UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
one)
x
Quarterly report
pursuant to section 13 or 15(d)
of
the
Securities Exchange Act of 1934
For
the quarterly period ended June 30, 2008
o
Transition report
pursuant to section 13 or 15(d) of the
Securities
and Exchange Act of 1934
For
the
transition period from _______ to ________
Commission
file number 0-8419
NEONODE
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
94-1517641
|
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
Sweden
Warfvingesväg 45, SE-112 51 Stockholm, Sweden
USA
4000
Executive Parkway, Suite 200, San Ramon, CA., 94583
(Address
of principal executive offices and zip code)
Sweden
46-8-678
18 50
USA
(925)
355-7700
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or such shorter period that the registrant was required
to
file such reports), and (2) has been subject to such filing requirements for
the
past 90 days.
Yes x
No
o
Indicate
by check mark whether the registrant is an large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
the definitions of “large accelerated filer”, “non-accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
|
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes o
No
x
The
number of shares of registrant's common stock outstanding as of August 12,
2008
was 29,979,493.
PART
I Financial
Information
NEONODE
INC.
INDEX
TO JUNE 30, 2008 FORM 10-Q
Item
1
|
Financial
Statements
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of
|
|
|
June
30, 2008 and December 31, 2007
|
|
3
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the
|
|
|
three
and six months ended June 30, 2008 and 2007
|
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the
|
|
|
six
months ended June 30, 2008 and 2007
|
|
5
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
6
|
|
|
|
|
Item
2
|
Management's
Discussion and Analysis of Financial Condition
and Results of Operations
|
|
22
|
|
|
|
|
Item
4
|
Controls
and
Procedures |
|
33
|
|
|
|
|
PART
II
|
Other
Information
|
|
34
|
|
|
|
|
Item
1A
|
Risk
Factors
|
|
|
|
|
|
|
Item
4
|
Submission
of Matters
to a Vote of Security Holders |
|
|
|
|
|
|
Item
6
|
Exhibits |
|
45
|
|
|
|
|
SIGNATURES
|
|
|
|
|
|
|
EXHIBITS
|
|
|
PART
I. Financial
Information
Item
1. Financial
Statements
NEONODE
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
(Unaudited)
|
|
June
|
|
December
|
|
|
|
30,
2008
|
|
31,
2007
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,096
|
|
$
|
1,147
|
|
Restricted
cash
|
|
|
168
|
|
|
5,702
|
|
Trade
accounts receivable, net of allowance for doubtful
accounts
|
|
|
|
|
|
|
|
of
$2,140 and $4,264 at June 30, 2008 and December 31, 2007
|
|
|
89
|
|
|
868
|
|
Inventory
|
|
|
6,036
|
|
|
6,610
|
|
Prepaid
expense
|
|
|
535
|
|
|
1,081
|
|
Other
|
|
|
222
|
|
|
2
|
|
Total
current assets
|
|
|
9,146
|
|
|
15,410
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
463
|
|
|
375
|
|
Patents,
net
|
|
|
66
|
|
|
95
|
|
Other
long term assets
|
|
|
177
|
|
|
395
|
|
Total
assets
|
|
$
|
9,852
|
|
$
|
16,275
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of convertible long term debt (face amount $3,003
|
|
|
|
|
|
|
|
and
$2,895 at June 30, 2008 and December 31, 2007)
|
|
$
|
643
|
|
$
|
132
|
|
Accounts
payable
|
|
|
7,130
|
|
|
4,417
|
|
Accrued
expenses
|
|
|
965
|
|
|
1,391
|
|
Deferred
revenues
|
|
|
2,609
|
|
|
2,979
|
|
Embedded
derivatives of convertible debt and warrants
|
|
|
18,636
|
|
|
9,507
|
|
Other
liabilities
|
|
|
1,695
|
|
|
674
|
|
Total
current liabilities
|
|
|
31,678
|
|
|
19,100
|
|
|
|
|
|
|
|
|
|
Long
term convertible debt (face amount $3,053 and $3,109 at
|
|
|
|
|
|
|
|
June
30, 2008 and December 31, 2007)
|
|
|
77
|
|
|
60
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
31,755
|
|
|
19,160
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit:
|
|
|
|
|
|
|
|
Common
stock
|
|
|
30
|
|
|
24
|
|
Additional
paid in capital
|
|
|
60,461
|
|
|
55,405
|
|
Accumulated
other comprehensive income
|
|
|
311
|
|
|
354
|
|
Accumulated
deficit
|
|
|
(82,705
|
)
|
|
(58,668
|
)
|
Total
stockholders' deficit
|
|
|
(21,903
|
)
|
|
(2,885
|
)
|
Total
liabilities and stockholders' deficit
|
|
$
|
9,852
|
|
$
|
16,275
|
|
See
notes
to condensed consolidated financial statements.
NEONODE
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$
|
401
|
|
$
|
226
|
|
$
|
792
|
|
$
|
475
|
|
Cost
of sales
|
|
|
8,382
|
|
|
1
|
|
|
9,023
|
|
|
3
|
|
Gross
margin (loss)
|
|
|
(7,981
|
)
|
|
225
|
|
|
(8,231
|
)
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
1,173
|
|
|
1,039
|
|
|
2,665
|
|
|
2,084
|
|
Sales
and marketing
|
|
|
1,136
|
|
|
484
|
|
|
2,966
|
|
|
970
|
|
General
and administrative
|
|
|
1,645
|
|
|
1,371
|
|
|
4,158
|
|
|
2,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
3,954
|
|
|
2,894
|
|
|
9,789
|
|
|
5,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(11,935
|
)
|
|
(2,669
|
)
|
|
(18,020
|
)
|
|
(5,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense, net):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income, net
|
|
|
21
|
|
|
87
|
|
|
186
|
|
|
181
|
|
Interest
expense
|
|
|
(84
|
)
|
|
(92
|
)
|
|
(93
|
)
|
|
(325
|
)
|
Non-cash
items related to debt discounts and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
financing fees and the valuation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
features and warrants
|
|
|
(600
|
)
|
|
(16,804
|
)
|
|
(6,110
|
)
|
|
(16,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense), net
|
|
|
(663
|
)
|
|
(16,809
|
)
|
|
(6,017
|
)
|
|
(16,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,598
|
)
|
$
|
(19,478
|
)
|
$
|
(24,037
|
)
|
$
|
(22,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.45
|
)
|
$
|
(1.89
|
)
|
$
|
(0.92
|
)
|
$
|
(2.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted - weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
used in per share computations
|
|
|
27,807
|
|
|
10,282
|
|
|
26,115
|
|
|
10,282
|
|
See
notes
to condensed consolidated financial statements.
NEONODE
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
months ended
June
30,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(24,037
|
)
|
$
|
(22,019
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
by operating activities:
|
|
|
|
|
|
|
|
Stock
based compensation expense
|
|
|
949
|
|
|
239
|
|
Depreciation
and amortization
|
|
|
257
|
|
|
53
|
|
Deferred
interest
|
|
|
— |
|
|
211
|
|
Write-down
of inventory to net realizable value
|
|
|
7,704
|
|
|
— |
|
Debt
discounts and deferred financing fees and the valuation
|
|
|
|
|
|
|
|
of
conversion features and warrants
|
|
|
6,110
|
|
|
16,804
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
849
|
|
|
(699
|
)
|
Inventories
|
|
|
(6,592
|
)
|
|
(673
|
)
|
Other
assets
|
|
|
(219
|
)
|
|
|
|
Prepaid
expenses
|
|
|
(100
|
)
|
|
173
|
|
Accounts
payable and other accrued expense
|
|
|
1,759
|
|
|
1,442
|
|
Deferred
revenue
|
|
|
(612
|
)
|
|
(64
|
)
|
Other
liabilities
|
|
|
1,064
|
|
|
— |
|
Net
cash used in operating activities
|
|
|
(12,868
|
)
|
|
(4,533
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Proceeds
from sale of property and equipment
|
|
|
32
|
|
|
— |
|
Purchase
of property, plant and equipment
|
|
|
(312
|
)
|
|
(349
|
)
|
Net
cash used in investing activities
|
|
|
(280
|
)
|
|
(349
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of convertible debt
|
|
|
— |
|
|
9,000
|
|
Debt
discounts and deferred financing fees related to
conversion
|
|
|
— |
|
|
(209
|
)
|
Proceeds
from exercise of stock options
|
|
|
39
|
|
|
140
|
|
Proceeds
from issuance of common stock
|
|
|
4,500
|
|
|
— |
|
Equity
issuance costs
|
|
|
(486
|
)
|
|
— |
|
Proceeds
from exercise of option to invest in August note
|
|
|
375
|
|
|
— |
|
Proceeds
from exercise of re-priced warrants
|
|
|
4,756
|
|
|
— |
|
Warrant
re-pricing costs
|
|
|
(651
|
)
|
|
— |
|
Restricted
cash
|
|
|
5,994
|
|
|
(875
|
)
|
Net
cash provided by financing activities
|
|
|
14,527
|
|
|
8,056
|
|
Effect
of exchange rate changes on cash
|
|
|
(430
|
)
|
|
— |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
949
|
|
|
3,174
|
|
Cash
and cash equivalents at beginning of period
|
|
|
1,147
|
|
|
369
|
|
Cash
and cash equivalents at end of period
|
|
$
|
2,096
|
|
$
|
3,543
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
218
|
|
$
|
219
|
|
Supplemental
disclosure of non-cash transactions:
|
|
|
|
|
|
|
|
Fair
value of warrants issued in warrant re-pricing
|
|
$
|
13,786
|
|
$
|
—
|
|
Fair
value of warrants issued to financial advisor
|
|
$
|
2,018
|
|
$
|
—
|
|
Fair
value of warrants issued to bridge note holder
|
|
$
|
842
|
|
$
|
—
|
|
Conversion
of September convertible notes
|
|
$
|
35
|
|
$
|
—
|
|
Value
of August note surrendered towards the
|
|
|
|
|
|
— |
|
exercise
of re-priced warrants
|
|
$
|
375
|
|
$
|
—
|
|
See
notes
to condensed consolidated financial statements
NEONODE
INC
Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
1.
Interim Period Reporting
The
condensed consolidated balance sheet of Neonode Inc (the Company) as of December
31, 2007 is derived from audited consolidated financial statements. The
unaudited interim condensed consolidated financial statements, include all
adjustments, consisting of normal recurring adjustments ,except as otherwise
explained in these financial statements, that are, in the opinion of management,
necessary for a fair presentation of the financial position and results of
operations and cash flows for the interim periods. The results of operations
for
the three and six months ended June 30, 2008 are not necessarily indicative
of
expected results for the full 2008 fiscal year.
The
accompanying financial data as of June 30, 2008 and for the three and six months
ended June 30, 2008, and 2007 has been prepared by us, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
notes
contained in our audited Consolidated Financial Statements and the notes thereto
for the fiscal year ended December 31, 2007.
Liquidity
The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the ordinary course of business. We have incurred net operating losses and
negative operating cash flows since inception. As of June 30, 2008, we had
an
accumulated deficit of $82.7 million. We expect to incur additional losses
and
may have negative operating cash flows through the end of 2008 and beyond.
The
report of our independent registered public accounting firm in respect of the
2007 fiscal year, includes an explanatory going concern paragraph regarding
substantial doubt as to our ability to continue as a going concern, which
indicates an absence of obvious or reasonably assured sources of future funding
that will be required by us to maintain ongoing operations.
We
are
not generating sufficient cash from the sale of our products to support our
operations and have been incurring significant losses. During
the six months ended June 30, 2008, we raised approximately $8.2 million net
cash proceeds though the sale of our securities. (See Note 5 Stockholders’
Equity). Unless
we
are able to increase our revenues and decrease expenses substantially in
addition to securing additional sources of financing, we will not have
sufficient cash to support our operations. We
are
currently evaluating different financing alternatives including but not limited
to selling shares of our common stock or issuing notes that may be converted
in
shares of our common stock which could result in the issuance of additional
shares. In addition, we have taken steps to restructure our operations and
reduce our monthly operational cash expenses. Our target is to reduce our
operational cash expenses to an amount less than $600,000 per month. Management
and the Board of Directors has determined that the liquidation basis of
accounting is not appropriate during the period that we are evaluating all
financing alternatives. We continue to pursue and support customers for our
N2
mobile handsets and are developing our next generation product and technology
offerings. We also revised our business plan so that we can focus our efforts
on
capitalizing on the special features of our technology and our core engineering
competence while at the same time laying the foundation for the future.
Our
cash
balance on June 30, 2008 totals $2.1 million (including the net proceeds from
our March and May financings described above). We project that we have
sufficient liquid assets to continue operating into the end of the third quarter
of 2008. We estimate that we will need a minimum of approximately $5 million
of
additional cash from a combination of revenue growth and additional financings,
to fund operating expenses and capital expenditures for the twelve-months ending
June 30, 2009.
There
is
no assurance that we will be successful in reducing our operating expense,
generating cash flow from operations or obtaining sufficient funding from any
source on acceptable terms, if at all. If we are unable to generate cash flow
from our operations or secure additional funding and stockholders, if required,
do not approve such financing, we would have to curtail certain expenditures
which we consider necessary for optimizing the probability of success of
developing new products and executing on our business plan. If we are unable
to
obtain additional funding for operations, we may not be able to continue
operations as proposed, requiring us to modify our business plan, curtail
various aspects of our operations or cease operations. In
such
event, investors may lose a portion or all of their investment.
2.
Summary of Significant Accounting Policies
For
a
complete list of significant accounting policies these condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes contained in our audited Consolidated Financial Statements and the
notes thereto for the fiscal year ended December 31, 2007.
Fiscal
Year
Our
fiscal year is the calendar year.
Principles
of Consolidation
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of Neonode Inc. and its subsidiary based in Sweden, Neonode
AB. All inter-company accounts and transactions have been eliminated in
consolidation.
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires making estimates and assumptions that affect,
at
the date of the 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 collectibility
of accounts receivable, carrying value of inventory, estimated useful lives
of
long-lived assets, recoverable amounts and fair values of intangible assets,
and
the fair value of securities such as options and warrants issued for stock-based
compensation and in certain financing transactions.
Reclassification
Certain
items have been reclassified from the presentation made in the prior year.
On
the balance sheet at December 31, 2007, we reduced other assets and accounts
payable by $648,000 to provide a comparable presentation to the Balance sheet
at
June 30, 2008 related to amounts owed to us by our contract manufacturer. The
amounts due from Balda are offset against amounts we owe to Balda.
Restricted
Cash
As
of
December 31, 2007, we provided bank guaranties totaling $5.7 million as
collateral for the performance of our obligations under our agreement with
our
manufacturing partner. The outstanding bank guaranties expired at December
29,
2007 and the funds were released by our bank to cash on January 2, 2008. The
cash restricted from withdrawal by our bank to secure the obligations of the
bank guaranty is shown as restricted cash within current assets. As of June
30,
2008, we provided a cash deposit totaling $168,000 related to the lease on
our
new headquarters office in Stockholm, Sweden.
Segment
information
We
have
one reportable segment. The segment is evaluated based on consolidated operating
results. We currently operate in one industry segment; the development and
selling of multimedia mobile phones. To date, we have carried out substantially
all of our operations through our subsidiary in Sweden, although we do carry
out
some development activities together with our manufacturing partner in Malaysia.
Effects
of Recent Accounting Pronouncements
The
following are expected effects of recent accounting pronouncements. We are
required to analyze these pronouncements and determined the effect, if any,
the
adoption of these pronouncements would have on our results of operations or
financial position.
In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
on Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business
Combinations
(SFAS
No. 141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of
the
business combination. SFAS No. 141R is effective as of the beginning of an
entity’s fiscal year that begins after 15 December 2008, and will be adopted by
us in the first quarter of 2009. The adoption of SFAS 141R will affect the
way
we account for any acquisitions made after January 1, 2009.
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements
. The
standard provides guidance for using fair value to measure assets and
liabilities. SFAS 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing an asset
or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The statement is effective for us beginning in fiscal year 2008.
In
February 2008, the FASB issued FASB Staff Position (FSP) SFAS 157-2,
Effective
Date of FASB Statement No. 157
(FSP
SFAS 157-2) that deferred the effective date of SFAS No. 157 for
one year for certain nonfinancial assets and nonfinancial liabilities.
In
December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements.
SFAS 160 establishes new standards that will govern the accounting for and
reporting of noncontrolling interests in partially owned subsidiaries.
SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008 and requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
shall be applied prospectively. We are currently evaluating the potential impact
of this statement.
In
March
2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133
, as
amended and interpreted, which requires enhanced disclosures about an entity’s
derivative and hedging activities and thereby improves the transparency of
financial reporting. Disclosing the fair values of derivative instruments and
their gains and losses in a tabular format provides a more complete picture
of
the location in an entity’s financial statements of both the derivative
positions existing at period end and the effect of using derivatives during
the
reporting period. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS 133,
Accounting
for Derivative Instruments and Hedging Activities,
as
amended and its related interpretations (together SFAS 133), and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning
after
November 15, 2008. . We do not expect the adoption of SFAS 161 to have a
material impact on our financial position, and we will make all necessary
disclosures upon adoption, if applicable.
In
May
2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles.
SFAS
162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. SFAS 162 is effective
sixty
days following the SEC's approval of PCAOB amendments to AU Section 411,
The
Meaning of 'Present fairly inconformity with generally accepted accounting
principles.
We are
currently evaluating the potential impact, if any, of the adoption of SFAS
162
on our consolidated financial statements.
3.
Inventories
At
June
30, 2008 and December 31, 2007, inventories consisted of parts, materials and
finished products as follows (in thousands):
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Parts
and materials
|
|
$
|
—
|
|
$
|
247
|
|
Finished
goods held at customer locations
|
|
|
2,489
|
|
|
1,243
|
|
Finished
goods held at manufacturing partner
|
|
|
3,547
|
|
|
5,120
|
|
Total
inventories
|
|
$
|
6,036
|
|
$
|
6,610
|
|
Parts
and
materials consist of components purchased by us in order to reduce the
production lead time of our products. Finished goods held at manufacturing
partner locations consist of N2 phones and accessories located at our
manufacturing partner or with our web sales partner. Finished goods held at
customer locations consists of N2 phones that have been shipped to distributors
but remain in their inventories at the end of the period for which revenue
has
been deferred.
In
January 2008, we discovered a technical issue that affected the quality of
the
reception of our phones in the 900 Megahertz bandwidth and lower. As a result,
we undertook a voluntary program to recall and modify the phones that our
customers held in inventory in order to bring the quality of the reception
up to
our standards. Due to the recall, we stopped all shipments of our N2 phones
during the first quarter of 2008, and our customers withheld payment of amounts
due to until such time as we are able to return the modified phones to them.
As
the modifications were completed we redistributed the inventory that had not
been paid for to new customers or are holding it in our inventory for future
shipment to new customers. We completed the product modification in May 2008.
We
have experienced limited success in selling our N2 mobile phone since
introduction in the third quarter of 2007 and have reevaluated our selling
efforts and the potential markets for the N2 during the second quarter of 2008.
Based upon this reevaluation, we decided that it was probable that we may have
to reduce the selling price of our N2 phones and/or offer our customers
substantial incentives in order to sell the N2. As a result of our revaluation,
we recorded a $7.7 million write-down of our inventory during the second quarter
of 2008 reducing the value of our inventory to $6.0 million, which represents
the estimated realizable value after selling costs of our inventory at June
30,
2008.
4.
Convertible Debt and Notes Payable
Our
convertible debt and notes payable consists of the following (in
thousands):
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Senior
Convertible Secured August 2007 Bridge Notes (face value
$3,003)
|
|
$
|
2,665
|
|
$
|
2,634
|
|
Senior
Convertible Secured Notes September 2007 (face value $3,053 at June
30,
2008 and $3,085 at December 31, 2007)
|
|
|
1,100
|
|
|
1,112
|
|
Loan
- Almi Företagspartner
|
|
|
103
|
|
|
120
|
|
Capital
leases - office copying machines
|
|
|
92
|
|
|
72
|
|
Total
|
|
|
3,960
|
|
|
3,938
|
|
|
|
|
|
|
|
|
|
Unamortized
debt discount
|
|
|
3,240
|
|
|
3,746
|
|
Total
debt, net of debt discount
|
|
|
720
|
|
|
192
|
|
|
|
|
|
|
|
|
|
Less:
short-term portion of long-term debt
|
|
|
643
|
|
|
132
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
77
|
|
$
|
60
|
|
Future
maturities of notes payable (in thousands):
Year
ended December 31,
|
|
Future
Maturity of Notes Payable
|
|
2008
remaining
|
|
$
|
2,879
|
|
2009
|
|
|
24
|
|
2010
|
|
|
3,053
|
|
Thereafter
|
|
|
-
|
|
Total
principal payments
|
|
$
|
5,956
|
|
Senior
Convertible Secured August Bridge Notes
Year
Ended December 31, 2007
On
August
8, 2007, we made an offering of convertible notes pursuant to a Note Purchase
Agreement (August Bridge Notes or Bridge Notes), dated as of July 31, 2007,
amended August 1, 2007, September 26, 2007 and March 24, 2008. The August Bridge
Notes are convertible into the units offered in the September 26, 2007 financing
agreement described below. We received $3,250,000 from the Bridge Note offering
and issued an option to invest $750,000, at the same terms and conditions as
the
Bridge Notes, to one of the Bridge Note investors/financial advisor as part
of a
longer range financing plan. The August Bridge Notes originally matured on
December 31, 2007, however the maturity of these notes was extended to June
30,
2008 in conjunction with the September 2007 financing described below and
extended again until December 31, 2008 in conjunction with the May 2008
financing described below.
The
August Bridge Notes, due December 31, 2008, bear 8% per annum interest and
are
convertible into purchase units that are made up of a combination of shares
of
our common stock, debt and warrants in accordance with the September 26, 2007
financing agreement. The note holders have a right to convert their notes plus
accrued interest anytime before December 31, 2008 into purchase units. Each
purchase unit of $3,000 is comprised of one $1,500 three-year promissory note
bearing the higher of LIBOR plus 3% or 8% interest per annum, convertible into
shares of our common stock at a conversion price of $3.50 per share, 600 shares
of our common stock and 5 year warrants to purchase 696.5 shares of our common
stock at a price of $1.27 per share. For accounting purposes the embedded
conversion feature was determined to meet the definition of a derivative and
was
recorded as liability. This was because the holder of the notes could convert
debt and accrued interest, where interest is at the greater of 8% or LIBOR
plus
3%, and therefore, the total number of shares the instrument could be
convertible into was not fixed. Accordingly, the embedded conversion feature
is
bifurcated from the debt host instrument and treated as a liability, with the
offset to debt discount. The related warrants were also recorded as a liability
for the same reason.
The
fair
value of the embedded conversion feature related to the Bridge Notes was
calculated at September 26, 2007 using the Black-Scholes option pricing model
and amounted to $3.3 million. The assumptions used for the Black-Scholes option
pricing model were a term of 0.76 years, volatility of 99% and a risk-free
interest rate of 4.16%. The $3.3 million was recorded as “Embedded derivatives
of convertible debt” and a debt discount. The debt discount exceeded the amount
of recorded debt, which resulted in a charge of $654,000 for the difference
between the debt discount and the value of the debt. The remaining debt discount
balance was allocated to interest expense based on the effective interest rate
method, with an effective interest rate of 393%, over the remaining term of
the
notes. The value of the embedded conversion feature is revalued at each
period-end and the liability is adjusted with the offset recorded as “Non-cash
financial items.”
On
September 26, 2007, the August Bridge Note holders that had not converted their
debt were given three year warrants to purchase up to 219,074 shares of our
common stock at a price of $3.92 per share in exchange for an agreement to
extend the term of their notes from the original date of December 31, 2007
until
June 30, 2008. In addition, the Bridge Note holders agreed to delay the right
to
convert their Bridge Notes until after March 15, 2008 and until June 30, 2008.
The fair value of the warrants issued to the holders of the $2.8 million of
Bridge Note was calculated at September 26, 2007 as $706,000 using the
Black-Scholes option pricing model. The fair value of the warrants was recorded
as a debt issuance cost to be allocated to interest expense based on the
effective interest rate method over the nine month term of the notes with the
offsetting entry to a liability. The warrants were classified as a liability
due
to the same reason as above. The assumptions used for the Black-Scholes option
pricing model were a term of 0.76 years, volatility of 116% and a risk-free
interest rate of 4.16%. As a result of the extension of the loan maturity
period, the agreement to delay conversion of the bridge notes and the issuance
of additional warrants, the modifications were significant enough to trigger
debt extinguishment accounting resulting in a debt extinguishment charge
amounting to $540,000. The liability for the warrants issued to the August
Bridge Note holders is revalued at the end of each reporting period and the
change in the liability is recorded as “Non-cash financing items”.
The
initial fair value of option issued in August 2007 to purchase $750,000 of
August Bridge Notes at a future date amounted to $716,000 based on the
Black-Scholes option pricing model. The assumptions used for the Black-Scholes
option pricing model were a term of 0.39 years, volatility of 99% and interest
rate of 4.16%. The fair value was recorded as a deferred financing fee to be
allocated to interest expense using the effective interest rate method over
the
nine month term of the notes with the offset recorded as other current
liability. At December 31, 2007, this option was extended to March 31, 2008
as
part of debt negotiations in a private placement that was abandoned in February
2008. At December 31, 2007, the value of the extension of this option was
calculated amounting to $475,000 and recorded as a deferred financing fee under
“Prepaid expense” relating to the financing under negotiation at December 31,
2007. The assumptions used for the Black-Scholes option pricing model were
a
term of 0.27 years, volatility of 99%-157% and interest rates of 3.36 to 3.49%.
When this financing package was abandoned in February 2008, the value of the
option recorded as deferred financing fees was charged to “Financing fees and
other non-cash financing items”.
Quarter
Ended March 31, 2008
On
March,
31, 2008, the expiration of the option to invest $750,000 was extended again
to
June 30, 2008. The value of the extension of this option was calculated using
the Black-Scholes option pricing model and amounted to $43,000. The assumptions
used for the Black-Scholes option pricing model were a term of 0.27 years,
volatility of 72% and interest rate of 1.24%. The $43,000 value of the warrants
was recorded as a liability with the corresponding amount recorded as a non-cash
finance expense.
The
liability of the embedded conversion feature related to the Bridge Notes
amounted to $3,235,000 at March 31, 2008 which is an increase of $1,140,000
from
December 31, 2007. The assumptions used for the Black-Scholes option pricing
model at March 31, 2008 were a term of 0.25 years, volatility of 79% and a
risk-free interest rate of 1.38%.
At
March
31, 2008, the revalued liability related to the Bridge Notes three year warrants
to purchase up to 219,074 shares of our common stock at a price of $3.92 per
share amounted to $472,000 resulting in a decrease from December 31, 2007 in
“Non-cash financial items” of $135,000. The assumptions used for the
Black-Scholes option pricing model when calculating the value of the warrants
at
March 31, 2008 were a term of 2.5 years, volatility of 127.58% and a risk-free
interest rate of 1.71%.
Quarter
Ended June 30, 2008
On
April
17, 2008, the option holder exercised $375,000 of the original $750,000 option
amount and was issued a note, at the same terms and conditions as the August
Bridge Notes. The option to invest $750,000 had an original expiration date
of
December 31, 2007 when issued, however, this option was extended until June
30,
2008 and the $375,000 unexercised portion was extended again until December
31,
2008 in conjunction with the May 2008 financing.
On
May
21, 2008, the option holder who exercised a portion of the option to invest
in
the August Bridge Notes converted an aggregate of $375,000 of debt into the
common stock and warrants issued in the May 21, 2008 financing described below.
Upon conversion we issued 295,275 shares of our common stock and 5-year warrants
to purchase 590,550 shares of our common stock at an exercise price of $1.45
per
share. The fair value of the 5-year warrants totaled $1.1 million and was
calculated using the Black-Scholes option pricing model. The assumptions used
for the Black-Scholes option pricing model were a term of 5 years, volatility
of
110.28% and interest rate of 3.09%. The warrants were recorded among “Liability
for warrants to purchase common stock” and are valued at fair valued at the end
of each reporting period.
At
June
30, 2008, the revalued liability related to the Bridge Notes three year warrants
to purchase up to 219,074 shares of our common stock at a price of $3.92 per
share amounted to $21,000 resulting in a decrease from March 31, 2008 in
“Non-cash financial items” of $451,000. The assumptions used for the
Black-Scholes option pricing model when calculating the value of the warrants
at
June 30, 2008 were a term of 2.2 years, volatility of 143.84% and a risk-free
interest rate of 2.7%.
On
May
21, 2008, the August Bridge Note holders that had not converted their debt
were
given three year warrants to purchase up to 510,294 shares of our common stock
at a price of $1.45 per share in exchange for an agreement to extend the term
of
their notes from June 30, 2008 until December 31, 2008. The fair value of the
warrants issued to the holders of the $2.8 million of Bridge Note was calculated
at May 21, 2008 as $842,000 using the Black-Scholes option pricing model. The
assumptions used for the Black-Scholes option pricing model were a term of
3
years, volatility of 123.58% and a risk-free interest rate of 2.68%. The
warrants were classified as a liability due to the same reason as described
above in the classification of the embedded conversion feature pursuant to
the
guidance provided in paragraph 17 of EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock.
The
liability for the warrants issued to the August Bridge Note holders is revalued
at the end of each reporting period and the change in the liability is recorded
as “Non-cash financing items.” At June 30, 2008, the liability amounted to
$694,000 resulting in a decrease from May 21, 2008 in “Non-cash financial items”
of $148,000 in the six months ended June 30, 2008. The assumptions used for
the
Black-Scholes option pricing model when calculating the value of the warrants
at
June 30, 2008 were a term of 2.9 years, volatility of 132.08% and a risk-free
interest rate of 2.9%.
Year
Ended December 31, 2007
On
September 26, 2007, we sold $5.7 million of securities in a private placement,
comprised of $2.9 million of three-year promissory notes bearing the higher
of
LIBOR plus 3% or 8% interest per annum, convertible into shares of our common
stock at a conversion price of $3.50 per share, 952,499 shares of our common
stock, and 5 year warrants to purchase 1,326,837 shares of our common stock
at a
price of $3.92 per share.
In
addition, on September 26, 2007, certain holders of the August Bridge Notes
converted an aggregate of $454,900 of debt and accrued interest into units
offered in the September 26, 2007 financing described below. The debt holders
of
the August Bridge Notes that were converted received $227,450 three-year
promissory notes bearing the higher of LIBOR plus 3% or 8% interest per annum,
convertible into shares of our common stock at a conversion price of $3.50
per
share, 75,817 shares of our common stock and 5-year warrants to purchase 105,612
shares of our common stock at a price of $3.92 per share. The fair value of
the
5-year warrants totaled $340,000 and was calculated using the Black-Scholes
option pricing model.
The
total
issuance of securities and debt on September 26, 2007 to investors and Bridge
Note holders who converted, see preceding paragraph for discussion on conversion
of Bridge Notes, was $3.1 million of three-year promissory notes bearing the
higher of LIBOR plus 3% or 8% interest per annum, convertible into shares of
our
common stock at a conversion price of $3.50 per share, 1,028,316 shares of
our
common stock and 5-year warrants to purchase 1,432,449 shares of our common
stock at a price of $3.92 per share.
The
embedded conversion feature of the convertible debt issued on September 26,
2007
meets the definition of a derivative financial instrument and is classified
as a
liability in accordance with SFAS 133 and EITF 00-19. The note holder has the
right to convert the debt and accrued interest and the interest rate is
calculated at the greater of 8% or LIBOR plus 3%, and therefore, the total
number of shares of our common stock that the convertible note can be
convertible into is not fixed. Accordingly, the embedded conversion features
are
revalued on each balance sheet date and marked to market with the adjusting
entry to “Non-cash financial items.” The fair value of the conversion feature
related to the September 26, 2007 convertible notes totaled $1.4 million at
September 26, 2007. The fair value of the conversion feature was recorded as
a
debt discount. On the issuance date, we allocated the proceeds first to the
warrants based on their fair value with the remaining balance allocated between
debt, $771,000, and equity, $669,000, based on their relative fair
values.
The
warrants issued in conjunction with the September 26, 2007 financing meet the
definition of a liability for the same reason as the embedded conversion feature
described above. The fair value of the warrants issued in conjunction with
issuance of shares of our common stock and convertible debt totaled $4.3 million
on its issue date and was recorded as a liability pursuant to the provisions
of
EITF No. 00-19 .
The fair
value of the warrants on the date of issuance was calculated using the
Black-Scholes option pricing model. The assumptions used for the Black-Scholes
option pricing model were a term of 5 years, volatility of 116% and a risk-free
interest rate of 4.2%.
As
part
of the September 26, 2007 Private Placement, we issued 142.875 unit purchase
warrants to Empire Asset Management Company (Empire) for financial advisory
services provided in connection with the placement. Each unit purchase warrant
has a strike price of $3,250 and is comprised of a $1,500 three-year promissory
note, bearing the higher of LIBOR plus 3% or 8% interest per annum, convertible
into shares of our common stock at a conversion price of $3.50 per share, 500
shares of our common stock and a five-year warrant to purchase 696.5 shares
of
our common stock at a purchase price of $3.92 per share. At the date of
issuance, the fair value of the unit purchase warrants issued to Empire totaled
$614,000 and was included in the issuance costs related to the September
financing. The assumptions used for the Black-Scholes option pricing model
were
a term of five years, volatility of 99% and a risk-free interest rate of 4.2%.
At December 31, 2007, the fair value of the unit purchase warrants issued to
Empire decreased to $509,000 with the adjusting offset of $105,000 recorded
in
“Non-cash charges for conversion features & warrants.”
Quarter
Ended March 31, 2008
On
January 28, 2008, a holder of convertible notes issued on September 26, 2007
elected to convert an aggregate amount of debt and accrued interest amounting
to
$35,000. The conversion resulted in the issuance of 10,000 shares of common
stock at $3.50. The debt discounts, conversion features and deferred financing
fees that related to the loans that were converted amounted to an aggregate
of
$20,000. The net amount of $15,000 was recorded in equity.
The
fair
value of the warrants issued in conjunction with the September 26, 2007
financing at March 31, 2008 decreased to $3.2 million compared to $3.7 million
at December 31, 2007and the offsetting amount of $511,000 was recorded in
“Non-cash charges for conversion features and warrants.”
The
fair
value of the warrants issued in conjunction with the September 26, 2007
financing amounted to $6.6 million at March 31, 2008 which is an increase of
$2.9 million from December 31, 2007. The assumptions used for the Black-Scholes
option pricing model at March 31, 2008 were a term of 4.49 years, volatility
of
107% and a risk-free interest rate of 2.29%.
The
liability of the embedded conversion feature of the debt issued in conjunction
with the September 26, 2007 financing amounted to $791,000 at March 31, 2008
which is a decrease of $713,000 from December 31, 2007. The assumptions used
for
the Black-Scholes option pricing model at June 30, 2008 were a term of .49
years, volatility of 111% and a risk-free interest rate of 1.51%.
Quarter
Ended June 30, 2008
The
fair
value of the warrants issued in conjunction with the September 26, 2007
financing at June 30, 2008 decreased to $1.4 million compared to $6.6 million
at
March 31, 2008 and the offsetting amount of $5.2 million was recorded in
“Non-cash charges for conversion features and warrants.” The assumptions used
for the Black-Scholes option pricing model at June 30, 2008 were a term of
4.24
years, volatility of 117% and a risk-free interest rate of 3.18%.
The
liability of the embedded conversion feature of the debt issued in conjunction
with the September 26, 2007 financing decreased to $1,000 at June 30, 2008
compared to $791,000 at March 31, 2008 with the offset of $790,000 recorded
in
“Non-cash financial items.” The assumptions used for the Black-Scholes option
pricing model at June 30, 2008 were a term of .24 years, volatility of 184.27%
and a risk-free interest rate of 1.90%.
At
June
30, 2008, the fair value of the unit purchase warrants issued to Empire in
conjunction with the September 26, 2007 financing decreased to $132,000 from
$402,000 at March 31, 2008 with the adjusting offset of $270,000 recorded in
“Non-cash charges for conversion features and warrants.” The assumptions used
for the Black-Scholes option pricing model at June 30, 2008 were a term of
4.24
years, volatility of 100% and a risk-free interest rate of 3.18%.
Anti-Dilution
Feature
Common
Stock
The
September 26, 2007 financing agreement contains anti-dilution features for
each
of the common stock, convertible debt and the warrants whereby these instruments
are protected separately for 18 months against future private placements made
at
lower share prices. On March 4, 2008, we issued 1,800,000 shares of common
stock
to investors of a private placement at a price of $2.50 per shares. The issuance
of these shares triggered the anti-dilution feature related to common stock
issued in the September 26, 2007 financing transaction. As a result we were
required to issue an additional 207,492 shares of our common stock to investors
in the September 26, 2007 financing. The fair value of the anti-dilution feature
was calculated at June 30, 2008 using the Black-Scholes option pricing model.
The assumptions used for the Black-Scholes option pricing model were a term
of
0.73 years, volatility of 145.8% and a risk-free interest rate of 2.27%. The
value of the anti-dilution feature at June 30, 2008 increased to $2.6 million
compared to $1.5 million at March 31, 2008 and the offsetting amount of $1.1
million was recorded in “Non-cash charges for conversion features and warrants.”
Warrants
As
part
of the May 21, 2008 financing transaction, we issued 400,480 warrants at a
price
of $1.27 per share and an additional 800,959 warrants at a price of $1.27 per
share to Empire for financial advisory services provided in connection with
the
transaction. At the date of issuance, the fair value of the warrants issued
to
Empire totaled $2.0 million and was included in the issuance costs related
to
the May 21, 2008 financing transaction. The assumptions used for the
Black-Scholes option pricing model were a term of five years, volatility of
110.28% and a risk-free interest rate of 3.09%. At June 30, 2008, the fair
value
of the warrants issued to Empire decreased to $1.5 million with the adjusting
offset of $500,000 recorded in “Non-cash charges for conversion features and
warrants.” The assumptions used for the Black-Scholes option pricing model at
June 30, 2008 were a term of 4.89 years, volatility of 113.97% and a risk-free
interest rate of 3.34%. (see Note 5 Stockholders’ Equity)
The
issuance of the warrants to Empire triggered the anti-dilution feature related
to the warrants issued in the September 26, 2007 financing transaction. As
a
result, we were required to reduce the exercise price to $1.27 from $3.92 of
the
warrants issued to investors in the September 26, 2007 financing. The result
of
the reduction in the exercise price of the warrants was calculated at May 21,
2008, using the Black-Scholes option pricing model. The assumptions used for
the
Black-Scholes option pricing model related to the anti-dilution feature were
a
term of 0.84 years, volatility of 117.89% and a risk-free interest rate of
1.99%. The value of the re-priced warrants at May 21, 2008, increased by
$223,000 and was recorded in “Non-cash charges for conversion features and
warrants.”
Derivatives
As
discussed above the senior secured, bridge and promissory notes issued above
contain embedded conversion features. Pursuant to SFAS 133 and EITF 00-19 the
conversion features are considered embedded derivatives and are included in
“Embedded derivative of convertible debt.” At the time of issuance of the senior
secured notes, the fair value of the conversion feature was recorded as a debt
discount and amortized to interest expense over the expected term of the senior
secured notes using the effective interest rate method. Changes in the fair
value of the conversion feature are recorded in “Non-cash charges for conversion
features and warrants.” During the three months ended June 30, 2008 and 2007, we
recorded a charge of $476,000 and $116,000 of interest expense associated with
the amortization of the debt discounts along with a (benefit) charge of $(3.1)
million and $65,000 associated with the changes in the fair value of embedded
conversion features recorded as liabilities, respectively.
During
the six months ended June 30, 2008 and 2007, we recorded charges of $494,000
and
$165,000 of interest expense associated with the amortization of the debt
discounts along with a (benefit)/charge of $(2.6) million and $66,000 associated
with the changes in the fair value of embedded conversion features recorded
as
liabilities, respectively.
Loan
Agreement with Almi Företagspartner
On
April
6, 2005, Neonode AB entered into a loan agreement with Almi Företagspartner
(“Almi”) in the amount of SEK 2,000,000, or approximately $336,000 U.S. Dollars
based on the March 31, 2008 exchange rate, with 40,000 detachable warrants
in
Neonode AB (corresponding to 72,000 warrants when converted into Neonode Inc.
shares). The loan has an expected credit period of 48 months with an annualized
interest rate of 2%. We were not required to make any repayments of principal
for the first nine months. Quarterly repayments of principal thereafter amounted
to SEK 154,000, or approximately $24,000 U.S. Dollars based on average exchanges
rates for the six month period ending June 30, 2008. We have the right to redeem
the loan at any time prior to expiration subject to a prepayment penalty of
1%,
on an annualized basis, of the outstanding principal amount over the remaining
term of the loan. A floating charge (chattel mortgage) of SEK 2,000,000, or
approximately $336,000 U.S. Dollars, is pledged as security.
The
warrants have a term of five years with a strike price of $10.00. The warrants
may be called by us for $0.10 should the price of our common stock trade over
$12.50 on a public exchange for 20 consecutive days. The warrants were analyzed
under EITF 00-19, and were determined to be equity instruments. In accordance
with Accounting Principles Board Opinion no. (APB) 14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants,
because
the warrants are equity instruments, we have allocated the proceeds of the
second Almi loan between the debt and detachable warrants based on the relative
fair values of the debt security and the warrants themselves. To calculate
the
debt discount related to the warrants, the fair market value of the warrants
was
calculated using the Black-Scholes options pricing model. The assumptions used
for the Black-Scholes option pricing model were a term of five years, volatility
of 30% and a risk-free interest rate of 4.50%.The aggregate debt discount
amounted to $42,000 and is amortized over the expected term of the loan
agreement.
5.
Stockholders’
Equity
On
March
4, 2008, we sold $4.5 million in securities in a private placement to accredited
investors. We sold 1,800,000 shares (Investor Shares) of our common stock,
for
$2.50 per share. After placement agent fees and offering expenses, we received
net cash proceeds of approximately $4,000,000.
We
granted the investors piggyback registration rights in respect to the Investor
Shares and we are obligated to include the Investor Shares in the next
registration statement we file with the Securities and Exchange Commission
(SEC). In addition, we issued an aggregate of 207,492 shares of common stock
to
investors who participated in the September 26, 2007 private placement pursuant
to anti-dilution provisions contained in the September 26, 2007 Private
Placement agreement. Empire acted as financial advisor in the private placement
and received compensation in connection with the private placement of
approximately $450,000 and 120,000 shares of our common stock.
On
May
21, 2008, we completed a $5.1 million, net cash proceeds to us of $4.1 million,
private placement, primarily to prior security holders, directors, affiliates
of
management and institutional investors.
We
offered our existing warrant holders an opportunity to exercise Neonode common
stock purchase warrants on a discounted basis. In all, 4,004,793outstanding
warrants were exercised at a strike price of $1.27 per warrant (including
$375,000 of surrender of debt). We issued 4,004,793 shares of our common stock
and two new common stock purchase warrants, with an exercise price of $1.45,
for
each outstanding warrant exercised. A total of 8,009,586 new common stock
purchase warrants were issued to investors who surrendered or purchased shares
under the warrant exchange offer. We also extended the maturity date of $2.85
million of convertible debt that was due on June 30, 2008 until December 31,
2008 by issuing the note holders 510,293 common stock purchase warrants, with
an
exercise price of $1.45. Empire acted as financial advisor for the transaction
and was paid a cash fee of approximately $510,000 and received a warrant to
purchase 400,480 shares of our common stock at $1.27 per share and a warrant
to
purchase 800,959 shares of our common stock at $1.45 per share.
After
the
financings, we have approximately 30 million shares of common stock, 13.3
million warrants to purchase our common stock and 1.8 million employee stock
options outstanding.
6.
Fair
Value Measurement of Assets and Liabilities
In
September 2006, the FASB issued Statement No. 157,
Fair
Value Measurements
(FAS 157), which became effective for us on January 1, 2008.
FAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure requirements about fair value measurements.
FAS 157 does not mandate any new fair-value measurements and is applicable
to assets and liabilities that are required to be recorded at fair value under
other accounting pronouncements. Implementation of this standard did not have
a
material effect on our results of operations or consolidated financial
position.
In
February 2008, the FASB issued FASB Staff Position (FSP)
FAS No. 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13 and Its
Related Interpretive Accounting Pronouncements That Address Leasing
Transactions
(FSP 157-1), which became effective for the company on January 1,
2008. This FSP excludes FASB Statement No. 13,
Accounting for Leases
, and
its related interpretive accounting pronouncements from the provisions of
FAS 157.
Also
in
February 2008, the FASB issued FSP FAS 157-2,
Effective Date of FASB Statement No. 157,
which
delayed our application of FAS 157 for certain nonfinancial assets and
liabilities until January 1, 2009. In this regard, the major categories of
assets and liabilities for which we will not apply the provisions of
FAS 157 until January 1, 2009, are long-lived assets that are measured
at fair value upon impairment and liabilities for asset retirement
obligations.
Our
implementation of FAS 157 for financial assets and liabilities on
January 1, 2008, had no effect on our existing fair-value measurement
practices but requires disclosure of a fair-value hierarchy of inputs we use
to
value an asset or a liability. The three levels of the fair-value hierarchy
are
described as follows:
Level 1:
Quoted prices (unadjusted) in active markets for identical assets and
liabilities. We had no level 1 assets or liabilities.
Level 2:
Inputs other than Level 1 that are observable, either directly or
indirectly. We use Level 2 inputs, primarily prices obtained through
third-party broker quotes for the valuation of certain warrants and embedded
derivatives.
Level 3:
Unobservable inputs. We did not have assets or liabilities without observable
market values that would require a high level of judgment to determine fair
value (level 3 inputs).
The
following tables shows the classification of our liabilities at June 30, 2008
that are subject to recurring fair value measurements and the roll-forward
of
these liabilities from December 31, 2007:
|
|
June 30,
2008
|
|
Prices
in Active Markets for Identical Assets (Level 1)
|
|
Other
Observable Inputs (Level 2)
|
|
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued with debt
|
|
$
|
14,779
|
|
$
|
-
|
|
$
|
14,779
|
|
$
|
-
|
|
Embedded
conversion features
|
|
|
1,199
|
|
|
-
|
|
|
1,199
|
|
|
-
|
|
Anti-dilution
feature in debt contracts
|
|
|
2,658
|
|
|
-
|
|
|
2,658
|
|
|
-
|
|
Total
Liabilities at Fair Value
|
|
$
|
18,636
|
|
$
|
-
|
|
$
|
18,636
|
|
$
|
-
|
|
For
the
common stock, convertible loans and warrants issued under the September 26,
2007
financing agreement, we assigned a probability to the re-pricing scenarios
pursuant to the anti-dilution provisions. At September 30, 2007 and at December
31, 2007, we did not consider a re-pricing likely and therefore set the
probability to zero.
In
order
to cover the negative cash flow resulting from the technical recall (as
discussed in Note 3 above) and not shipping phones during Q1, we issued common
stock on March 4, 2008 for $2.50 per share. This triggered the re-pricing
feature on the equity portion of the September financing resulting in the
issuance of 207,492 shares of our common stock based on a re-priced amount
of
$2.50 per common share. In addition, as part of a financing transaction
completed on May 21, 2008, we issued certain warrants with an exercise price
of
$1.27. This triggered the re-pricing feature on the warrant portion of the
September 26, 2007 financing resulting in re-pricing warrants to purchase
1,432,449 shares of our common stock at $3.92 per share to a new exercise price
of $1.27 per share. The warrant holders of the warrants issued in the September
26, 2007 financing are not entitled to additional shares of our common stock
as
a result of the re-pricing, but rather just a reduction in the exercise price.
We also determined that it was probable that additional common stock would
be
issued in the future and that there may be future re-pricing of outstanding
warrants. In order to determine the value of the re-pricing features included
with the common stock and warrants issued under the September 27, 2007 financing
agreement, we used the Black and Scholes option pricing model. The variables
used in the Black & Scholes model at June 30, 2008 for the re-pricing
feature related to common stock included a stock price of $0.35, a re-priced
put
amount of $2.13, volatility of 145.8%, and a risk-free interest rate of 2.27%.
The variables used in the Black & Scholes model for the re-pricing feature
related to warrants containing a re-pricing feature included a stock price
of
$0.35, a warrant put price of $1.27, volatility of 117.9%, and a risk-free
interest rate of 3.18%.
7.
Stock-Based
Compensation
We
have
several approved stock option plans for which stock options and restricted
stock
awards are available to grant to employees, consultants and directors. All
employee and director stock options granted under our stock option plans have
an
exercise price equal to the market value of the underlying common stock on
the
grant date. There are no vesting provisions tied to performance conditions
for
any options, as vesting for all outstanding option grants was based only on
continued service as an employee, consultant or director. All of our outstanding
stock options and restricted stock awards are classified as equity
instruments.
Stock
Options
As
of
June 30, 2008, we had four equity incentive plans:
|
·
|
The
1996 Stock Option Plan (the 1996 Plan), which expired in January
2006, we
will not grant any additional
equity awards out of the 1996 Plan;
|
|
|
|
|
·
|
The
1998 Non-Officer Stock Option Plan (the 1998 Plan), which expired
in June
2008, we will not grant any additional
equity awards out of the 1998 Plan ;
|
|
|
|
|
·
|
The
2007 Neonode Stock Option Plan (the Neonode Plan), we will not grant
any
additional
equity awards out of the Neonode Plan; and
|
|
|
|
|
·
|
The
2006 Equity Incentive Plan (the 2006 Plan).
|
We
also
had one non-employee director stock option plan as of June 30,
2008:
|
·
|
The
2001 Non-Employee Director Stock Option Plan (the Director
Plan).
|
The
following table details the outstanding options to purchase shares of our common
stock pursuant to each plan at June 30, 2008:
Plan
|
|
Shares
Reserved
|
|
Options
Outstanding
|
|
Available
for
Issue
|
|
Outstanding
Options
Vested
|
|
1996
Plan
|
|
|
546,000
|
|
|
61,000
|
|
|
—
|
|
|
61,000
|
|
1998
Plan
|
|
|
130,000
|
|
|
72,395
|
|
|
|
|
|
35,900
|
|
Neonode
Plan
|
|
|
2,119,140
|
|
|
1,205,655
|
|
|
|
|
|
1,205,655
|
|
2006
Plan
|
|
|
1,300,000
|
|
|
421,505
|
|
|
618,495
|
|
|
5,000
|
|
Director
Plan
|
|
|
68,000
|
|
|
42,500
|
|
|
|
|
|
15,500
|
|
Total
|
|
|
4,163,140
|
|
|
1,803,055
|
|
|
618,495
|
|
|
1,323,055
|
|
A
summary
of the combined activity under all of the stock option plans is set forth
below:
|
|
Weighted
Average
Number
of
Shares
|
|
Exercise
Price
Per
Share
|
|
Weighted
Average Exercise Price
|
|
Outstanding
at December 31, 2007
|
|
|
2,434,732
|
|
$
|
1.42
- $27.50
|
|
$
|
2.58
|
|
Granted
|
|
|
570,000
|
|
|
0.60
- 3.45
|
|
|
3.17
|
|
Cancelled
or expired
|
|
|
(1,180,677
|
)
|
|
1.84
- 3.45
|
|
|
2.24
|
|
Exercised
|
|
|
(21,000
|
)
|
|
1.84
- 1.84
|
|
|
1.84
|
|
Outstanding
at June 30, 2008
|
|
|
1,803,055
|
|
$
|
0.60
- $27.50
|
|
$
|
2.99
|
|
The
1996
Plan terminated effective January 17, 2006 and the 1998 Plan terminated
effective June 15, 2008 and although we can no longer issue stock options out
of
the plans, the outstanding options at the date of termination will remain
outstanding and vest in accordance with their terms. Options granted under
the
Director Plan vest over a one to four-year period, expire five to seven years
after the date of grant and have exercise prices reflecting market value of
the
shares of our common stock on the date of grant. Stock options granted under
the
1996, 1998 and 2006 and are exercisable over a maximum term of ten years from
the date of grant, vest in various installments over a one to four-year period
and have exercise prices reflecting the market value of the shares of common
stock on the date of grant.
The
Neonode Plan has been designed for participants (i) who are subject to Swedish
income taxation (each, a Swedish Participant) and (ii) who are not subject
to
Swedish income taxation (each, a Non-Swedish Participant). The options issued
under the plan to the Non-Swedish Participant are five year options with 25%
vesting immediately and the remaining vesting over a three year period. The
options issued to Swedish participants are vested immediately upon issuance.
The
fair
value of the options issued out of the Neonode
Plan at
the
date of issuance was calculated using the Black-Scholes option pricing model.
These calculations assumed risk free interest rates ranging from 4.5% to 4.875%,
a volatility of 50% and a share prices ranging from $4.69 to $4.78. We
will
not grant any additional equity awards out of the Neonode Plan.
Salary
expense for the three and six months ending June 30, 2008 includes stock
compensation charges totaling $59,000 and $949,000 relating to the above
issuance of employee and director stock options, respectively. Salary expense
for the three and six months ending June 30, 2007 includes a stock compensation
charges totaling $64,000 and $239,000 relating to the above issuance of employee
and director stock options, respectively. The remaining unamortized expense
related to issued stock options is $887,000 at June 30, 2008. The remaining
unamortized expense related to stock options will be recognized on a straight
line basis monthly as compensation expense over the remaining vesting period
which approximates 3 years. The stock compensation expense reflects the fair
value of the vested portion of options for the Swedish and Non-Swedish
participants at the date of issuance, the amortization of the unvested portion
of the stock options, less the option premiums received from the Swedish
participants. The fair value of the options at the date of issuance of the
Swedish options was calculated using the Black-Scholes option pricing model.
The
amount allocated to the unvested portion is amortized on a straight line basis
over the remaining vesting period.
The
fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
Options
granted in the three months ended June 30
|
|
2008
|
|
2007
|
|
Expected
life (in years)
|
|
|
4.08
|
|
|
2.99
|
|
Risk-free
interest rate
|
|
|
1.68
|
%
|
|
4.72
|
%
|
Volatility
|
|
|
117.01
|
%
|
|
87.69
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Options
granted in the six months ended June 30
|
|
2008
|
|
2007
|
|
Expected
life (in years)
|
|
|
2.67
|
|
|
4.16
|
|
Risk-free
interest rate
|
|
|
2.86
|
%
|
|
5.48
|
%
|
Volatility
|
|
|
150.56
|
%
|
|
111.32
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
·
|
The
weighted average grant-date fair value of options granted during
the three
and six months ended June 30, 2008 was $1.82 and $2.43, respectively.
|
|
·
|
The
weighted average grant-date fair value of options granted during
the three
and six months ended June 30, 2007 was $1.37 and $1.47, respectively.
|
|
·
|
No
options were exercised during the three and six months ended June
30,
2007.
|
The
fair
value of stock-based awards to employees is calculated using the Black-Scholes
option pricing model, even though this model was developed to estimate the
fair
value of freely tradable, fully transferable options without vesting
restrictions, which differ significantly from our stock options. The
Black-Scholes model also requires subjective assumptions, including future
stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The expected term and forfeiture rate of options granted
is
derived from historical data on employee exercises and post-vesting employment
termination behavior, as well as expected behavior on outstanding options.
The
risk-free rate is based on the U.S. Treasury rates in effect during the
corresponding period of grant. The expected volatility is based on the
historical volatility of our stock price. These factors could change in the
future, which would affect fair values of stock options granted in such future
periods, and could cause volatility in the total amount of the stock-based
compensation expense reported in future periods.
The
following is a summary of our agreements that we have determined are within
the
scope of FASB Interpretation (FIN) No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others.
Our
products are generally warranted against defects for 12 months following the
sale. We have a 12 month warranty from the manufacturer of the mobile phones.
Reserves for potential warranty claims not covered by the manufacturer are
provided at the time of revenue recognition and are based on several factors,
including current sales levels and our estimate of repair costs. Shipping and
handling charges are expensed as incurred.
We
accrue the estimated costs to be incurred in performing warranty services at
the
time of revenue recognition and shipment of the products to our
customers.
Our
estimate of costs to service our warranty obligations is based on our
expectation of future conditions. To the extent we experience increased warranty
claim activity or increased costs associated with servicing those claims, the
warranty accrual will increase, resulting in decreased gross
margin.
The
following table sets forth an analysis of our warranty reserve (in
thousands):
|
|
June
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
Warranty
reserve at beginning of period
|
|
$
|
95
|
|
$
|
|
|
Less:
Cost to service warranty obligations
|
|
|
(16
|
)
|
|
|
|
Plus:
Increases to reserves
|
|
|
3
|
|
|
95
|
|
Total
warranty reserve included in other accrued expenses
|
|
$
|
82
|
|
$
|
95
|
|
We
have
agreed to indemnify each
of
our
executive
officers
and directors for certain events or occurrences arising as a result of the
officer or director serving in such capacity. The term of the indemnification
period is for the officer's or director's lifetime. The maximum potential amount
of future payments we could be required to make under these indemnification
agreements is unlimited. However, we have a directors’
and
officers’
liability insurance policy that should
enable
us to
recover a portion of future amounts paid. As a result of our insurance policy
coverage, we believe the estimated fair value of these indemnification
agreements is minimal and have no liabilities recorded for these agreements
as
of June 30, 2008 and December 31, 2007,
respectively.
We
enter
into indemnification provisions under our agreements with other companies in
the
ordinary course of business, typically with business partners, contractors,
customers and landlords.
Under these provisions we generally indemnify and hold harmless the indemnified
party for losses suffered or incurred by the indemnified party as a result
of
our activities or, in some cases, as a result of the indemnified party's
activities under the agreement. These indemnification provisions often include
indemnifications relating to representations made by us with regard to
intellectual property rights. These indemnification provisions generally survive
termination of the underlying agreement. The maximum potential amount of future
payments we could be required to make under these indemnification provisions
is
unlimited. We have not incurred material costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, we believe
the
estimated fair value of these agreements is minimal. Accordingly, we have no
liabilities recorded for these agreements as of June 30, 2008 and December
31,
2007,
respectively.
We
are
the secondary guarantor on the sublease of our previous headquarters until
March
2010. We believe we will have no liabilities on this guarantee and have not
recorded a liability at June 30, 2008.
9.
Concentration
of Credit and Business Risks
Our
trade
accounts receivable are concentrated among a small number of customers,
principally located in Europe and India. At June 30, 2008, our accounts
receivable, after a $2.1 million reserve for doubtful accounts related to our
accounts receivable from our distributor in India, Turnstone Mobile Media,
is
$89,000. Four customers accounted for 95% of our net outstanding accounts
receivable at June 30, 2008 compared to one customer, My Phone SA who accounted
for 99% of total accounts receivable at June 30, 2007.
Revenue
for the three and six months ended June 30, 2008 includes revenue from the
sales
of our N2 multimedia mobile phones. None of our revenues are generated from
sales activities in the United States. Revenue for the three and six months
ended June 30, 2007 includes $22,000 in revenue from the sales of our first
mobile phone, the N1, and revenue from a licensing agreement with a major Asian
manufacturer. In July 2005, we entered into a licensing agreement with a major
Asian manufacturer whereby we licensed our touchscreen technology for use in
a
mobile phone to be included in their product assortment. In this agreement,
we
received approximately $2.0 million in return for granting an exclusive right
to
use our touchscreen technology over a two year period. The exclusive rights
did
not limit our right to use our licensed technology for our own use, nor to
grant
to third parties rights to use our licensed technology in devices other than
mobile phones. Another component of the agreement provides for a fee of
approximately $2.65 per telephone if the Asian manufacturer sells mobile phones
based on our technology. In July 2007, we extended this license agreement on
a
non-exclusive basis for an additional term of one year. As of June 30, 2008,
the
Asian manufacturer had not sold any mobile telephones using our
technology. The
net
revenue related to this agreement was allocated over the term of the agreement,
amounting to $0 and $223,000 for the three month ended June 30, 2008 and 2007,
respectively. The net revenue related to this agreement amounted to $0 and
$458,000 for the six months ended June 30, 2008 and 2007,
respectively
Sales
to
individual customers in excess of 15% of net sales for the three months ended
June 30, 2008 include sales to Brodos AB located in Germany of $225,000 or
60%
of net sales and A&C Systems NC located in Belgium of $138,000, or 37% of
net sales. Sales to individual customers in excess of 15% of net sales for
the
three months ended June 30, 2007 included sales to a major Asian manufacturer
located in Korea related to the amortization of the technology licensing
agreement of $233,000, or 100% of net sales.
Sales
to
individual customers in excess of 15% of net sales for the six months ended
June
30, 2008 include sales to Brodos AB located in Germany of $225,000 or 38% of
net
sales and A&C Systems NC located in Belgium of $215,000, or 27% of net
sales. Sales to individual customers in excess of 15% of net sales for the
six
months ended June 30, 2007 included sales to a major Asian manufacturer located
in Korea related to the amortization of the technology licensing agreement
of
$458,000, or 96% of net sales. All sales were executed in Euros or U.S.
dollars.
We
depend
on a limited number of customers for substantially all revenue to date. Failure
to anticipate or respond adequately to technological developments in our
industry, changes in customer or supplier requirements or changes in regulatory
requirements or industry standards, or any significant delays in the development
or introduction of products or services, could have a material adverse effect
on
our business, operating results and cash flows.
Substantially
all of our manufacturing process is subcontracted to one independent company.
The chipsets used in our mobile phone handset product are currently available
from single source suppliers. The inability to obtain sufficient key components
as required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments or margins that,
in
turn, could have a material adverse effect on our business, operating results,
financial condition and cash flows.
10.
Net
Loss Per Share
Basic
net
loss per common share for the three and six months ended June 30, 2008 and
2007
was computed by dividing the net loss for the relevant period by the weighted
average number of shares of common stock outstanding. Diluted earnings per
common share is computed by dividing net loss by the weighted average number
of
shares of common stock and common stock equivalents outstanding.
However,
common stock equivalents of approximately 0 and 333,544 stock options and 13.3
million and 232,000 warrants to purchase common stock are excluded from the
diluted earnings per share calculation for the three months ended June 30,
2008
and 2007, respectively, due to their anti-dilutive effect.
Common
stock equivalents of approximately 212,123 and 32,288 stock options and 13.3
million and 232,000 warrants to purchase common stock are excluded from the
diluted earnings per share calculation for the six months ended June 30, 2008
and 2007, respectively, due to their anti-dilutive effect.
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30,
|
|
June
30,
|
|
(in
thousands, except per share amounts)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
BASIC
AND DILUTED
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
common
shares outstanding
|
|
|
27,807
|
|
|
10,282
|
|
|
26,115
|
|
|
10,282
|
|
Number
of shares for computation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
loss per share
|
|
|
27,807
|
|
|
10,282
|
|
|
26,115
|
|
|
10,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(12,598
|
)
|
$
|
(19,478
|
)
|
$
|
(24,037
|
)
|
$
|
(22,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share basic and diluted
|
|
$
|
(0.45
|
)
|
$
|
(1.89
|
)
|
$
|
(0.92
|
)
|
$
|
(2.14
|
)
|
(a) |
In
loss periods, common share equivalents would have an anti-dilutive
effect
on net loss per share and therefore have
been excluded.
|
We
have
one reportable segment, as defined in SFAS 131, Disclosures
about Segments of an Enterprise and Related Information
. We
currently operate in one industry segment: the development and selling of
multimedia mobile phones. To date, we have carried out substantially all of
our
operations through our subsidiary in Sweden, although we do carry out some
development activities together with our manufacturing partner in Malaysia.
12. NASDAQ
Notice of Non-Compliance
Our
common stock is quoted on The NASDAQ Capital Market under the symbol “NEON”. In
order for our common stock to continue to be quoted on the NASDAQ Capital
Market, we must satisfy various listing maintenance standards established by
NASDAQ. Among other things, as such requirements pertain to us, we are required
to have stockholders’ equity of at least $2.5 million or a market capitalization
of at least $35 million and our common stock must have a minimum closing bid
price of $1.00 per share.
On
May
29, 2008, we received a NASDAQ staff deficiency letter from The NASDAQ Stock
Market Listing Qualifications Department stating that for the last 10
consecutive business days, the market value of our listed securities has been
below the minimum $35 million requirement for continued inclusion under
Marketplace Rule 4310 (c)(3)(B) (the "Rule"). The notice further states that
pursuant to Marketplace Rule 4310(c)(8)(C), we were provided 30 calendar days
(or until June 30, 2008) to regain compliance.
On
July
1, 2008, we received a notice from NASDAQ that we had not regained compliance
within the specified time period and that unless we requested an appeal of
the
non-compliance determination our securities would be suspended from trading
on
the NASDAQ Capital Market on July 10, 2008. We submitted a request to have
a
hearing to the NASDAQ Listing Qualifications Panel (Panel). Our request stays
the delisting of our securities pending the hearing and a determination by
the
Panel. We are scheduled to appear before the Panel on August 28, 2008. There
can
be no assurance that the Panel will grant our request for continued listing.
Additionally,
on July 3, 2008, we received another staff deficiency letter from NASDAQ stating
that for the last 30 consecutive business days, the bid price of our common
stock closed below the $1.00 minimum required for continued inclusion under
Marketplace Rule 4310(c)(4). The notice further states that pursuant to
Marketplace Rule 4310(c)(8)(D), we will be provided 180 calendar days (or until
December 30, 2008) to regain compliance. If, at anytime before December 30,
2008, the bid price of our common stock closes at $1.00 per share or more for
a
minimum of 10 consecutive business days, we may regain compliance with the
Minimum Bid Price Rule.
The
notice indicates that, if compliance with the Minimum Bid Price Rule is not
regained by December 30, 2008, the NASDAQ staff will determine whether we meet
the Nasdaq Capital Market initial listing criteria as set forth in Marketplace
Rule 4310(c), except for the bid price requirement. If we meet the initial
listing criteria, the NASDAQ staff will notify us that we have been granted
an
additional 180 calendar day compliance period. If we are not eligible for an
additional compliance period the NASDAQ staff will provide written notification
that our securities will be delisted.
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward
Looking Statements
The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and
uncertainties. Words such as "believes," "anticipates," "expects," "intends"
and
similar expressions are intended to identify forward-looking statements, but
are
not the exclusive means of identifying such statements. Readers are cautioned
that the forward-looking statements reflect our analysis only as of the date
hereof, and we assume no obligation to update these statements. Actual events
or
results may differ materially from the results discussed in or implied by the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those risks and uncertainties set forth under the
caption "Risk Factors" below.
The
following discussion 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 financial statements for the year ended
December 31, 2007.
Overview
We
are
not generating sufficient cash from the sale of our products to support our
operations and have been incurring significant losses. We
have
been funding our operations primarily with cash proceeds raised through the
sale
of notes that are convertible into our common stock, shares of our common stock
and warrants. We expect to incur additional losses and may have negative
operating cash flows through the end of 2008 and beyond. During the six months
ended June 30, 2008, we raised approximately $8.2 million net cash proceeds
though the sale of our securities. Unless
we
are able to increase our revenues and decrease expenses substantially and secure
an external funding source, we will not have sufficient cash to support our
operations. We
are
currently evaluating different financing alternatives including but not limited
to selling shares of our common stock or issuing notes that may be converted
in
shares of our common stock which could result in the issuance of additional
shares. In addition, we have taken steps to restructure our operations and
reduce our monthly operational cash expenses. Our target is to reduce our
operational cash expenses to an amount less than $600,000 per month. We continue
to pursue customers for our N2 mobile handsets and are developing our next
generation product and technology offerings.
Our
cash
balance as of June 30, 2008 totals $2.1 million (including the net proceeds
from
our March and May financings described above). We project that we have
sufficient liquid assets to continue operating into the end of the third quarter
of 2008. We estimate that we will need a minimum of approximately $5 million
of
additional cash from a combination of revenue growth and additional financings,
to fund operating expenses and capital expenditures for the twelve-months ending
June 30, 2009.
There
is
no assurance that we will be successful in reducing our operating expense,
generate cash flow from operations or obtain sufficient funding from any source
on acceptable terms, if at all. If we are unable to generate cash flow from
our
operations or secure additional funding and stockholder approval, if necessary,
we would have to curtail certain expenditures which we consider necessary for
optimizing the probability of success of developing new products and executing
on our business plan. If we are unable to obtain additional funding for
operations, we may not be able to continue operations as proposed, requiring
us
to modify our business plan, curtail various aspects of our operations or cease
operations. In
such
event, investors may lose a portion or all of their investment. The
report of our independent registered public accounting firm, in respect of
the
2007 fiscal year, includes an explanatory going concern paragraph regarding
substantial doubt as to our ability to continue as a going concern, which
indicates an absence of obvious or reasonably assured sources of future funding
that will be required by us to maintain ongoing operations.
Business
We
specialize in finger based optical touchscreen technology which we refer to
as
zForce. Our mission is to enhance the user experience related to any
consumer or industrial device that can benefit from a finger based optical
touchscreen solution.
We
believe our current mobile phone product, the Neonode N2, is the world’s
smallest finger based optical touchscreen mobile phone handset. The N2 fits
in
the palm of your hand and is designed to allow the user to navigate the menus
and functions with simple finger based taps and sweeps. The N2 incorporates
our
patent pending optical touchscreen and other proprietary technologies to deliver
a mobile phone with a completely unique user experience that doesn’t require any
keypads, buttons or other moving parts.
The
first
model of our touchscreen multimedia mobile phone, the N1, was released in
November 2004. The N1 was primarily a concept phone that was sold in limited
quantities from late 2004 to early 2006. The N2 is our first production-quality
mobile phone product. We began shipping small quantities of the N2 to customers
in mid-July 2007. To date, the sales volume of the N2 has been below
expectations. In
January 2008, we discovered a technical issue that affected the quality of
the
voice reception of our N2 phone. As a result, we undertook a voluntary program
to recall and modify the phones that our customers held in inventory in order
to
bring the quality of the voice reception up to our standards. Due to the recall,
we stopped all shipments of our N2 phones during the first quarter of 2008
and
as a result our customers withheld payment of amounts due to us until such
time
as we were able to return the modified phones to them. The
problem is now corrected but the recall and subsequent rework of all
shipped products cost us both valuable time and money and made it difficult
to
reenter certain markets. Another
contributing reason for the lack of expected sales is that we entered too many
markets, too fast, thereby spreading our resources too thin. We revised our
business plan and are now focusing on fewer but larger selected markets such
as
Germany, India and certain Asian markets. We are also actively seeking to
license our proprietary touch screen technology to other businesses.
We
adopted a revised business plan that we expect will enhance our ability to
capitalize on the special features of our technology and our core engineering
competence while at the same time lay the foundation for the future. In this
regard, we have established the following priorities:
|
·
|
Generate
sales of our N2 phone in selected markets;
|
|
·
|
Reduce
our operating expenses to below $600,000 per
month;
|
|
·
|
Continue
to develop our optical touchscreen technology; and,
|
|
·
|
Develop
Business to Business (B2B) opportunities to integrate our technology
into
third party company’s products.
|
Neonode
was incorporated in the State of Delaware in 2006 to be the parent of Neonode
AB, a company founded in February 2004 and incorporated in Sweden. In a February
2006 corporate reorganization, Neonode issued shares and warrants to the
stockholders of Neonode AB in exchange for all of the outstanding stock and
warrants of Neonode AB. Following the reorganization, Neonode AB became a
wholly-owned subsidiary of Neonode. Since there was no change in control of
the
group, the reorganization was accounted for with no change in accounting basis
for Neonode AB and the assets and liabilities were accounted for at historical
cost in the new group. The consolidated accounts comprise the accounts of the
combined companies as if they had been owned by Neonode throughout the entire
reporting period.
We
are
subject to certain risks common to technology-based companies in similar stages
of development. See “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2007. Principal risks include uncertainty of growth
in
market acceptance for our products, history of losses since inception, ability
to remain competitive in response to new technologies, costs to defend, as
well
as risks of losing patent and intellectual property rights, reliance on limited
number of suppliers, reliance on outsourced manufacture of our products for
quality control and product availability, ability to increase production
capacity to meet demand for our products, concentration of our operations in
a
limited number of facilities, uncertainty of demand for our products in certain
markets, ability to manage growth effectively, dependence on key members of
our
management and development team, limited experience in conducting operations
internationally, and ability to obtain adequate capital to fund future
operations.
Background
The
merger (Merger) of SBE, Inc and the former Neonode Inc closed on August 10,
2007. The merged entity then changed its name to Neonode Inc. For accounting
purposes, the Merger was accounted for as a reverse merger with Neonode as
the
accounting acquirer. Thus, the historical financial statements of the former
Neonode Inc have become our historical financial statements and the results
of
operations of our company. The unaudited consolidated financial statements
appearing elsewhere in this Quarterly Report on Form 10-Q and discussion of
our
financial condition and results of operations for the six months and three
months ended June 30, 2007 below reflect the former Neonode’s stand-alone
consolidated operations. Our consolidated financial statements include the
former Neonode Inc accounts, those of its wholly-owned subsidiary, Neonode
AB,
and, from August 10, 2007, the former SBE, Inc’s accounts and the accounts of
SBE, Inc’s wholly-owned subsidiary Cold Winter, Inc.
Critical
Accounting Policies and Estimates
The
preparation of our financial statements are in conformity with generally
accepted accounting principles in the United States of America (GAAP) and
include the accounts of Neonode Inc. and its subsidiary based in Sweden, Neonode
AB. All inter-company accounts and transactions have been eliminated in
consolidation. 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
results of which 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 some of the more critical accounting policies and
related judgments and estimates used in the preparation of consolidated
financial statements.
Revenue
Recognition
Our
policy is to recognize revenue for product sales when title transfers and risk
of loss has passed to the customer, which is generally upon shipment of products
to our customers. We estimate expected sales returns and record the amount
as a
reduction of revenues and cost of sales at the time of shipment for direct
sales. Our policy complies with the guidance provided by the Securities and
Exchange Commission’s (SEC) Staff Accounting Bulletin (SAB) No. 104,
Revenue
Recognition in Financial Statements.
We
recognize revenue from the sale of our mobile phones when all of the following
conditions have been met: (1) evidence exists of an arrangement with the
customer, typically consisting of a purchase order or contract; (2) our products
have been delivered and risk of loss has passed to the customer; (3) we have
completed all of the necessary terms of the contract; (4) the amount of revenue
to which we are entitled is fixed or determinable; and (5) we believe it is
probable that we will 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. Judgments are required in evaluating the credit
worthiness of our customers. Credit is not extended to customers and revenue
is
not recognized until we have determined that collectibility is reasonably
assured.
To
date,
our revenues have consisted primarily of sales to distributors located in
various 13 regions. We may allow, from time to time, certain distributors price
protection subsequent to the initial product shipment. Price protection may
allow the distributor a credit (either in cash or as a discount on future
purchases) if there is a price decrease during a specified period of time or
until the distributor resells the goods. Future price adjustments are difficult
to estimate since we do not have sufficient history of making price adjustments.
We, therefore, defer recognition of revenue (in the balance sheet line item
“deferred revenue”) derived from sales to these customers until they have resold
our products to their customers. Although revenue recognition and related cost
of sales are deferred, we record an accounts receivable at the time of initial
product shipment. As standard terms are generally FOB shipping point, payment
terms are enforced from shipment date and legal title and risk of inventory
loss
passes to the distributor upon shipment.
Revenue
from products sold directly to end-users though our web sales channels is
generally recognized when title and risk of loss has passed to the buyer, which
typically occurs upon shipment. Reserves for sales returns are estimated based
primarily on historical experience and are provided at the time of
shipment.
From
time
to time we derive revenue from license of our 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 will
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 sale 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.
Revenue
for the three and six months ended June 30, 2008 includes revenue from the
sales
of our N2 multimedia mobile phones. Revenue for the three and six months ended
June 30, 2007 includes revenue from the sales of our first mobile phone, the
N1,
and revenue from a licensing agreement with a major Asian manufacturer. In
July
2005, we entered into a licensing agreement with a major Asian manufacturer
whereby we licensed our touchscreen technology for use in a mobile phone to
be
included in their product assortment. In this agreement, we received
approximately $2.0 million in return for granting an exclusive right to use
our
touchscreen technology over a two year period. The exclusive rights did not
limit our right to use our licensed technology for our own use, nor to grant
to
third parties rights to use our licensed technology in devices other than mobile
phones. Another component of the agreement provides for a fee of approximately
$2.65 per telephone if the Asian manufacturer sells mobile phones based on
our
technology. In July 2007, we extended this license agreement on a non-exclusive
basis for an additional term of one year. As of June 30, 2008, the Asian
manufacturer had not sold any mobile telephones using our
technology.
The
net
revenue related to this agreement was allocated over the term of the agreement,
amounting to $0 and $223,000 for the three month period ending June 30, 2008
and
2007, respectively. The net revenue related to this agreement amounted to $0
and
$458,000 for the six month period ending June 30, 2008 and 2007, respectively.
The contract also includes consulting services to be provided by Neonode on
an
“as needed basis.” The fees for these consultancy services vary from hourly
rates to monthly rates and are based on reasonable market rates for such
services. To date, we have not provided any consulting service related to this
agreement. Generally, our customers are responsible for the payment of all
shipping and handling charges directly with the freight carriers.
Allowance
for Doubtful Accounts
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 the customer when determining or modifying their credit
limits. We regularly evaluate the collectibility 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 their 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 historical collection experience with
customers.
Warranty
Reserves
Our
products are generally warranted against defects for 12 months following the
sale. We have a 12 month warranty from the manufacturer of the mobile phones.
Reserves for potential warranty claims not covered by the manufacturer are
provided at the time of revenue recognition and are based on several factors,
including current sales levels and our estimate of repair costs.
Research
and Development
Long-lived
Assets
We
assess
any impairment by estimating the future cash flow from the associated asset
in
accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
. If the
estimated undiscounted cash flow related to these assets decreases in the future
or the useful life is shorter than originally estimated, we may incur charges
for impairment of these assets. The impairment is based on the estimated
discounted cash flow associated with the asset.
Stock
Based Compensation Expense
We
account for stock-based employee compensation arrangements in accordance with
SFAS 123 (revised 2004), Share-Based
Payment (SFAS
123R) . We account for equity instruments issued to non-employees in accordance
with SFAS 123R and Emerging Issues Task Force (EITF) 96-18, Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services
, which
require that such equity instruments be recorded at their fair value and the
unvested portion is re-measured each reporting period. 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.
Accounting
for Debt Issued with Stock Purchase Warrants
We
account for debt issued with stock purchase warrants in accordance with
Accounting Principles Board (APB) Opinion 14, Accounting
for Convertible Debts and Debts issued with stock purchase
warrants,
if they
meet equity classification .
We
allocate the proceeds of the debt between the debt and the detachable warrants
based on the relative fair values of the debt security without the warrants
and
the warrants themselves.
Derivatives
We
do not
enter into derivative contracts for purposes of risk management or speculation.
However, from time to time, we enter into contracts that are not
considered derivative financial instruments in their entirety but that include
embedded derivative features. Such embedded derivatives are assessed at
inception of the contract and, depending on their characteristics, are accounted
for as separate derivative financial instruments pursuant to SFAS 133
,
Accounting for Derivative Instruments and Hedging Activities,
as
amended (together, SFAS 133. We account for these derivatives under SFAS
133.
SFAS
133
requires that we analyze all material contracts and determine whether or not
they contain embedded derivatives. Any such derivatives are then bifurcated
from
their host contract and recorded on the consolidated balance sheet at fair
value
and the changes in the fair value of these derivatives are recorded each
period in the consolidated statements of operations.
Income
taxes
We
account for income taxes in accordance with SFAS 109, Accounting
for Income Taxes
. SFAS
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the financial
statements or tax returns. We estimate income taxes based on rates in effect
in
each of the jurisdictions in which we operate. Deferred income tax assets and
liabilities are determined based upon differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates
in effect for the year in which the differences are expected to reverse. The
realization of deferred tax assets is based on historical tax positions and
expectations about future taxable income. Valuation allowances are recorded
against net deferred tax assets where, in our opinion, realization is uncertain
based on the “not more likely than not” criteria of SFAS 109.
Based
on
the uncertainty of future pre-tax income, we fully reserved our net deferred
tax
assets as of June 30, 2008 and December 31, 2007. In the event we were to
determine that we would be able to realize our deferred tax assets in the
future, an adjustment to the deferred tax asset would increase income in the
period such a determination was made. The provision for income taxes represents
the net change in deferred tax amounts, plus income taxes payable for the
current period.
Effective
January 1, 2007, we adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes
, which
provides for a two-step approach to recognizing, de-recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS 109. As a result
of the implementation of FIN 48, we recognized no increase in the liability
for
unrecognized tax benefits and therefore no material adjustment to the
January 1, 2007 balance of retained earnings. As of June 30, 2008 and
December 31, 2007, unrecognized tax benefits approximated $0,
respectively.
The
following are expected effects of recent accounting pronouncements. We are
required to analyze these pronouncements and determined the effect, if any,
the
adoption of these pronouncements would have on our results of operations or
financial position.
In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
on Financial Accounting Standards (SFAS) No. 141 (revised 2007), Business
Combinations
(SFAS
No. 141R). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS No. 141R also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of
the
business combination. SFAS No. 141R is effective as of the beginning of an
entity’s fiscal year that begins after 15 December 2008, and will be adopted by
us in the first quarter of 2009. The adoption of SFAS 141R will affect the
way
we account for any acquisitions made after January 1, 2009.
In
September 2006, the FASB issued SFAS 157, Fair
Value Measurements
. The
standard provides guidance for using fair value to measure assets and
liabilities. SFAS 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing an asset
or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. The statement is effective for us beginning in fiscal year 2009.
In
February 2008, the FASB issued FASB Staff Position (FSP) SFAS 157-2,
Effective
Date of FASB Statement No. 157
(FSP
SFAS 157-2) that deferred the effective date of SFAS No. 157 for
one year for certain nonfinancial assets and nonfinancial liabilities.
In
December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements.
SFAS 160 establishes new standards that will govern the accounting for and
reporting of noncontrolling interests in partially owned subsidiaries.
SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008 and requires retroactive adoption of the presentation and
disclosure requirements for existing minority interests. All other requirements
shall be applied prospectively. We are currently evaluating the potential impact
of this statement.
In
March
2008, the FASB issued SFAS 161, Disclosures
about Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133
, as
amended and interpreted, which requires enhanced disclosures about an entity’s
derivative and hedging activities and thereby improves the transparency of
financial reporting. Disclosing the fair values of derivative instruments and
their gains and losses in a tabular format provides a more complete picture
of
the location in an entity’s financial statements of both the derivative
positions existing at period end and the effect of using derivatives during
the
reporting period. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial
performance, and cash flows. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
.
We do not expect the adoption of SFAS 161 to have a material impact on our
financial position, and we will make all necessary disclosures upon adoption,
if
applicable.
In
May
2008, the FASB issued SFAS No. 162 ,The
Hierarchy of Generally Accepted Accounting Principles
. FAS
162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. FAS 162 is effective sixty
days following the SEC's approval of PCAOB amendments to AU Section 411,
The
Meaning of 'Present fairly inconformity with generally accepted accounting
principles.
We are
currently evaluating the potential impact, if any, of the adoption of FAS 162
on
our consolidated financial statements.
Results
of Operations
The
following table sets forth, as a percentage of net sales, certain statements
of
operations data for the three and six months ended June 30, 2008 and 2007.
These
operating results are not necessarily indicative of Neonode’s operating results
for any future period.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net
Sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost
of sales
|
|
|
2,090
|
|
|
---
|
|
|
1,139
|
|
|
1
|
|
Gross
Margin (Loss)
|
|
|
(1,990
|
)
|
|
100
|
|
|
(1,039
|
)
|
|
99
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
293
|
|
|
460
|
|
|
336
|
|
|
439
|
|
Sales
and marketing
|
|
|
283
|
|
|
214
|
|
|
374
|
|
|
204
|
|
General
and administrative
|
|
|
410
|
|
|
607
|
|
|
525
|
|
|
524
|
|
Total
operating expenses
|
|
|
986
|
|
|
1,281
|
|
|
1,235
|
|
|
1,167
|
|
Operating
loss
|
|
|
(2,976
|
)
|
|
(1,181
|
)
|
|
(2,274
|
)
|
|
(1,068
|
)
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income and other, net
|
|
|
5
|
|
|
38
|
|
|
23
|
|
|
38
|
|
Interest
expense
|
|
|
(21
|
)
|
|
(41
|
)
|
|
(12
|
)
|
|
(68
|
)
|
Non-cash
items related to debt discounts and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deferred
financing fees and the valuation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversion
features and warrants
|
|
|
(150
|
)
|
|
(7,435
|
)
|
|
(771
|
)
|
|
(3,538
|
)
|
|
|
|
(166
|
)
|
|
(7,438
|
)
|
|
(760
|
)
|
|
(3,568
|
)
|
Net
loss
|
|
|
(3,142
|
)%
|
|
(3,036
|
)%
|
|
(3,034
|
)%
|
|
(4,636
|
)%
|
Net
Sales
Net
sales
for the three and six months ended June 30, 2008 includes revenue from the
sales
of our N2 multimedia mobile phones. Revenue for the three and six months ended
June 30, 2007 includes revenue from the sales of our first mobile phone, the
N1,
and revenue from a licensing agreement with a major Asian manufacturer. In
July
2005, we entered into a licensing agreement with a major Asian manufacturer
whereby we licensed our touchscreen technology for use in a mobile phone to
be
included in their product assortment. In this agreement, we received
approximately $2.0 million in return for granting an exclusive right to use
our
touchscreen technology over a two year period. The exclusive rights did not
limit our right to use our licensed technology for our own use, nor to grant
to
third parties rights to use our licensed technology in devices other than mobile
phones. Another component of the agreement provides for a fee of approximately
$2.65 per telephone if the Asian manufacturer sells mobile phones based on
our
technology. In July 2007, we extended this license agreement on a non-exclusive
basis for an additional term of one year. As of June 30, 2008, the Asian
manufacturer had not sold any mobile telephones using our
technology.
Our
total
net sales for the three months ended June 30, 2008 were $401,000, an 77%
increase from $226,000 from the three months ended June 30, 2007. We began
shipping the N2 to our first customers in July of 2007. Our revenue for the
three month period ending June 30, 2008 were related to the sell-through of
the
N2 phones amounting to $401,000. We
shipped a total of 872 N2 phones to customers in the three months ended June
30,
2008. Our total net
sales
for the six months ended June 30, 2008 were $792,000, a 67% increase from
$475,000 from the six months ended June 30, 2007. The
net
sales related to this technology licensing agreement was allocated over the
term
of the agreement, amounting to $0 and $223,000 for the three month period ending
June 30, 2008 and 2007, respectively. The net revenue related to this licensing
agreement amounted to $0 and $458,000 for the six month period ending June
30,
2008 and 2007, respectively. Phone
sales included in revenue for the six months period ending June 30, 2007 were
related to the N1 phones and amounted to $22,000.
The
first
model of our touchscreen multimedia mobile phone, the N1, was released in
November 2004. The N1 was primarily a concept phone that was sold in limited
quantities from late 2004 to early 2006. The N2 is our first production-quality
mobile phone product. We began shipping small quantities of the N2 to customers
in mid-July 2007. To date, the sales volume of the N2 has been below
expectations. In
January 2008, we discovered a technical issue that affected the quality of
the
voice reception of our N2 phone. As a result, we undertook a voluntary program
to recall and modify the phones that our customers held in inventory in order
to
bring the quality of the voice reception up to our standards. Due to the recall,
we stopped all shipments of our N2 phones during the first quarter of 2008
and
as a result our customers withheld payment of amounts due to us. The
problem was corrected in May 2008 but the recall and subsequent rework of
all shipped products cost us both valuable time and money and made it difficult
to reenter certain markets. As
the
modifications were completed we redistributed the inventory that had not been
paid for to new customers or are holding it in our inventory for future shipment
to new customers. Since the completion of the technical modifications, we have
experienced limited success in selling our N2 mobile phone and have reevaluated
our selling efforts and the potential markets for the N2 during the second
quarter of 2008. Based upon this reevaluation, we decided that it was probable
that we may have to reduce the selling price of our N2 phones and/or offer
our
customers substantial incentives in order to sell the N2. Another
contributing reason for the lack of expected sales is that we entered too many
markets, too fast, thereby spreading our resources too thin. We revised our
business plan and are now focusing on fewer but larger selected markets. We
are
also actively seeking to sell our proprietary touch screen technology to other
businesses.
We
sell
our products through a direct sales force that supports our distributors. In
the
future, we will concentrate our sales efforts on selected large markets in
the
European and Indian markets. We sell our products through a direct sales force
that supports our distributors. In the foreseeable future,
we anticipate concentrating
our
sales
efforts on selected markets in the European, Indian and Asian
markets.
In
addition, we had previously planned an expansion into the North American, South
American and Chinese markets through Neonode
USA, an affiliated company that we formed in early 2008 with Distribution
Management Consolidators LLC (DMC), a sales channel development and supply
chain
management company.
Currently,
DMC and the Company are in discussions regarding the future direction of the
venture. If
the
parties cannot reach agreement regarding key strategic and
operational decisions involving the joint venture, a risk exists that the
previously planned marketing and sales programs in North America, Latin America
and China will be materially and adversely affected.
Gross
Margin
Gross
profit (loss) as a percentage of net sales was (1,990%) and 100% for the three
months ended June 30, 2008 and 2007. Gross profit (loss) as a percentage of
net
sales was (1,039%) and 99% for the six months ended June 30, 2008 and 2007.
Our
cost of goods include the direct cost of production of the phone plus indirect
costs such as the cost of our internal production department and accrued
estimated warranty costs. In the three months ended June 30, 2008, our cost
of
sales includes an inventory write-down charge of $7.7 million. We have
experienced limited success in selling our N2 mobile phone since introduction
in
2007 and have reevaluated our selling efforts and the potential markets for
the
N2 during the second quarter of 2008. Based upon this reevaluation, we decided
that it was probable that we may have to reduce the selling price of our N2
phones and/or offer our customers substantial incentives in order to sell the
N2. As a result of our revaluation, we recorded a write-down during the second
quarter of 2008 reducing the value of our inventory to $6.0 million, which
represents the estimated realizable value of our inventory at June 30, 2008.
In
addition our low sales volumes have been unable to efficiently absorb the cost
of our internal production department.
We
began
producing and shipping our commercially available N2 mobile phone handsets
in
the second half of 2007. The cost of goods in 2008 reflects the cost to produce
the N2 mobile phone handsets along with the aforementioned inventory
write-down.
Effective
May 2008, we reduced the headcount of our production department by one employee.
The monthly reduction in salaries and benefits related to the reductions in
staffing is approximately $22,000.
Product
Research and Development
Product
research and development (R&D) expenses for the three months ended June 30,
2008 were $1.2 million, a 19% increase over $1.0 million for the same period
in
2007. R&D expenses for the six months ended June 30, 2008 were $2.7 million,
a 29% increase over $2.1 million for the same six month period in 2007. Factors
that contributed to the increase in R&D costs include an
increase in the headcount of our engineering department from 11 to 14 from
2007
to 2008 resulting in an increase in salaries of approximately $100,000. In
addition, there was an increase in external consultancy costs of approximately
$400,000 related to the further development of the N2 as well as early stage
development of successor products.
Effective
May 2008, we reduced the headcount of our engineering department by three
employees and six consultants. The monthly reduction in salaries and benefits
related to the reductions in staffing is approximately $188,000.
Sales
and Marketing
Sales
and
marketing expenses for the three
months ended June 30, 2008 were $1.1 million, a 135% increase over $484,000
for
the same period in 2007. Sales
and
marketing expenses
for the six months ended June 30, 2008 were $3.0 million, a 206% increase over
$970,000 for the same six month period in 2007. This
increase in 2008 over 2007 is primarily related to increases in product
marketing activities such as advertising agency fees and marketing co-op
expenses as well as an increase in sales and marketing headcount in order to
strengthen the sales force for the product rollout on the European market.
Effective
May 2008, we reduced the headcount of our sales and marketing departments by
six
employees and four consultants. The monthly reduction in salaries and benefits
related to the reductions in staffing is approximately $153,000.
General
and Administrative
General
and administrative expenses for the
three
months ended June 30, 2008 were $1.7 million, a 21% increase from $1.4 million
for the same period in 2007. General
and administrative expenses for the
six
months ended June 30, 2008 were $4.2 million, a 68% increase over $2.5 million
for the same six month period in 2007.
The
increase in 2008 over 2007 is primarily related to an increase in headcount
of
four employees along with general overhead, legal and accounting expense after
the August 10, 2007 merger with SBE whereby Neonode became a publicly traded
company.
Effective
May 2008, we reduced the headcount of our general and administrative departments
by four employees. In May 2008, we terminated the employment of our CEO and
President and the Chairman of our Board of Directors, Per Bystedt agreed to
serve as the interim CEO without cash compensation. The monthly reduction in
salaries and benefits related to the reductions in staffing is approximately
$100,000.
Interest
Expense
Interest
expense for the three months ended June 30, 2008 was $84,000, a 9% decrease
over
$92,000 for the same period ended June 30, 2007. Interest expense for the six
months ended June 30, 2008 was $94,000, a 71% decrease over $325,000 for the
same six month period in 2007. The decrease is primarily due to the allocation
of interest paid on the outstanding debt during the first three months of 2008
using the effective interest method . The effective interest rate method of
calculating the interest takes into account the debt discount and as a result
the recognized interest expense in earlier periods is lower as the face amount
of the debt is accreted to the debt as the note reaches maturity.
Non-cash
items related to debt discounts and deferred financing fees and the valuation
of
conversion features and warrants
Charges
related to debt extinguishments and debt discounts
We
recorded a charge related to debt discounts and deferred financing fees for
the
three months ended June 30, 2008 totaling $12 million compared to charges
totaling $199,000 for the three months ended June 30, 2007. The $14.2 million
increase is due a combination of the amortization of the debt discounts and
deferred financing fees as well as the cost of extending certain warrants and
issuing new warrants in the process of obtaining additional financing. We
recorded a charge related to debt discounts and deferred financing fees for
the
six months ended June 30, 2008 totaling $12.8 million compared to charges
totaling $367,000 for the six months ended June 30, 2007. The $12.4 million
increase is due a combination of the amortization of the debt discounts and
deferred financing fees as well as the cost of extending certain warrants and
issuing new warrants in the process of obtaining additional
financing.
Non-cash
valuation for conversion features and warrants
Due
to
various financing arrangement as described in the notes to the financial
statements, we carry certain warrants as liabilities on our balance sheet.
In
addition, we have recorded the value of the conversion features in outstanding
debt as liabilities in our financial statements. These warrants and the value
of
the conversion features are valued at the end of each reporting period and
marked to market. During the three months ended June 30, 2008, we recorded
changes in the value of the warrants and conversion features amounting to a
benefit of $11.4 million compared to a charge of $16.6 million for the three
months ended June 30, 2007. During the six months ended June 30, 2008, we
recorded changes in the value of the warrants and conversion features amounting
to a benefit of $6.7 million compared to a charge of $16.6 million for the
six
months ended June 30, 2007. Factors that affect the valuation of the warrants
and conversion features in the three and six months ended June 30, 2008 are
changes in our stock price, volatility of our stock price over time, interest
rates and the time period remaining for the warrants and conversion features
being valued.
Income
Taxes
Our
effective tax rate was 0% in the three and six months ended June 30, 2008 and
2007, respectively. We recorded valuation allowances for the three and six
month
periods ended June 30, 2008 and 2007 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 $12.6 million
and $24.0 million for the three and six months ended June 30, 2008,
respectively, compared to a net loss of $19.5 million and $22.0 million in
the
comparable periods in 2007, 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 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 sales of our
products;
|
|
· |
collection
of accounts receivable;
|
|
· |
our
actual versus anticipated operating
expenses;
|
|
· |
the
timing of our product shipments;
|
|
· |
the
timing of payment for 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.
|
The
consolidated financial statements included herein have been prepared on a going
concern basis, which contemplates continuity of operations and the realization
of assets and liquidation of liabilities in the ordinary course of business.
The
report of our independent registered public accounting firm, in respect of
the
2007 fiscal year, includes an explanatory going concern paragraph regarding
substantial doubt as to our ability to continue as a going concern, which
indicates an absence of obvious or reasonably assured sources of future funding
that will be required by us to maintain ongoing operations. We
are
not generating sufficient cash from the sale of our products to fund our
operations and have been incurring significant losses. We
have
been funding our operations primarily with cash proceeds raised through the
sale
of notes that are convertible into our common stock, shares of our common stock
and warrants. During the six months ended June 30, 2008, we raised approximately
$8.2 million net cash proceeds though the sale of our securities. We have taken
steps to restructure our operations and reduce our monthly operational cash
expenses . Our goal is to reduce our operational cash expenses to less than
$600,000 per month. Although we have been able to fund our operations to date,
there is no assurance that we will be able to increase sales and reduce expenses
or attract the additional capital or other funds needed to sustain our
operations. If we are unable to obtain additional funding for operations, we
may
not be able to continue operations as proposed, requiring us to modify our
business plan, curtail various aspects of our operations or cease operations.
In
such event, investors may lose a portion or all of their
investment.
Our
cash
is subject to interest rate risk. We invest primarily on a short-term basis.
Our
financial instrument holdings at June 30, 2008 were analyzed to determine their
sensitivity to interest rate changes. The fair values of these instruments
were
determined by net present values. In our sensitivity analysis, the same change
in interest rate was used for all maturities and all other factors were held
constant. If interest rates increased by 10%, the expected effect on net loss
related to our financial instruments would be immaterial. 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. Certain of Neonode loans are in
Swedish kronor and fluctuations in the exchange rate of the U.S. Dollar compared
to the Swedish krona will impact both the interest and future principal payments
associated with these loans.
At
June
30, 2008, we had cash and cash equivalents of $2.3 million, as compared to
$6.8
million at December 31, 2007. Included in this cash are amounts held as
restricted cash of $169,000 and $5.7 million at June 30, 2008 and December
31,
2007, respectively. In the six months ended June 30, 2008, $12.9 million of
cash
was used in operating activities, partially offset by a decrease in inventory
amounting to $1.1 million, a decrease in accounts receivable and other assets
amounting to $0.9 million, an increase in accounts payable and other liabilities
amounting to $2.5 million and our net loss of $24.0 million adjusted by the
following non-cash items (in thousands):
Depreciation
and amortization
|
|
$
|
257
|
|
Write-down
of inventory
|
|
|
7,704
|
|
Deferred
interest
|
|
|
(124
|
)
|
Valuation
charges for conversion features and warrants
|
|
|
6,110
|
|
Stock-based
compensation expense
|
|
|
949
|
|
|
|
$
|
14,896
|
|
At
December 31, 2007, we had outstanding $5.7 million in bank guaranties that
were
provided at various times during the 12 month period then ended. These bank
guaranties were provided as collateral for the performance of our obligations
under our agreement with our manufacturing partner except for an amount of
$169,000 relating to the leasing agreement for our new premises beginning in
April 2008. All the outstanding bank guaranties relating to our manufacturing
partner expired at December 29, 2007 and the funds were released by our bank
to
cash on January 2, 2008 leaving $169,000 as restricted cash at June 30,
2008.
Adjusted
working capital (current assets less current liabilities not including non-cash
liabilities related to warrants and embedded derivatives) was a deficit of
$3.9
million at June 30, 2008 compared to an adjusted working capital of $5.8 million
at December 31, 2007.
In
the
six month period ended June 30, 2008, we purchased $312,000 of fixed assets,
consisting primarily of manufacturing tooling, computers and engineering
equipment.
On
March
4, 2008, we sold $4.5 million in securities, net cash proceeds to us of $4.0
million, in a private placement to accredited investors. We sold 1,800,000
shares of our common stock for $2.50 per share. After placement agent fees
and
offering expenses, we received net proceeds of approximately $4.0
million.
Empire
Asset Management Company acted as financial advisor for the transaction and
was
paid a cash fee of approximately $450,000 and received 120,000 shares of our
common stock
On
May
21, 2008, we completed a $5.1 million, net cash proceeds to us of $4.1 million,
primarily to prior security holders, directors, affiliates of management and
institutional investors
.We
offered our existing warrant holders an opportunity to exercise Neonode common
stock purchase warrants on a discounted basis for a limited period, ended May
19, 2008. In all, 4,004,793 outstanding warrants were exercised at a strike
price of $1.27 per warrant (including $375,000 of surrender of debt). We issued
4,004,793 shares of our common stock and two new common stock purchase warrants,
with an exercise price of $1.45, for each outstanding warrant exercised. A
total
of 8,009,586 new common stock purchase warrants were issued to investors who
surrendered or purchased shares under the warrant exchange offer. We also
extended the maturity date of $2.85 million of convertible debt that was due
on
June 30, 2008 until December 31, 2008 by issuing the note holders 510,293 common
stock purchase warrants, with an exercise price of $1.45. Empire Asset
Management Company acted as financial advisor for the transaction and was paid
a
cash fee of approximately $510,000 and received a warrant to purchase 400,480
shares of our common stock at $1.27 per share and a warrant to purchase 800,959
shares of our common stock at $1.45 per share.
The
majority of our cash has been provided by borrowings from senior secured notes
and bridge notes that have been or are convertible into shares of our common
stock or from the sale of our common stock and common stock purchase warrants
to
private investors. We have been able to extended the maturity date until
December 31, 2008 of approximately $3.0 million of notes and accrued interest
that are convertible into shares of our common stock . No assurance can be
given
that the note holders will chose to convert their debt into shares of our common
stock or that we will have the cash on hand to satisfy the payment of the notes
and accrued interest when they come due on December 31, 2008. We will require
sources of capital in addition to cash on hand to continue operations and to
implement our strategy. Our operations are not cash flow positive and we will
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.
Item
4. Controls
and Procedures
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 June 30, 2008.
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were not effective
for the reasons described below.
During
the audit of our consolidated financial statements for the year ended December
31, 2007, management determined that we had certain material weaknesses relating
to our revenue recognition policies and our accounting for certain financing
transactions, including convertible debt and derivative financial instruments.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of a Company’s annual or interim financial
statements will not be prevented or detected on a timely basis. During mid-2007
we began shipping products to customers and initially recorded revenue as
products were shipped. After evaluation of contracts and actual sell through,
we
determined that the proper revenue recognition methods would be “sell through.”
This change resulted in certain accounting adjustments during our year-end
audit. In addition, we entered into several complex financing transactions
(including convertible debt, derivatives, bifurcation and complex valuation
and
measurement activities) that resulted in accounting adjustments during our
year-end audit. Because these material weaknesses as to internal control over
financial reporting also bear upon our disclosure controls and procedures,
our
Chief Executive Officer and Chief Financial Officer were unable to conclude
our
disclosure controls and procedures were effective.
The
factors described below under “Internal Control of Financial Reporting” related
to the integration and consolidation of the Swedish operating subsidiary we
acquired on August 10, 2007 further contributed to the conclusion of our Chief
Executive Officer and Chief Financial Officer.
Despite
the conclusion that disclosure controls and procedures were not effective as of
the end of period covered by this report, the Chief Executive Officer and Chief
Financial Officer believe that the financial statements and other information
contained in this annual report present fairly, in all material respects, our
business, financial condition and results of operations.
Changes
in Internal Control over Financial Reporting
During
the quarter ended June 30, 2008 we continued moving towards complete integration
and consolidation of business and financial operations of SBE and Neonode and
we
expect to take additional steps to both remedy the material weaknesses described
above and facilitate our management’s assessment of internal control over
financial reporting in accordance the Sarbanes-Oxley Act and Commission rules.
Our planned steps include:
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adding
personnel to our financial department, consultants, or other resources
(including those with public company
reporting experience) to enhance our policies and procedures, including
those related to revenue recognition;
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exploring
the suitability of further upgrades to our accounting system to complement
the new management reporting
system software described above;
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modifying
the documentation and testing programs SBE was developing prior to
the
merger to appropriately apply
to the new Neonode; and
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engaging
a qualified consultant in 2008 to perform an assessment of the
effectiveness of our internal control over
financial reporting and assist us in implementing appropriate internal
controls on weaknesses determined, if
any, documenting, and then testing the effectiveness of those
controls.
|
Other
than as described above, there have not been any other changes in our internal
control over financial reporting as of the quarter ended June 30, 2008 that
has
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II. Other
Information
Risks
Related To Our Business
We
will require additional capital in the future to fund our operations, which
capital may not be available on commercially attractive terms or at
all.
We
will
require sources of capital in addition to cash on hand to continue operations
and to implement our strategy. In March 2008, we closed an aggregate of $4.0
million, net of offering expenses, of private equity financing and in May 2008
we closed an aggregate of $4.2 million, net of offering expenses, of private
equity financing. We project that we have sufficient liquid assets to continue
operating into the end of the third quarter of 2008. We estimate that we will
need a minimum of approximately $5 million of additional cash from a combination
of revenue growth and additional financings, to fund operating expenses and
capital expenditures for the twelve-months ending June 30, 2009. We are
currently evaluating different financing alternatives including but not limited
to selling shares of our common stock or issuing notes that may be converted
in
shares of our common stock which could result in the issuance of additional
shares. If our operations do not become cash flow positive as projected we
will
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.
Our
vendors may deny our requests to delay or reduce the payment of amounts owed
to
them or to cancel shipments of materials and products purchased from and to
allow us to return unused materials and products already received from them.
We
are
indebted to vendors in excess of $8 million and have cash resources totaling
$2.1 million at June 30, 2008. We
are
not generating cash from operations and have been incurring significant losses.
We
have
been funding our operations primarily with cash proceeds raised through the
sale
of notes that are convertible into our common stock, shares of our common stock
and warrants. Unless
we
are able to increase our revenues and decrease expenses substantially and secure
an external funding source, we
may
not be able to pay our vendors the amount due them and we
will
not have sufficient cash to support our operations for the next six
months.
Our
vendors may
not
allow us to return unused materials or renegotiate amounts owed them. or they
may resort to legal action to try to enforce payment in full pursuant to the
terms or the original payment commitment.
We
have never been profitable and we anticipate significant additional losses
in
the future .
Neonode
was formed in 2006 as a holding company owning and operating Neonode AB, which
was formed in 2004 and has been primarily engaged in the business of developing
and selling mobile phones. We have a limited operating history on which to
base
an evaluation of our business and prospects. Our prospects must be considered
in
light of the risks and uncertainties encountered by companies in the early
stages of development, particularly companies in new and rapidly evolving
markets. Our success will depend on many factors, including, but not limited
to:
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the
growth of mobile telephone usage;
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the
efforts of our marketing partners;
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the
level of competition faced by us;
and
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our
ability to meet customer demand for products and ongoing
service.
|
In
addition, we have experienced substantial net losses in each fiscal period
since
our inception. These net losses resulted from a lack of substantial revenues
and
the significant costs incurred in the development of our products and
infrastructure. Our ability to continue as a going concern is dependent on
our
ability to raise additional funds and implement our business
plan.
Our
limited operating history and the emerging nature of our market, together with
the other risk factors set forth in this report, make prediction of our future
operating results difficult. There can also be no assurance that we will ever
achieve significant revenues or profitability or, if significant revenues and
profitability are achieved, that they could be sustained.
Our
independent registered public accounting firm issued a going concern opinion
on
our financial statements, questioning our ability to continue as a going
concern.
Due
to
our need to raise additional financing to fund our operations and satisfy
obligations as they become due, our independent registered public accounting
firm has included an explanatory paragraph in their report on our December
31,
2007 consolidated financial statements regarding their substantial doubt as
to
our ability to continue as a going concern. This may have a negative impact
on
the trading price of our common stock and adversely impact our ability to obtain
necessary financing.
If
we fail to develop and introduce new products and services successfully and
in a
cost effective and timely manner, we will not be able to compete effectively
and
our ability to generate revenues will suffer
.
We
operate in a highly competitive, rapidly evolving environment, and our success
depends on our ability to develop and introduce new products and services that
our customers and end users choose to buy. If we are unsuccessful at developing
and introducing new products and services that are appealing to our customers
and end users with acceptable quality, prices and terms, we will not be able
to
compete effectively and our ability to generate revenues will
suffer.
The
development of new products and services is very difficult and requires high
levels of innovation. The development process is also lengthy and costly. If
we
fail to anticipate our end users’ needs or technological trends accurately or we
are unable to complete the development of products and services in a cost
effective and timely fashion, we will be unable to introduce new products and
services into the market or successfully compete with other
providers.
We
are dependent on third parties to manufacture and supply our products and
components of our products.
Our
products are built by a production partner. Although we provide our production
partner with key performance specifications for the phones, our production
partner could:
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· |
manufacture phones
with
defects that fail to perform to our
specifications;
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fail
to meet delivery schedules; or
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fail
to properly service phones or honor
warranties.
|
Any
of
the foregoing could adversely affect our ability to sell our products and
services, which, in turn, could adversely affect our revenues, profitability
and
liquidity, as well as our brand image.
We
may become highly dependent on wireless carriers for the success of our
products.
Our
business strategy includes significant efforts to establish relationships with
international wireless carriers. We cannot assure you that we will be successful
in establishing new relationships, or maintaining such relationships, with
wireless carriers or that these wireless carriers will act in a manner that
will
promote the success of our multimedia phone products. Factors that are largely
within the control of wireless carriers, but which are important to the success
of our multimedia phone products, include:
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testing
of our products on wireless carriers’ networks;
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quality
and coverage area of wireless voice and data services offered by
the
wireless carriers;
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the
degree to which wireless carriers facilitate the introduction of
and
actively market, advertise, promote,
distribute and resell our multimedia phone products;
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the
extent to which wireless carriers require specific hardware and software
features on our multimedia phone
to be used on their networks;
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timely
build out of advanced wireless carrier networks that enhance the
user
experience for data centric services
through higher speed and other functionality;
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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;
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wireless
carriers’ pricing requirements and subsidy programs;
and
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pricing
and other terms and conditions of voice and data rate plans that
the
wireless carriers offer for use
with our multimedia phone products.
|
For
example, flat data rate pricing plans offered by some wireless carriers may
represent some risk to our relationship with such carriers. While flat data
pricing helps customer adoption of the data services offered by carriers and
therefore highlights the advantages of the data applications of its products,
such plans may not allow its multimedia phones to contribute as much average
revenue per user to wireless carriers as when they are priced by usage, and
therefore reduces our differentiation from other, non-data devices in the view
of the carriers. In addition, if wireless carriers charge higher rates than
consumers are willing to pay, the acceptance of our wireless solutions could
be
less than anticipated and our revenues and results of operations could be
adversely affected.
Wireless
carriers have substantial bargaining power as we enter into agreements with
them. They may require contract terms that are difficult for us to satisfy,
which could result in higher costs to complete certification requirements and
negatively impact our results of operations and financial condition. Moreover,
we may not have agreements with some of the wireless carriers with whom they
will do business and, in some cases, the agreements may be with third-party
distributors and may not pass through rights to us or provide us with recourse
or contact with the carrier. The absence of agreements means that, with little
or no notice, these wireless carriers could refuse to continue to purchase
all
or some of our products or change the terms under which they purchase our
products. If these wireless carriers were to stop purchasing our products,
we
may be unable to replace the lost sales channel on a timely basis and our
results of operations could be harmed.
Carriers,
who control most of the distribution and sale of, and virtually all of the
access for, multimedia phone products could commoditize multimedia phones,
thereby reducing the average selling prices and margins for our products which
would have a negative impact on our business, results of operations and
financial condition. In addition, if carriers move away from subsidizing the
purchase of mobile phone products, this could significantly reduce the sales
or
growth rate of sales of mobile phone products. This could have an adverse impact
on our business, revenues and results of operations.
As
we build strategic relationships with wireless carriers, we may be exposed
to
significant fluctuations in revenue for our multimedia phone
products
.
Because
of their large sales channels, wireless carriers may purchase large quantities
of our products prior to launch so that the products are widely available.
Reorders of products may fluctuate quarter to quarter, depending on end-customer
demand and inventory levels required by the carriers. As we develop new
strategic relationships and launch new products with wireless carriers, our
revenue could be subject to significant fluctuation based on the timing of
carrier product launches, carrier inventory requirements, marketing efforts
and
our ability to forecast and satisfy carrier and end-customer demand. We do
not
have a history of selling to wireless carriers and as a result do not have
do
not have a basis for estimating what the potential fluctuations in our revenue
will be from the sale of our multimedia phones.
The
mobile communications industry is highly competitive and many of our competitors
have significantly greater resources to engage in product development,
manufacturing, distribution and marketing.
The
mobile communications industry, in which we are engaged, is a highly competitive
business with companies of all sizes engaged in business in all areas of the
world, including companies with far greater resources than we have. There can
be
no assurance that other competitors, with greater resources and business
connections, will not compete successfully against us in the future. Our
competitors may adopt new technologies that reduce the demand for our products
or render our technologies obsolete, which may have a material adverse effect
on
the cost structure and competitiveness of our products, possibly resulting
in a
negative effect on our revenues, profitability or liquidity.
Our
future results could be harmed by economic, political, regulatory and other
risks associated with international sales and
operations.
Because
we sell our products worldwide and most of the facilities where our devices
are
manufactured, distributed and supported are located outside the United States,
our business is subject to risks associated with doing business internationally,
such as:
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changes
in foreign currency exchange rates;
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the
impact of recessions in the global economy or in specific sub
economies;
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changes
in a specific country’s or region’s political or economic conditions,
particularly in emerging markets;
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changes
in international relations;
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trade
protection measures and import or export licensing
requirements;
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changes
in tax laws;
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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;
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difficulty
in managing widespread sales operations;
and
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difficulty
in managing a geographically dispersed workforce in compliance with
diverse local laws and customs.
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While
we
sell our products worldwide, one component of our strategy is to expand our
sales efforts in countries with large populations and propensities for adopting
new technologies. We have limited experience with sales and marketing in some
of
these countries. There can be no assurance that we will be able to market and
sell our products in all of our targeted international markets. If our
international efforts are not successful, our business growth and results of
operations could be harmed.
We
must significantly enhance our sales and product development
organizations.
We
will
need to improve the effectiveness and breadth of our sales operations in order
to increase market awareness and sales of our products, especially as we expand
into new markets. Competition for qualified sales personnel is intense, and
we
may not be able to hire the kind and number of sales personnel we are targeting.
Likewise, our efforts to improve and refine our products require skilled
engineers and programmers. Competition for professionals capable of expanding
our research and development organization is intense due to the limited number
of people available with the necessary technical skills. If we are unable to
identify, hire or retain qualified sales, marketing and technical personnel,
our
ability to achieve future revenue may be adversely affected.
We
are dependent on the services of our key personnel.
We
are
dependent on our current management for the foreseeable future. The loss of
the
services of any member of management could have a materially adverse effect
on
our operations and prospects.
If
third parties infringe our intellectual property or if we are unable to secure
and protect our intellectual property, we may expend significant resources
enforcing our rights or suffer competitive injury.
Our
success depends in large part on our proprietary technology and other
intellectual property rights. We rely on a combination of patents, copyrights,
trademarks and trade secrets, confidentiality provisions and licensing
arrangements to establish and protect our proprietary rights. Our intellectual
property, particularly our patents, may not provide us a significant competitive
advantage. If we fail to protect or to enforce our intellectual property rights
successfully, our competitive position could suffer, which could harm our
results of operations.
Our
pending patent and trademark applications for registration may not be allowed,
or others may challenge the validity or scope of our patents or trademarks,
including patent or trademark applications or registrations. Even if our patents
or trademark registrations are issued and maintained, these patents or
trademarks may not be of adequate scope or benefit to them or may be held
invalid and unenforceable against third parties.
We
may be
required to spend significant resources to monitor and police our intellectual
property rights. Effective policing of the unauthorized use of our products
or
intellectual property is difficult and litigation may be necessary in the future
to enforce our intellectual property rights. Intellectual property litigation
is
not only expensive, but time-consuming, regardless of the merits of any claim,
and could divert attention of our management from operating the business.
Despite our efforts, we may not be able to detect infringement and may lose
competitive position in the market before they do so. In addition, competitors
may design around our technology or develop competing technologies. Intellectual
property rights may also be unavailable or limited in some foreign countries,
which could make it easier for competitors to capture market share.
Despite
our efforts to protect our proprietary rights, existing laws, contractual
provisions and remedies afford only limited protection. Intellectual property
lawsuits are subject to inherent uncertainties due to, among other things,
the
complexity of the technical issues involved, and we cannot assure you that
we
will be successful in asserting intellectual property claims. Attempts may
be
made to copy or reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we cannot assure you
that we will be able to protect our proprietary rights against unauthorized
third party copying or use. The unauthorized use of our technology or of our
proprietary information by competitors could have an adverse effect on our
ability to sell our products.
We
have an international presence in countries whose laws may not provide
protection of our intellectual property rights to the same extent as the laws
of
the United States, which may make it more difficult for us to protect our
intellectual property.
If
we do not correctly forecast demand for our products, we could have costly
excess production or inventories or we may not be able to secure sufficient
or
cost effective quantities of our products or production materials, and our
revenues, cost of revenues and financial condition could be adversely
impacted.
The
demand for our products depends on many factors, including pricing and channel
inventory levels, and is difficult to forecast due in part to variations in
economic conditions, changes in consumer and enterprise preferences, relatively
short product life cycles, changes in competition, seasonality and reliance
on
key sales channel partners. It is particularly difficult to forecast demand
by
individual variations of the product, such as the color of the casing or size
of
memory. Significant unanticipated fluctuations in demand, the timing and
disclosure of new product releases or the timing of key sales orders could
result in costly excess production or inventories or the inability to secure
sufficient, cost-effective quantities of our products or production materials.
This could adversely impact our revenues, cost of revenues and financial
condition.
We
rely on third parties to sell and distribute our products and we rely on their
information to manage our business. Disruption of our relationship with these
channel partners, changes in their business practices, their failure to provide
timely and accurate information or conflicts among its channels of distribution
could adversely affect our business, results of operations and financial
condition.
The
distributors, wireless carriers, retailers and resellers who sell or distribute
our products also sell products offered by our competitors. If our competitors
offer our sales channel partners more favorable terms or have more products
available to meet their needs or utilize the leverage of broader product lines
sold through the channel, those wireless carriers, distributors, retailers
and
resellers may de-emphasize or decline to carry our products. In addition,
certain of our sales channel partners could decide to de-emphasize the product
categories that we offer in exchange for other product categories that they
believe provide higher returns. If we are unable to maintain successful
relationships with these sales channel partners or to expand our distribution
channels, our business will suffer.
Because
we intend to sell our products primarily to distributors, wireless carriers,
retailers and resellers, we are subject to many risks, including risks related
to product returns, either through the exercise of contractual return rights
or
as a result of its strategic interest in assisting them in balancing
inventories. In addition, these sales channel partners could modify their
business practices, such as inventory levels, or seek to modify their
contractual terms, such as return rights or payment terms. Unexpected changes
in
product return requests, inventory levels, payment terms or other practices
by
these sales channel partners could negatively impact our business, results
of
operations and financial condition.
We
will
rely on distributors, wireless carriers, retailers and resellers to provide
us
with timely and accurate information about their inventory levels as well as
sell-through of products purchased from us. We will use this information as
one
of the factors in our forecasting process to plan future production and sales
levels, which in turn will influence our public financial forecasts. We will
also use this information as a factor in determining the levels of some of
our
financial reserves. If we do not receive this information on a timely and
accurate basis, our results of operations and financial condition may be
adversely impacted.
Distributors,
retailers and traditional resellers experience competition from Internet-based
resellers that distribute directly to end-customers, and there is also
competition among Internet-based resellers. We also sell our products directly
to end-customers from our Neonode.com web site. These varied sales channels
could cause conflict among our channels of distribution, which could harm our
business, revenues and results of operations.
If
our multimedia phone products do not meet wireless carrier and governmental
or
regulatory certification requirements, we will not be able to compete
effectively and our ability to generate revenues will
suffer.
We
depend on our suppliers, some of which are the sole source and some of which
are
our competitors, for certain components, software applications and elements
of
our technology, and our production or reputation could be harmed if these
suppliers were unable or unwilling to meet our demand or technical requirements
on a timely and/or a cost-effective basis.
Our
multimedia products contain software applications and components, including
liquid crystal displays, touch panels, memory chips, microprocessors, cameras,
radios and batteries, which are procured from a variety of suppliers, including
some who are our competitors. The cost, quality and availability of software
applications and components are essential to the successful production and
sale
of our device products. For example, media player applications are critical
to
the functionality of our multimedia phone devices.
Some
components, such as screens and related integrated circuits, digital signal
processors, microprocessors, radio frequency components and other discrete
components, come from sole source suppliers. Alternative sources are not always
available or may be prohibitively expensive. In addition, even when we have
multiple qualified suppliers, we may compete with other purchasers for
allocation of scarce components. Some components come from companies with whom
we competes in the multimedia phone device market. If suppliers are unable
or
unwilling to meet our demand for components and if we are unable to obtain
alternative sources or if the price for alternative sources is prohibitive,
our
ability to maintain timely and cost-effective production of our multimedia
phone
will be harmed. Shortages affect the timing and volume of production for some
of
our products as well as increasing our costs due to premium prices paid for
those components. Some of our suppliers may be capacity-constrained due to
high
industry demand for some components and relatively long lead times to expand
capacity.
If
we are unable to obtain key technologies from third parties on a timely basis
and free from errors or defects, we may have to delay or cancel the release
of
certain products or features in our products or incur increased
costs.
We
license third-party software for use in our products, including the operating
systems. Our ability to release and sell our products, as well as our
reputation, could be harmed if the third-party technologies are not delivered
to
customers in a timely manner, on acceptable business terms or contain errors
or
defects that are not discovered and fixed prior to release of our products
and
we are unable to obtain alternative technologies on a timely and cost effective
basis to use in our products. As a result, our product shipments could be
delayed, our offering of features could be reduced or we may need to divert
our
development resources from other business objectives, any of which could
adversely affect our reputation, business and results of
operations.
Our
product strategy is to base our products on software operating systems that
are
commercially available to competitors.
Our
multimedia phone is based on a commercially available version of Microsoft’s
Windows CE. We cannot assure you that we will be able to maintain this licensing
agreement with Microsoft and that Microsoft will not grant similar rights to
our
competitors or that we will be able to sufficiently differentiate our multimedia
phone from the multitude of other devices based on Windows CE.
In
addition, there is significant competition in the operating system software
and
services market, including proprietary operating systems such as Symbian and
Palm OS, open source operating systems, such as Linux, other proprietary
operating systems and other software technologies, such as Java and RIM’s
licensed technology. This competition is being developed and promoted by
competitors and potential competitors, some of which have significantly greater
financial, technical and marketing resources than we have, such as Access,
Motorola, Nokia, Sony-Ericsson and RIM. These competitors could provide
additional or better functionality than we do or may be able to respond more
rapidly than we can to new or emerging technologies or changes in customer
requirements. Competitors in this market could devote greater resources to
the
development, promotion and sale of their products and services and the
third-party developer community, which could attract the attention of
influential user segments.
If
we are
unable to continue to differentiate the operating systems that we include in
our
mobile computing devices, our revenues and results of operations could be
adversely affected.
The
market for multimedia phone products is volatile, and changing market
conditions, or failure to adjust to changing market conditions, may adversely
affect our revenues, results of operations and financial condition, particularly
given our size, limited resources and lack of
diversification.
This
reliance on the success of and trends in our industry is compounded by the
size
of our organization and our focus on multimedia phones. These factors also
make
us more dependent on investments of our limited resources. For example, Neonode
faces many resource allocation decisions, such as: where to focus our research
and development, geographic sales and marketing and partnering efforts; which
aspects of our business to outsource; and which operating systems and email
solutions to support. Given the size and undiversified nature of our
organization, any error in investment strategy could harm our business, results
of operations and financial condition.
Our
products are subject to increasingly stringent laws, standards and other
regulatory requirements, and the costs of compliance or failure to comply may
adversely impact our business, results of operations and financial
condition.
Our
products must comply with a variety of laws, standards and other requirements
governing, among other things, safety, materials usage, packaging and
environmental impacts and must obtain regulatory approvals and satisfy other
regulatory concerns in the various jurisdictions where our products are sold.
Many of our products must meet standards governing, among other things,
interference with other electronic equipment and human exposure to
electromagnetic radiation. Failure to comply with such requirements can subject
us to liability, additional costs and reputational harm and in severe cases
prevent us from selling our products in certain jurisdictions.
For
example, many of our products are subject to laws and regulations that restrict
the use of lead and other substances and require producers of electrical and
electronic equipment to assume responsibility for collecting, treating,
recycling and disposing of our products when they have reached the end of their
useful life. In Europe, substance restrictions began to apply to the products
sold after July 1, 2006, when new recycling, labeling, financing and
related requirements came into effect. Failure to comply with applicable
environmental requirements can result in fines, civil or criminal sanctions
and
third-party claims. If products we sell in Europe are found to contain more
than
the permitted percentage of lead or another listed substance, it is possible
that we could be forced to recall the products, which could lead to substantial
replacement costs, contract damage claims from customers, and reputational
harm.
We expect similar requirements in the United States, China and other parts
of
the world.
As
a
result of these new European requirements and anticipated developments
elsewhere, we are facing increasingly complex procurement and design challenges,
which, among other things, require us to incur additional costs identifying
suppliers and contract manufacturers who can provide, and otherwise obtain,
compliant materials, parts and end products and re-designing products so that
they comply with these and the many other requirements applicable to
them.
Allegations
of health risks associated with electromagnetic fields and wireless
communications devices, and the lawsuits and publicity relating to them,
regardless of merit, could adversely impact our business, results of operations
and financial condition.
There
has
been public speculation about possible health risks to individuals from exposure
to electromagnetic fields, or radio signals, from base stations and from the
use
of mobile devices. While a substantial amount of scientific research by various
independent research bodies has indicated that these radio signals, at levels
within the limits prescribed by public health authority standards and
recommendations, present no evidence of adverse effect to human health, we
cannot assure you that future studies, regardless of their scientific basis,
will not suggest a link between electromagnetic fields and adverse health
effects. Government agencies, international health organizations and other
scientific bodies are currently conducting research into these issues. In
addition, other mobile device companies have been named in individual plaintiff
and class action lawsuits alleging that radio emissions from mobile phones
have
caused or contributed to brain tumors and the use of mobile phones pose a health
risk. Although our products are certified as meeting applicable public health
authority safety standards and recommendations, even a perceived risk of adverse
health effects from wireless communications devices could adversely impact
use
of wireless communications devices or subject them to costly litigation and
could harm our reputation, business, results of operations and financial
condition.
Changes
in financial accounting standards or practices may cause unexpected fluctuations
in and adversely affect our reported results of
operations.
Wars,
terrorist attacks or other threats beyond its control could negatively impact
consumer confidence, which could harm our operating
results.
Wars,
terrorist attacks or other threats beyond our control could have an adverse
impact on the United States, Europe and world economy in general, and consumer
confidence and spending in particular, which could harm our business, results
of
operations and financial condition.
Risks
Related to Owning Our Stock
Our
common stock is at risk for delisting from the Nasdaq Capital Market. If it
is
delisted, our stock price and your liquidity may be
impacted.
Our
common stock is quoted on The NASDAQ Capital Market under the symbol “NEON”. In
order for our common stock to continue to be quoted on the NASDAQ Capital
Market, we must satisfy various listing maintenance standards established by
NASDAQ. Among other things, as such requirements pertain to us, we are required
to have stockholders’ equity of at least $2.5 million or a market capitalization
of at least $35 million and our common stock must have a minimum closing bid
price of $1.00 per share.
On
May
29, 2008, we received a NASDAQ staff deficiency letter from The NASDAQ Stock
Market Listing Qualifications Department stating that for the last 10
consecutive business days, the market value of our listed securities has been
below the minimum $35 million requirement for continued inclusion under
Marketplace Rule 4310 (c)(3)(B) (the "Rule"). The notice further states that
pursuant to Marketplace Rule 4310(c)(8)(C), we were provided 30 calendar days
(or until June 30, 2008) to regain compliance.
On
July
1, 2008, we received a notice from NASDAQ that we had not regained compliance
within the specified time period and that unless we requested an appeal of
the
non-compliance determination our securities would be suspended from trading
on
the NASDAQ Capital Market on July 10, 2008. We submitted a request to have
a
hearing to the NASDAQ Listing Qualifications Panel (Panel). Our request stays
the delisting of our securities pending the hearing and a determination by
the
Panel. We are scheduled to appear before the Panel on August 28, 2008. There
can
be no assurance that the Panel will grant our request for continued listing.
Additionally,
on July 3, 2008, we received another staff deficiency letter from NASDAQ stating
that for the last 30 consecutive business days, the bid price of our common
stock closed below the $1.00 minimum required for continued inclusion under
Marketplace Rule 4310(c)(4). The notice further states that pursuant to
Marketplace Rule 4310(c)(8)(D), we will be provided 180 calendar days (or until
December 30, 2008) to regain compliance. If, at anytime before December 30,
2008, the bid price of our common stock closes at $1.00 per share or more for
a
minimum of 10 consecutive business days, we may regain compliance with the
Minimum Bid Price Rule.
The
notice indicates that, if compliance with the Minimum Bid Price Rule is not
regained by December 30, 2008, the NASDAQ staff will determine whether we meet
the Nasdaq Capital Market initial listing criteria as set forth in Marketplace
Rule 4310(c), except for the bid price requirement. If we meet the initial
listing criteria, the NASDAQ staff will notify us that we have been granted
an
additional 180 calendar day compliance period. If we are not eligible for an
additional compliance period the NASDAQ staff will provide written notification
that our securities will be delisted.
If
we continue to experience losses, we could experience difficulty meeting our
business plan and our stock price could be negatively
affected.
If
we are
unable to gain market acceptance of our mobile phone handsets, we will
experience continuing operating losses and negative cash flow from our
operations. Any failure to achieve or maintain profitability could negatively
impact the market price of our common stock. We anticipate that we will continue
to incur product development, sales and marketing and administrative expenses.
As a result, we will need to generate significant quarterly revenues if we
are
to achieve and maintain profitability. A substantial failure to achieve
profitability could make it difficult or impossible for us to grow our business.
Our business strategy may not be successful, and we may not generate significant
revenues or achieve profitability. Any failure to significantly increase
revenues would also harm our ability to achieve and maintain profitability.
If
we do achieve profitability in the future, we may not be able to sustain or
increase profitability on a quarterly or annual basis.
Our
certificate of incorporation and bylaws and the Delaware General Corporation
Law
contain provisions that could delay or prevent a change in
control.
Our
board
of directors has the authority to issue up to 2,000,000 shares of preferred
stock and to determine the price, rights, preferences and privileges of those
shares without any further vote or action by the stockholders. The rights of
the
holders of common stock will be subject to, and may be materially adversely
affected by, the rights of the holders of any preferred stock that may be issued
in the future. The issuance of preferred stock could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. Furthermore, certain other provisions of our certificate of
incorporation and bylaws may have the effect of delaying or preventing changes
in control or management, which could adversely affect the market price of
our
common stock. In addition, we are subject to the provisions of Section 203
of
the Delaware General Corporation Law, an anti-takeover law.
Our
stock price has been volatile, and your investment in our common stock could
suffer a decline in value.
There
has
been significant volatility in the market price and trading volume of equity
securities, which is unrelated to the financial performance of the companies
issuing the securities. These broad market fluctuations may negatively affect
the market price of our common stock. You may not be able to resell your shares
at or above the price you pay for those shares due to fluctuations in the market
price of our common stock caused by changes in our operating performance or
prospects and other factors.
Some
specific factors that may have a significant effect on our common stock market
price include:
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·
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actual
or anticipated fluctuations in our operating results or future
prospects;
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·
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our
announcements or our competitors’ announcements of new
products;
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·
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the
public’s reaction to our press releases, our other public announcements
and our filings with the SEC;
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·
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strategic
actions by us or our competitors, such as acquisitions or
restructurings;
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·
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new
laws or regulations or new interpretations of existing laws or regulations
applicable to our business;
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·
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changes
in accounting standards, policies, guidance, interpretations or
principles;
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·
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changes
in our growth rates or our competitors’ growth rates;
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·
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developments
regarding our patents or proprietary rights or those of our
competitors;
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·
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our
inability to raise additional capital as needed;
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·
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concern
as to the efficacy of our products;
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·
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changes
in financial markets or general economic conditions;
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·
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sales
of common stock by us or members of our management team;
and
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·
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changes
in stock market analyst recommendations or earnings estimates regarding
our common stock, other
comparable companies or our industry
generally.
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Future
sales of our common stock could adversely affect its price and our future
capital-raising activities could involve the issuance of equity securities,
which would dilute your investment and could result in a decline in the trading
price of our common stock.
We
may
sell securities in the public or private equity markets if and when conditions
are favorable, even if we do not have an immediate need for additional capital
at that time. Sales of substantial amounts of common stock, or the perception
that such sales could occur, could adversely affect the prevailing market price
of our common stock and our ability to raise capital. We may issue additional
common stock in future financing transactions or as incentive compensation
for
our executive management and other key personnel, consultants and advisors.
Issuing any equity securities would be dilutive to the equity interests
represented by our then-outstanding shares of common stock. The market price
for
our common stock could decrease as the market takes into account the dilutive
effect of any of these issuances. Furthermore, we may enter into financing
transactions at prices that represent a substantial discount to the market
price
of our common stock. A negative reaction by investors and securities analysts
to
any discounted sale of our equity securities could result in a decline in the
trading price of our common stock.
If
registration rights that we have previously granted are exercised, then the
price of our common stock may be adversely affected.
We
have
agreed to register with the SEC the shares of common issued to former Neonode
stockholders in connection with the merger and to participants in a private
placement funding we completed on March 4, 2008 and May 21, 2008. In
addition, we have granted piggyback registration rights to the investors who
participated in our March private placement. In the event these securities
are
registered with the SEC, they may be freely sold in the open market, subject
to
trading restrictions to which our insiders holding the shares may be subject
from time to time. In the event that we fail to register such shares in a timely
basis, we may have liabilities to such stockholders. We expect that we also
will
be required to register any securities sold in future private financings. The
sale of a significant amount of shares in the open market, or the perception
that these sales may occur, could cause the trading price of our common stock
to
decline or become highly volatile.
Item
4.
Submission of Matters to a Vote of Security Holders
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1)
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A
special meeting of stockholders was held on Friday, May 30, 2008,
at
the
offices of DavenportMajor Executive Search, located at 12770 High
Bluff
Drive, Suite 320, San Diego, CA.
|
The
stockholders approved the following item:
(i)
The
approval of the selection of BDO Feinstein International AB as our independent
registered public accounting firm for the fiscal year ending December 31,
2008
For
|
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Against
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Abstain
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13,235,040
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14,472
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14,287
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2)
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A
special meeting of stockholders was held on Tuesday, August 5, 2008,
at
our headquarters office located at Warfvingesväg
45, SE-112
51 Stockholm, Sweden.
|
The
stockholders approved the following item:
(i) The
approval of
the
terms of the May 2008 Financing, including without limitation the anti-dilution
provisions applicable to warrants issued pursuant to the May 2008
Financing.
Item
5. Other Information
Financial
Advisory Agreement
On
February 19, 2008, we entered into a Financial Advisory Agreement with our
financial advisor and placement agent, Empire Asset Management Company (Empire),
to advise us and act as our exclusive placement agent in connection with any
private placement and the sale of any equity securities.
As
part
of the March 4, 2008 financing, Empire
acted as our financial advisor for the transaction and was paid a cash fee
of
approximately $450,000 and received 120,000 shares of our common
stock.
As
part
of the May 2008 Financing, Empire acted as our financial advisor and was paid;
(i) cash fees equal to 10% of the gross proceeds from the May 2008 Financing,
plus (ii) warrants in substantially the form of the New Warrants, to purchase
a
number of shares of our Common Stock equal to 10% of the aggregate number of
Warrant Shares and New Warrants issued in the May 2008 Financing at an exercise
price equal to the reduced exercise price of the Exercise Warrants and the
exercise price of the New Warrants, respectively, and (iii) a non-accountable
expense allowance of $35,000. Empire received 1,201,439 warrants exercisable
at
prices ranging from $1.27 to $1.45 per share and a cash fee of $509,961, equal
to 10% of the gross proceeds received at the closing of the May 2008 Financing
through the exercise of the Exercise Warrants.
On
July
28, 2008, Empire notified us that they would no longer act as financial advisor
to the Company and terminated the Financial Advisory Agreements entered into
on
February 19, 2008 and May 12, 2008 effective immediately.
Item
6. Exhibits
Exhibits
Exhibit
#
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Description
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2.1
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Agreement
and Plan of Merger and Reorganization between SBE, Inc. and Neonode
Inc.,
dated
January 19, 2007 (incorporated
by reference to Exhibit 2.1 of our Current Report on
Form 8-K
filed on January 22, 2007
)
( In
accordance with Commission rules, we supplementally will
furnish a copy of any omitted schedule to the Commission upon
request
)
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2.2
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Amendment
No. 1 to the Agreement and Plan of Merger and Reorganization between
SBE,
Inc. and
Neonode Inc., dated May 18, 2007, effective May 25, 2007 (incorporated
by reference to Exhibit 2.1
of our Current Report on Form 8-K filed on May 29,
2007
)
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3.1
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Amended
and Restated Certificate of Incorporation, dated December 20, 2007,
effective December 21, 2007
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3.2
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Bylaws,
as amended through December 5, 2007
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10.1
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Note
Purchase Agreement, dated February 28, 2006
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10.2
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Senior
Secured Note issued to AIGH Investment Partners LLC, dated February
28,
2006
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10.3
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Senior
Secured Note issued to Hirshcel Berkowitz, dated February 28,
2006
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10.4
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Senior
Secured Note issued to Joshua Hirsch, dated February 28,
2006
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10.5
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Security
Agreement, dated February 28, 2006
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10.6
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Stockholder
Pledge and Security Agreement (form of), dated February 28,
2006
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10.7
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Intercreditor
Agreement, dated February 28, 2006
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10.8
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Note
Purchase Agreement, dated November 20, 2006
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10.9
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Senior
Secured Note issued to AIGH Investment Partners LLC, dated November
20,
2006
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10.10
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Senior
Secured Note issued to Hirshcel Berkowitz, dated November 20,
2006
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10.11
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Senior
Secured Note issued to Joshua Hirsch, dated November 20,
2006
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10.12
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Amendment
to Security Agreement, dated November 20, 2006
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10.13
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Amendment
to Stockholder Pledge and Security Agreement, dated November 20,
2006
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10.14
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Amendment
to Security Agreement, dated January 22,
2007
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10.15
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Amendment
to Stockholder Pledge and Security Agreement, dated January 22,
2007
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10.16
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Amendment
to Senior Secured Notes, dated May 22, 2007, effective May 25,
2007
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10.17
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Note
Purchase Agreement between SBE, Inc. and Neonode Inc., dated May
18, 2007,
effective
May 25, 2007 ( incorporated
by reference to Exhibit 10.1 of our Current Report on
Form 8-K filed on May 29, 2007
)
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10.18
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Senior
Secured Note issued to SBE, Inc., dated May 18, 2007, effective May
25,
2007 (incorporated
by reference to Exhibit 10.3 of our Current Report on Form 8-K
filed on May 29, 2007
)
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10.19
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Amendment
to Security Agreement, dated July 31, 2007
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10.20
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Amendment
to Stockholder Pledge and Security Agreement, dated July 31,
2007
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10.21
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Note
Purchase Agreement, dated July 31, 2007
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10.22
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Amendment
to Note Purchase Agreement, dated August 1, 2007
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10.23
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Amendment
No. 2 to Note Purchase Agreement, dated December 21,
2007
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10.24
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Amendment
No. 3 to Note Purchase Agreement, dated March 31, 2008
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10.25
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Senior
Secured Note, dated August 8, 2007 ( incorporated
by reference to Exhibit 10.22(a) of
our Current Report on Form 8-K filed on October 2,
2007
)
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10.26
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Amendment
to Senior Secured Note, dated September 10, 2007 ( incorporated
by reference to Exhibit 10.22(b)
of our Current Report on Form 8-K filed on October 2,
2007
)
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10.27
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Form
of Common Stock Purchase Warrant issued pursuant to Amendment to
Senior
Secured Notes, dated
September 10, 2007 ( incorporated
by reference to Exhibit 10.22(c) of our Current Report on
Form 8-K
filed on October 2, 2007
)
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10.28
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Subscription
Agreement, dated September 10, 2007 ( incorporated
by reference to Exhibit 10.23 of our
Current Report on Form 8-K filed on October 2, 2007
)
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10.29
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Convertible
Promissory Note ( incorporated
by reference to Exhibit 10.24 of our Current Report on
Form 8-K
filed on October 2, 2007
)
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10.30
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Form
of Common Stock Purchase Warrant ( incorporated
by reference to Exhibit 10.25 of our Current
Report on Form 8-K filed on October 2, 2007
)
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10.31
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Form
of Unit Purchase Warrant ( incorporated
by reference to Exhibit 10.26 of our Current Report on
Form 8-K filed on October 2, 2007
)
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10.32
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Subscription
Agreement, dated March 4, 2008 ( incorporated
by reference to Exhibit 10.1 of our Current
Report on Form 8-K filed on March 3, 2008
)
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10.33
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Asset
Purchase Agreement with One Stop Systems, Inc., dated January 11,
2007 (
incorporated
by reference
to Exhibit 2.1 of our Current Report on Form 8-K filed on
January 12, 2007
)
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10.34
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Asset
Purchase Agreement with Rising Tide Software, dated August 15, 2007
(
incorporated
by reference
to Exhibit 2.1 of our Current Report on Form 8-K filed on August
24, 2007
)
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10.35
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Lease
for 4000 Executive Parkway, Suite 200 dated July 27, 2005 with Alexander
Properties Company
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10.36
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Lease
for Warfvingesväg 45, SE-112 51 Stockholm, Sweden dated October 16, 2007
with NCC Property
G AB
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10.37
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1998
Non-Officer Stock Option Plan, as amended ( incorporated
by reference to Exhibit 99.2 of our Registration
Statement on Form S-8 (333-63228) filed on June 18,
2001
)+
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10.38
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2001
Non-Employee Directors’ Stock Option Plan, as amended ( incorporated
by reference to Exhibit 10.2
of our Annual Report on Form 10-K for the fiscal year ended October
31, 2002, as
filed on January 27, 2003
)+
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10.39
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Director
and Officer Bonus Plan, dated September 21, 2006 ( incorporated
by reference to Exhibit 10.1
of our Current Report on Form 8-K filed on September 26,
2006
)+
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10.40
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Employment
Agreement with Mikael Hagman, dated November 30, 2006+
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10.41
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Executive
Severance Benefits Agreement with Kenneth G. Yamamoto, dated March
21,
2006 (incorporated
by reference to Exhibit 10.16 of our Quarterly Report on
Form 10-Q for the period ended
January 31, 2007, as filed on March 16, 2007
)+
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10.42
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Executive
Severance Benefits Agreement with David W. Brunton, dated April 12,
2004
(incorporated
by reference to Exhibit 10.13 of our Quarterly Report on
Form 10-Q for the period ended
January 31, 2005, as filed on March 2, 2005
)+
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10.43
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Executive
Severance Benefits Agreement with Kirk Anderson, dated April 12,
2004
(incorporated
by reference
to Exhibit 10.14 of our Quarterly Report on Form 10-Q for the
period ended January 31, 2005, as
filed on March 2, 2005
)+
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10.44
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Executive
Severance Benefits Agreement with Leo Fang, dated May 24, 2006 (
incorporated
by reference
to Exhibit 10.1 of our Current Report on Form 8-K filed on May
26, 2006
)+
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10.45
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Executive
Severance Benefits Agreement with Nelson Abal, dated August 4, 2006
(incorporated
by
reference to Exhibit 10.1 of our Current Report on Form 8-K
filed on August 7, 2006
)+
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10.46
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Formation
and Contribution Agreement for Neonode USA LLC dated January 8,
2008 (incorporated
by reference to Exhibit 10.46 of our Quarterly Report on Form 10-Q
filed
on May 20, 2008)
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10.47
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License
Agreement by and among Neonode AB, Neonode Inc. and Neonode USA LLC
dated
January 8, 2008. (incorporated
by reference to Exhibit 10.1 of our Quarterl Report on Form
10-Q filed on May 20, 2008)
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10.48
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Form
of Warrant Exercise Subscription Agreement, dated as of May 19, 2008
(incorporated
by reference to Exhibit 10.48 of our Current Report on Form 8-K
filed on May 27, 2008)
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10.49
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Form
of Warrant Transfer Agreement, dated as of May 19, 2008 (incorporated
by reference to Exhibit 10.49 of our Current Report on Form 8-K
filed on May 27, 2008)
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10.50
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Form
of New Warrant, pursuant to Warrant Exercise Subscription Agreement
and
Warrant Transfer Agreement, each
dated as of May 19, 2008
(incorporated
by reference to Exhibit 10.50 of our Current Report on Form 8-K
filed on May 27, 2008)
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10.51
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Amendment
No. 4 to Note Purchase Agreement, dated as of May 19, 2008 (incorporated
by reference to Exhibit 10.51 of our Current Report on Form 8-K
filed on May 27, 2008)
|
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10.52
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Form
of Extension Warrant pursuant to Amendment No. 4 to Note Purchase
Agreement, dated as of May 19, 2008 (incorporated
by reference to Exhibit 10.52 of our Current Report on Form 8-K
filed on May 27, 2008)
|
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10.53
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Financial
Advisor Agreement with Empire Asset Management Company, dated as
of May
12, 2008 (incorporated
by reference to Exhibit 10.53 of our Current Report on Form 8-K
filed on May 27, 2008)
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31.1
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Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act Of 2002
|
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31.2
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act Of 2002
|
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|
|
32
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley
Act
of 2002
|
+
Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly this report to be signed on its behalf by the undersigned thereunto duly
authorized, on August 14, 2008.
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Neonode
Inc.
Registrant
|
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Date:
August 14, 2008 |
By: |
/s/
David W. Brunton |
|
David
W. Brunton
Chief
Financial Officer,
Vice
President, Finance
and
Secretary
(Principal
Financial and
Accounting
Officer)
|