Delaware
|
94-1517641
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
Item
1
|
Financial
Statements
|
|
Condensed
Balance Sheets as of July
31, 2007 (unaudited) and October 31, 2006
|
3
|
|
Condensed
Statements of Operations for the three and nine months ended
July 31, 2007
and 2006 (unaudited)
|
4
|
|
Condensed
Statements of Cash Flows for the nine months ended July 31,
2007 and 2006
(unaudited)
|
5
|
|
|
||
Notes
to Condensed Financial Statements
|
6
|
|
Item
2
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
Item
3
|
Quantitative
and Qualitative Disclosures about Market Risk
|
31
|
Item
4
|
Controls
and Procedures
|
31
|
PART
II
|
Other
Information
|
|
Item
1A
|
Risk
Factors
|
31
|
Item
6
|
Exhibits
|
44
|
SIGNATURES
|
45
|
|
EXHIBITS
|
|
|
|
July
31,
|
|
October
31,
|
|
||
|
|
2007
|
|
2006
(A)
|
|
||
ASSETS
|
|
(unaudited)
|
|
|
|||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
407
|
$
|
1,147
|
|||
Trade
accounts receivable, net
|
— |
930
|
|||||
Note
receivable
|
1,009
|
— | |||||
Other
|
165
|
177
|
|||||
Current
assets from discontinued operations (B)
|
— |
739
|
|||||
Total
current assets
|
1,581
|
2,993
|
|||||
Property,
plant and equipment, net
|
85
|
231
|
|||||
Capitalized
software costs, net
|
90
|
1,314
|
|||||
Other
|
4
|
5
|
|||||
Non-current
assets from discontinued operations (B)
|
— |
325
|
|||||
Total
assets
|
$
|
1,760
|
$
|
4,868
|
|||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Trade
accounts payable
|
$
|
114
|
$
|
557
|
|||
Accrued
payroll and employee benefits
|
7
|
105
|
|||||
Capital
lease obligations - current portion
|
35
|
33
|
|||||
Deferred
revenues
|
359
|
432
|
|||||
Other
accrued expenses
|
48
|
144
|
|||||
Current
liabilities from discontinued operations (B)
|
— |
21
|
|||||
Total
current liabilities
|
563
|
1,292
|
|||||
Capital
lease obligations, net of current portion
|
51
|
65
|
|||||
Long-term
liabilities from discontinued operations (B)
|
— |
190
|
|||||
Total
long-term liabilities
|
51
|
255
|
|||||
Total
liabilities
|
614
|
1,547
|
|||||
Commitments
(note 7)
|
|||||||
Stockholders'
equity:
|
|||||||
Common
stock
|
35,986
|
35,186
|
|||||
Accumulated
deficit
|
(34,840
|
)
|
(31,865
|
)
|
|||
Total
stockholders' equity
|
1,146
|
3,321
|
|||||
Total
liabilities and stockholders' equity
|
$
|
1,760
|
$
|
4,868
|
(A)
|
Derived
from audited financial statements
|
(B)
|
See
Note 1 to the condensed financial statements for information related
to
discontinued operations
|
Three
months ended
|
|
Nine
months ended
|
|
||||||||||
|
|
July
31,
|
|
July
31,
|
|
||||||||
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|||||
Net
revenue
|
$
|
26
|
$
|
21
|
$
|
75
|
$
|
31
|
|||||
Operating
expenses
|
|||||||||||||
Amortization
and impairment of acquired
|
|||||||||||||
software
and intellectual property
|
830
|
6,518
|
1,205
|
8,564
|
|||||||||
Product
research and development
|
225
|
351
|
836
|
1,420
|
|||||||||
Sales
and marketing
|
87
|
236
|
360
|
854
|
|||||||||
General
and administrative
|
638
|
552
|
1,824
|
2,090
|
|||||||||
Total
operating expenses
|
1,780
|
7,657
|
4,225
|
12,928
|
|||||||||
Operating
loss from continuing operations
|
(1,754
|
)
|
(7,636
|
)
|
(4,150
|
)
|
(12,897
|
)
|
|||||
Interest
income
|
13
|
9
|
17
|
38
|
|||||||||
Provision
for income taxes
|
(1
|
)
|
(1
|
)
|
(5
|
)
|
(6
|
)
|
|||||
Loss
from continuing operations
|
(1,742
|
)
|
(7,628
|
)
|
(4,138
|
)
|
(12,865
|
)
|
|||||
Loss
from discontinued operations
|
— |
(214
|
)
|
(181
|
)
|
(734
|
)
|
||||||
Gain
on sale of discontinued operations
|
— | — |
1,343
|
— | |||||||||
Net
income (loss) from discontinued
|
|||||||||||||
Operations
(B)
|
(1,742
|
)
|
(214
|
)
|
1,162
|
(734
|
)
|
||||||
Net
loss
|
$
|
(1,742
|
)
|
$
|
(7,842
|
)
|
$
|
(2,976
|
)
|
$
|
(13,599
|
)
|
|
Basic
and diluted income (loss) per share
|
|||||||||||||
Continuing
operations
|
$
|
(0.77
|
)
|
$
|
(3.77
|
)
|
$
|
(1.85
|
)
|
$
|
(6.20
|
)
|
|
Discontinued
operations (B)
|
$ | — |
$
|
(0.11
|
)
|
$
|
0.52
|
$
|
(0.35
|
)
|
|||
Basic
and diluted loss per share
|
$
|
(0.77
|
)
|
$
|
(3.87
|
)
|
$
|
(1.33
|
)
|
$
|
(6.55
|
)
|
|
Basic
and diluted - weighted average
|
|||||||||||||
shares
used in per share computations
|
2,264
|
2,025
|
2,235
|
2,077
|
(B)
|
See
Note 1 to the condensed financial statements for information related
to
discontinued operations
|
Nine
months ended
July
31,
|
|
||||||
|
|
2007
|
|
2006
|
|||
Cash
flows from operating activities:
|
|||||||
Net
loss
|
$
|
(2,975
|
)
|
$
|
(5,757
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|||||||
used
by operating activities:
|
|||||||
Equity
based compensation expense
|
799
|
1,108
|
|||||
Depreciation
and amortization
|
711
|
2,165
|
|||||
Impairment
of capitalized software
|
661
|
256
|
|||||
Gain
on sale of hardware business
|
(1,343
|
)
|
— | ||||
Changes
in operating assets and liabilities:
|
|||||||
Accounts
receivable
|
930
|
(31
|
)
|
||||
Inventories
|
— |
95
|
|||||
Other
assets
|
12
|
74
|
|||||
Trade
accounts payable
|
(443
|
)
|
174
|
||||
Other
accrued liabilities
|
(279
|
)
|
97
|
||||
Net
cash used by operating activities
|
(1,927
|
)
|
(1,819
|
)
|
|||
Cash
flows from investing activities:
|
|||||||
Purchases
of property, plant and equipment
|
(4
|
)
|
(167
|
)
|
|||
Capitalized
software costs
|
— |
(40
|
)
|
||||
Loan
to Neonode, Inc.
|
(1,009
|
)
|
— | ||||
Cash
proceeds from sale of hardware business
|
2,200
|
— | |||||
Net
cash provided (used) in investing activities
|
1,187
|
(207
|
)
|
||||
Cash
flows from financing activities:
|
|||||||
Stock
offering expense
|
— |
(2
|
)
|
||||
Proceeds
from exercise of stock options
|
— |
39
|
|||||
Net
cash provided by financing activities
|
— |
37
|
|||||
Net
increase (decrease) in cash and cash equivalents
|
(740
|
)
|
(1,989
|
)
|
|||
Cash
and cash equivalents at beginning of period
|
1,147
|
3,632
|
|||||
Cash
and cash equivalents at end of period
|
$
|
407
|
$
|
1,643
|
|||
SUPPLEMENTAL
SCHEDULE OF NON-CASH ACTIVITIES:
|
|||||||
Non-cash
reduction in liabilities related to sale of hardware
business
|
$
|
209
|
$
|
—
|
|||
Non-cash
reduction in assets related to sale of hardware business
|
$
|
1,066
|
$
|
—
|
Gain
on the sale of hardware business
|
||||
(in
thousands)
|
||||
Cash
and escrow receivable
|
$
|
2,200
|
||
Liabilities
assumed
|
209
|
|||
Total
consideration
|
2,409
|
|||
Less
basis of assets transferred in sale
|
||||
Inventory
|
741
|
|||
Plant
property & equipment
|
277
|
|||
Other
assets
|
48
|
|||
Total
basis of transferred assets
|
1,066
|
|||
Gain
on Sale
|
$
|
1,343
|
July
31,
|
|
October
31,
|
|
||||
|
|
2007
|
|
2006
|
|||
Purchased
software
|
$
|
14,217
|
$
|
14,217
|
|||
Less
accumulated amortization
|
(14,127
|
)
|
(12,903
|
)
|
|||
$
|
90
|
$
|
1,314
|
Three
months ended
|
|
Nine
months ended
|
|||||||||||
July
31,
|
July
31,
|
||||||||||||
(in
thousands)
|
2007
|
2006
|
2007
|
2006
|
|||||||||
Common
Stock Equivalents
|
|||||||||||||
Employee
stock options
|
803
|
—
|
390
|
189
|
|||||||||
Loss
per share is calculated as follows:
|
Three
months ended
|
Nine
months ended
|
||||||||||||
July
31,
|
July
31,
|
||||||||||||
(in
thousands, except per share amounts)
|
2007
|
2006
|
2007
|
2006
|
|||||||||
BASIC
AND DILUTED
|
|||||||||||||
Weighted
average number of
|
|||||||||||||
common
shares outstanding
|
2,264
|
2,025
|
2,235
|
2,077
|
|||||||||
Number
of shares for computation of
|
|||||||||||||
net
loss per share
|
2,264
|
2,025
|
2,235
|
2,077
|
|||||||||
Net
loss from continuing operations
|
$
|
(1,742
|
)
|
$
|
(7,628
|
)
|
$
|
(4,138
|
)
|
$
|
(12,865
|
)
|
|
Net
loss per share from continuing
|
|||||||||||||
operations
|
$
|
(0.77
|
)
|
$
|
(3.77
|
)
|
$
|
(1.85
|
)
|
$
|
(6.20
|
)
|
|
Net
income (loss) from
|
|||||||||||||
discontinued
operations
|
$
|
—
|
$
|
(214
|
)
|
$
|
1,162
|
$
|
(734
|
)
|
|||
Net
income (loss) per share from
|
|||||||||||||
discontinued
operations
|
$
|
—
|
$
|
(0.11
|
)
|
$
|
0.52
|
$
|
(0.35
|
)
|
|||
Net
loss per share
|
$
|
(0.77
|
)
|
$
|
(3.87
|
)
|
$
|
(1.33
|
)
|
$
|
(6.55
|
)
|
(a)
|
In
loss periods, all common share equivalents would have had an anti-dilutive
effect on
net
loss
per share and therefore were
excluded.
|
·
|
The
1996
Stock Option Plan (the 1996 Plan), which expired in January 2006;
|
·
|
the
1998 Non-Officer Stock Option Plan (the 1998 Plan);
|
·
|
the
PyX 2005 Stock Option Plan (the PyX Plan), which we assumed in our
acquisition of PyX, but under which we have not granted and will
not grant
any additional equity awards; and
|
·
|
the
2006 Equity Incentive Plan (the 2006 Plan).
|
·
|
The
2001 Non-Employee Director Stock Option Plan (the Director
Plan).
|
Plan
|
Shares
Reserved
|
Options
Outstanding
|
Available
for
Issue
|
Outstanding
Options
Vested
|
|||||||||
1996
Plan
|
546,000
|
91,000
|
—
|
86,999
|
|||||||||
1998
Plan
|
130,000
|
46,800
|
32,095
|
46,800
|
|||||||||
PyX
Plan
|
407,790
|
204,240
|
—
|
203,510
|
|||||||||
2006
Plan
|
300,000
|
42,000
|
17,954
|
41,249
|
|||||||||
Director
Plan
|
68,000
|
56,750
|
—
|
56,750
|
|||||||||
Total
|
1,451,790
|
440,790
|
50,049
|
435,308
|
Three
months ended
July
31,
2006
|
|
Nine
months ended
July 31,
2006
|
|
Three
months ended
July
31,
2007
|
|
Nine
months ended
July
31,
2007
|
|
Remaining
unamortized expense
|
||||||||
Stock
option compensation
|
$
|
278
|
$
|
1,002
|
$
|
278
|
$
|
633
|
$
|
—
|
Options
Granted During Nine Months Ended July 31,
|
|
Options
Granted During Nine Months Ended July 31,
|
|
||||
|
|
2006
|
|
2007
|
|||
Expected
life (in years)
|
5.15
|
3.23
|
|||||
Risk-free
interest rate
|
4.50
|
%
|
5.75
|
%
|
|||
Volatility
|
112.50
|
%
|
119.53
|
%
|
|||
Dividend
yield
|
0.00
|
%
|
0.00
|
%
|
|||
Forfeiture
rate
|
6.01
|
%
|
10.10
|
%
|
Number
of options
|
Weighted
Average Exercise Price
|
||||||
Outstanding
at October 31, 2006
|
577,974
|
$
|
10.49
|
||||
Granted
Stock Options
|
66,150
|
2.53
|
|||||
Exercised
|
—
|
—
|
|||||
Cancelled
|
(203,334
|
)
|
13.34
|
||||
Outstanding
at July 31, 2007
|
440,790
|
$
|
9.45
|
||||
As
of July 31, 2007:
|
|||||||
Options
exercisable
|
435,308
|
$
|
9.41
|
||||
Shares
available for grant
|
50,049
|
Weighted
Average Shares Unvested Stock Units
|
Average
Grant Date Fair Value
|
||||||
Unvested
at November 1, 2006
|
48,400
|
$
|
5.20
|
||||
Granted
|
—
|
—
|
|||||
Vested
|
(22,000
|
)
|
5.20
|
||||
Cancelled
|
(26,400
|
)
|
5.20
|
||||
Unvested
at July 31, 2007
|
—
|
$
|
5.20
|
Three
months
July
31, 2007
|
|
Three
months
July
31, 2006
|
|||||
Discontinued
operations
|
$
|
—
|
$
|
152
|
|||
Product
research and development
|
81
|
102
|
|||||
Sales
and marketing
|
12
|
23
|
|||||
General
and administrative
|
255
|
274
|
|||||
Total
|
$
|
348
|
$
|
551
|
Nine
months
|
|
Nine
months
|
|
||||
|
|
July
31, 2007
|
|
July
31, 2006
|
|||
Discontinued
operations
|
$
|
176
|
$
|
495
|
|||
Product
research and development
|
139
|
316
|
|||||
Sales
and marketing
|
18
|
125
|
|||||
General
and administrative
|
467
|
724
|
|||||
Total
|
$
|
800
|
$
|
1,660
|
Nine
months ended July 31
|
|
||||||
|
|
2007
|
|
2006
|
|||
Warranty
reserve at beginning of period
|
$
|
13
|
$
|
22
|
|||
Less:
Cost to service warranty obligations
|
(13
|
)
|
(1
|
)
|
|||
Plus:
Increases to reserves
|
—
|
1
|
|||||
Total
warranty reserve, included in other accrued expenses
|
$
|
—
|
$
|
22
|
Product
|
Nine
months ended July 31,
2007
|
Nine
months ended July 31, 2006
|
|||||||||||
Adapter
|
$
|
893
|
59
|
%
|
$
|
2,816
|
59
|
%
|
|||||
HighWire
|
556
|
37
|
%
|
1,571
|
33
|
%
|
|||||||
Legacy
& other
|
70
|
4
|
%
|
351
|
8
|
%
|
|||||||
Total
|
$
|
1,519
|
$
|
4,738
|
Gain
on the sale of hardware business
|
||||
(in
thousands)
|
||||
Cash
and escrow receivable
|
$
|
2,200
|
||
Liabilities
assumed
|
209
|
|||
Total
consideration
|
2,409
|
|||
Inventory
|
741
|
|||
Plant
property & equipment
|
277
|
|||
Other
assets
|
48
|
|||
Total
basis of assets sold
|
1,066
|
|||
Gain
on Sale
|
$
|
1,343
|
·
|
actual
versus anticipated sales of our post merger
products;
|
·
|
our
actual versus anticipated operating
expenses;
|
·
|
the
timing of our product shipments;
|
·
|
our
actual versus anticipated gross profit
margin;
|
·
|
our
ability to raise additional capital, if necessary;
and
|
·
|
our
ability to secure credit facilities, if
necessary.
|
·
|
timely
introduction and market acceptance of new products and
services;
|
·
|
changes
in consumer and enterprise spending
levels;
|
·
|
quality
issues with our products;
|
·
|
changes
in consumer, enterprise and carrier preferences for our products
and
services;
|
·
|
loss
or failure of carriers or other key sales channel
partners;
|
·
|
competition
from other mobile telephone or handheld devices or other devices
with
similar functionality;
|
·
|
competition
for consumer and enterprise spending on other
products;
|
·
|
failure
by our third party manufacturers or suppliers to meet our quantity
and
quality requirements for products or product components on
time;
|
·
|
failure
to add or replace third party manufacturers or suppliers in a timely
manner;
|
·
|
changes
in terms, pricing or promotional program
|
·
|
variations
in product costs or the mix of products
sold;
|
·
|
failure
to achieve product cost and operating expense
targets;
|
·
|
excess
inventory or insufficient inventory to meet
demand;
|
·
|
seasonality
of demand for some of our products and
services;
|
·
|
litigation
brought against us; and
|
·
|
changes
in general economic conditions and specific market
conditions.
|
·
|
manufacture phones with
defects that fail to perform to our specifications;
|
·
|
fail
to meet delivery schedules; or
|
·
|
fail
to properly service phones or honor warranties.
|
· |
testing
of our products on wireless carriers’
networks;
|
· |
quality
and coverage area of wireless voice and data services offered by
the
wireless carriers;
|
· |
the
degree to which wireless carriers facilitate the introduction of
and
actively market, advertise, promote, distribute and resell our multimedia
phone products;
|
· |
the
extent to which wireless carriers require specific hardware and software
features on our multimedia phone to be used on their
networks;
|
· |
timely
build out of advanced wireless carrier networks that enhance the
user
experience for data centric services through higher speed and other
functionality;
|
· |
contractual
terms and conditions imposed on them by wireless carriers that, in
some
circumstances, could limit our ability to make similar products available
through competitive carriers in some market
segments;
|
· |
wireless
carriers’ pricing requirements and subsidy programs;
and
|
· |
pricing
and other terms and conditions of voice and data rate plans that
the
wireless carriers offer for use with our multimedia phone
products.
|
·
|
changes
in foreign currency exchange rates;
|
·
|
the
impact of recessions in the global economy or in specific sub
economies
|
·
|
changes
in a specific country’s or region’s political or economic conditions,
particularly in emerging markets;
|
·
|
changes
in international relations;
|
·
|
trade
protection measures and import or export licensing
requirements;
|
·
|
changes
in tax laws;
|
·
|
compliance
with a wide variety of laws and regulations which may have civil
and/or
criminal consequences for them and our officers and directors who
they
indemnify;
|
·
|
difficulty
in managing widespread sales operations;
and
|
·
|
difficulty
in managing a geographically dispersed workforce in compliance with
diverse local laws and customs.
|
(a)(3)
|
List
of Exhibits
|
||
Exhibit
Number
|
Description
|
||
2.1(1)
|
Asset
Purchase Agreement with One Stop Systems, Inc., dated January 11,
2007.
|
||
2.2(2)
|
Agreement
and Plan of Merger and Reorganization, with Neonode Inc., dated
January
19, 2007.
|
||
3.1(3)
|
Certificate
of Incorporation, as amended through December 15, 1997.
|
||
3.2(4)
|
Bylaws,
as amended through December 8, 1998.
|
||
3.3(5)
|
Certificate
of Amendment of Certificate of Incorporation, dated March 26,
2004.
|
||
3.4(6)
|
Certificate
of Amendment of Certificate of Incorporation, dated March 30,
2007.
|
||
10.21(19)
|
Amendment
1 to the Agreement and Plan of Merger and Reorganization, with
Neonode
Inc., dated May 18, 2007.
|
||
31.1
|
Certification
of Chief Executive Officer.
|
||
31.2
|
Certification
of Chief Financial Officer.
|
||
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
||
(19)
|
Filed
as an exhibit to Current Report on Form 8-K dated May 29, 2007
and
incorporated herein by
reference.
|
Neonode, Inc. | ||
Registrant | ||
|
|
|
Date: September 12, 2007 | By: | /s/ David W. Brunton |
David W. Brunton |
||
Chief Financial Officer, | ||
Vice President, Finance and Secretary | ||
(Principal
Financial and Accounting Officer)
|
||