. 19 -------------------------------------------------------------------------------- Results of Operations Net Revenues Net revenues for the three months ended March 31, 2013 and 2012 was $548,000 and $1.2 million, respectively. Our net revenues for the three months ended March 31, 2013 included $539,000 from technology license fees related to product shipments by six customers plus $9,000 in fees for engineering design services related to our touch screen solution for another customer. Our net revenues for the three months ended March 31, 2012 included $896,000 from technology license fees related to product shipments by four customers plus $268,000 in fees for engineering design services related to our touch screen solution for other customers. Gross Margin Gross margin was $532,000 and $915,000 for the three months ended March 31, 2013 and 2012, 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 decreased due to the decrease 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 decrease our gross margin will decrease. Product Research and Development Product research and development ("R&D") expenses for the three month period ended March 31, 2013 were $1.6 million compared to $687,000 for the same period in 2012. R&D costs mainly consist of personnel related costs in addition to some external consultancy costs such as testing, certifying and measurements along with costs related to developing and building new product prototypes. We continue to pursue and expand R&D expenditures on the development of our touchscreen and other technologies. As of March 31, 2013, our R&D department has twenty-nine full time employees compared to seventeen at March 31, 2012. Included in R&D expenses are approximately $60,000 of non-cash stock option and warrant expense for the three months ended March 31, 2013 compared to approximately $10,000 for the same period in 2012. Sales and Marketing Sales and marketing ("S&M") expenses for the three month period ended March 31, 2013 were $805,000 compared to $799,000 for the same period in 2012. This increase in 2013 as compared to 2012 is primarily related to non-cash stock option expense in 2013 related to stock options issued to employees in the second quarter of 2012 that was offset by a reduction in overall marketing expense and travel. Included in S&M expenses are approximately $196,000 of non-cash stock option and warrant expense for the three months ended March 31, 2013 compared to approximately $24,000 for the same period in 2012. 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. General and Administrative General and administrative ("G&A") expenses for the three months ended March 31, 2013 were $1.7 million compared to $995,000 for the same period in 2012. This increase in 2013 as compared to 2012 is related to an increase in finance department staff that took place in the second and third quarters of 2012 and an increase in legal fees related to patent filings and customer contract reviews. In addition, there was an increase in non-cash stock option expense in 2013 related to stock options issued to employees and members of our Board of Directors in the second quarter of 2012. Included in G&A expenses are approximately $330,000 of non-cash stock option and warrant expense for the three months ended March 31, 2013 compared to none for the same period in 2012. 20 -------------------------------------------------------------------------------- Income Taxes Our effective tax rate was 0% in the three months ended March 31, 2013 and 2012, respectively. We recorded valuation allowances for the three month periods ended March 31, 2013 and 2012 for deferred tax assets related to net operating losses due to the uncertainty of realization. In the event of future taxable income, our effective income tax rate in future periods could be lower than the statutory rate as such tax assets are realized. Net Loss As a result of the factors discussed above, we recorded a net loss of $3.6 million for the three month period ended March 31, 2013, compared to a net loss of $1.6 million in the comparable period in 2012. 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 operating leases. 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 financial statements. Contractual Obligations and Commercial Commitments Non-Recurring Engineering Development Costs Neonode and Texas Instruments Inc. ("TI") entered into an Analog Device Development Agreement ("Agreement") on January 24, 2010 where TI integrated Neonode's intellectual property into an Application Specific Integrated Circuit (" ASIC") developed by TI. The TI ASIC is designated as NN1001 and can be sold by TI exclusively to licensees of Neonode. Under the terms of the Agreement, Neonode is obligated to contribute $500,000 of non-recurring engineering development costs ("NRE") to TI based on shipments of the NN1001. In the three months ended March 31, 2013, $217,600 of NRE expense related to this agreement is included in product research and development on the condensed consolidated statement of operations. As of March 31, 2013, no cash payment had been made to TI. Operating Leases We lease office space in one U.S. location. Outside the U.S., we lease office space in Stockholm, Sweden and Tokyo, Japan. The future minimum lease payments under all of our non-cancelable operating leases with an initial term in excess of one year as of March 31, 2013 were $571,000. There have been no material changes in those obligations during the first three months of fiscal 2013. On April 16, 2013, Neonode Technologies AB renewed a lease with No Picnic for 2,853 square feet of office space located at Storgatan 23C, Stockholm, Sweden for approximately $14,000 per month including property tax (excluding VAT). The annual payment for this space equates to approximately $174,000 per year including property tax (excluding VAT). This lease is valid through April 15, 2014. 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; 21 -------------------------------------------------------------------------------- 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. At March 31, 2013, we had cash of $7.6 million, as compared to $9.1 million at December 31, 2012. Working capital (current assets less current liabilities) was $4.9 million at March 31, 2013, compared to working capital of $7.7 million at December 31, 2012. Net cash used in operating activities for the three months ended March 31, 2013 was primarily the result of (i) a net loss of approximately $3.6 million and (ii) approximately $1.3 million in net cash provided by changes in operating assets and liabilities, primarily accounts receivable. Cash used to fund net losses is reduced by approximately $0.6 million in non-cash operating expenses, comprised of depreciation and amortization and stock-based compensation. Accounts receivable decreased approximately $1.3 million at March 31, 2013 compared with December 31, 2012, primarily as a result of a decrease in net revenues from approximately $2.3 million in the fourth quarter of 2012 compared to approximately $0.6 million in the first quarter of 2013. During the three months ended March 31, 2013, we were successful in collecting cash from net revenues to our customers in accordance with our standard payment terms. Deferred revenue increased approximately $0.2 million during the three months ended March 31, 2013 compared with December 31, 2012, primarily as a result of additional license technology agreements and engineering projects entered into during the three months ended March 31, 2013. In the three months ended March 31, 2013, we purchased $28,000 of property and equipment, primarily computers and test equipment. Net cash provided by financing activities was the result of net proceeds of $167,000 received in connection with the exercise of stock options for shares of our common stock during the three months ended March 31, 2013. We believe we have sufficient cash to operate for 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. We may from time to time raise capital under our current shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. At March 31, 2013, there were 1,000,000 shares that remained registered and available for issuance under our shelf registration. The functional currency of our foreign subsidiaries in Sweden is the Swedish Krona and in Japan is the Japanese Yen. They are subject to foreign currency exchange rate risk. Any increase or decrease in the exchange rate of the U.S. Dollar compared to the Swedish Krona or Japanese Yen will impact Neonode's future operating results. 22 -------------------------------------------------------------------------------- Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to risks associated with changes in currency exchange rates. All of our revenue and approximately 58% of our consolidated costs are denominated in U.S. dollars We do not believe changes in foreign currency exchange rates will be material to our financial position or results of operation. We do not currently enter into forward-exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if our operations change and we determine that our foreign exchange exposure has increased, we may consider entering into hedging transactions to mitigate such risk. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Under the supervision of and with the participation of our management, including the Company's Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. Changes in internal control over financial reporting There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting. PART II. Other Information ITEM 1. Legal Proceedings We are not currently involved in any material legal proceedings. However, from time to time, we may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including, but not limited to, employee, customer and vendor disputes. ITEM 1A. Risk Factors There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012. 23 -------------------------------------------------------------------------------- ITEM 6. Exhibits Exhibits Exhibit # Description 3.1 Amended and Restated Certificate of Incorporation of Neonode Inc., dated April 17, 2009 (incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q filed on August 4, 2009). 3.1.1 Certificate of Amendment, dated December 13, 2010 (incorporated by reference to Exhibit 3.1.1 of our Annual Report on Form 10-K filed on March 31, 2011) 3.1.2 Certificate of Amendment, dated March 18, 2011 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on March 28, 2011) 3.1.3 Certificate of Correction, dated February 29, 2011 (incorporated by reference to Exhibit 3.1.3 of our Annual Report on Form 10-K filed on March 30, 2012) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 of our Annual Report on Form 10-K filed on April 15, 2008) 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002* 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002* 32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* 101.INS XBRL Instance Document * 101.SCH XBRL Taxonomy Extension Schema Document * 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document * 101.DEF XBRL Taxonomy Extension Definition Linkbase Document * 101.LAB XBRL Taxonomy Extension Label Linkbase Document * 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * * Furnished herewith 24-------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on May 8, 2013. Neonode Inc. Registrant Date: May 8, 2013 By: /s/ David W. Brunton David W. Brunton Chief Financial Officer, Vice President, Finance and Secretary (Principal Financial and Accounting Officer) 25-------------------------------------------------------------------------------- |