Neonode Inc. - Quarter Report: 2010 March (Form 10-Q)

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x          Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2010

o         Transition report pursuant to section 13 or 15(d) of the Securities and Exchange Act of 1934

                                                            

 

NEONODE INC.

 

 

 

2.            Summary of significant accounting policies

 

 

 

 

 

 

 

 

Our net accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its 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 its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. We did not record an allowance for doubtful accounts at March 31, 2010.

 

Tooling	1 year
Computer equipment	3 years
Furniture and fixtures	5 years

 

 

 

 

 

The functional currency of our foreign subsidiary is the applicable local currency, the Swedish Krona. The translation from Swedish Krona to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or losses resulting from translation are included as a separate component of accumulated other comprehensive loss. Gains or losses resulting from foreign currency transactions are included in other (expense) income. For the periods ended March 31, 2010 and 2009, we had no foreign currency transaction gains or losses.

 

 

 

 

 

 

Our comprehensive loss includes cumulative foreign currency translation gains and losses which are reflected as a separate component in stockholders’ deficit.

 

 

 

 

 

		March 31,                             December 31,
		2010				2009
Senior Convertible Secured Notes - 2007		$	139			$	139
Senior Convertible Secured Notes - 2009			987				987
Senior Convertible Secured Notes - 2010			1,203				--
Total			2,329				1,126
Less: unamortized debt discounts			(1,567	)			(765	)
Convertible debt		$	762			$	361

		Future Maturity of Notes Payable
Year ended December 31, 2010		$	2,329
Total principal payments		$	2,329

 

 

The fair value of the embedded conversion feature of the September 2009 Convertible Notes totaled $2.2 million on the dates of issuance of the convertible debt. The $2.2 million fair value of the conversion feature is included in the account entitled embedded derivatives of convertible debt and warrants on our consolidated balance sheet.  We recorded a debt discount of $987,000 and the excess fair value was recorded as an expense in the account entitled non-cash items related to debt discounts and deferred financing fees and the valuation of conversion features and warrants on our consolidated statement of operations (totaling $1.2 million) for the year ended December 31, 2009. The embedded conversion feature was valued on the dates we received the proceeds using the Black-Scholes option pricing model. The assumptions used for the Black-Scholes option pricing model at the dates of issuance ranged from a term of 1 to 1.33 years, volatility of 226.79% to 247.52%, and a risk-free interest rate of 1.13%. 

 

 

On March 21, 2010, we issued 875,000 shares of our common stock and a warrant to purchase 875,000 of our common stock at an exercise price of $0.04 per share to an investor for services provided for the private placement of convertible note and warrant in the 2010 financing transaction.  The fair value of the 875,000 shares of common stock is $26,000 based on our common stock closing price on the date of issuance. The $26,000 fair value is included in common stock and additional paid- in capital and debt issuance costs on the condensed consolidated balance sheets. The $26,000 fair value of the warrants is included in embedded derivatives of convertible debt and warrants and debt issuance costs on the condensed consolidated balance sheets. The warrants were valued using the Black-Scholes option pricing model. The assumptions used for the Black-Scholes option pricing model at March 31, 2010 were a term of 3 years, volatility of 204.37%, and a risk-free interest rate of 1.60%.

	Dividends and Distributions.

Series A Preferred:

The holders of shares of Series A Preferred stock are entitled to participate with the holders of our common stock with respect to any dividends declared on the common stock in proportion to the number of shares of common stock issuable upon conversion of the shares of Series A Preferred stock held by them.

Series B Preferred:

The holders of shares of Series B Preferred stock are entitled to participate with the holders of our common stock with respect to any dividends declared on the common stock in proportion to the number of shares of common stock issuable upon conversion of the shares of Series B Preferred stock held by them.

	Liquidation Preference.

Series A Preferred:

In the event of any liquidation, dissolution, or winding up of our operations, either voluntary or involuntary, subject to the rights of any other series of Preferred stock to be established by the Board of Directors (the “Senior Preferred Stock”), the holders of Series A Preferred stock shall be entitled to receive, after any distribution to the holders of Senior Preferred Stock and prior to and in preference to any distribution to the holders of common stock, $0.001 for each share of Series A Preferred stock then outstanding.

Series B Preferred:

In the event of any liquidation, dissolution, or winding up of our operations, either voluntary or involuntary, subject to the rights of the Series A Preferred stock and Senior Preferred Stock, the holders of Series B Preferred stock shall be entitled to receive, after any distribution to the holders of Senior Preferred Stock and prior to and in preference to any distribution to the holders of common stock, $0.001 for each share of Series B Preferred stock then outstanding.

Voting.

	Conversion.

		112,290.40 shares to investors in a private placement who invested $1,121,904.
		244,265.56 shares to convertible debt holders who converted $6,195,805 of principal and accrued interest;
		495,000 shares to acquire Neonode Technologies AB; and
		4,067.02 shares for brokerage services in regards to the refinancing and capital raising transactions.

		Shares of Preferred Stock Not Exchanged as of March 31, 2010				Conversion Ratio				Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged at March 31, 2010
Series A Preferred stock			68,120.33				480.63				32,740,674
Series B Preferred stock			9,874.38				132.07				1,304,110
Total  Remaining Not Exchanged			77,994.71								34,044,784

 

 

 

 

		March  31, 2010				Net Decrease in Fair Value				New Derivatives Added				December 31,  2009
Fair value of embedded conversion features and warrants		$	5,263			$	(1,215	)		$	1,971			$	4,507

 

		The 1996 Stock Option Plan (the 1996 Plan), which expired in January 2006;
		The 1998 Non-Officer Stock Option Plan (the 1998 Plan), which expired in June 2008 ;
		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).

The 2001 Non-Employee Director Stock Option Plan (the Director Plan).

		Weighted Average Number of Shares			Exercise Price Per Share			Weighted Average Exercise Price
Outstanding at January 1, 2010			497,095		$	1.42 - $27.50		$	4.15
Granted			---			---			---
Cancelled or expired			---		$	---			---
Exercised			---			---			---
Outstanding at March 31, 2010			497,095		$	1.42 - $ 27.50		$	4.15

 

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 Plans 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”). We will not grant any additional equity awards out of the Neonode Plan. 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.

 

We did not grant any stock options to employees or members of our Board of Directors (Board) during the three months ending March 31, 2010 and 2009. There was no other activity in our stock options during the three month periods ended March 31, 2010 and 2009.

 

Salary expense for the three months ended March 31, 2010 and 2009 includes a stock compensation charges relating to the above issuance of employee and director stock options. The fair value of the options at the date of issuance 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 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. Employee and director stock-based compensation expense related to stock options in the accompanying condensed statements of operations is as follows (in thousands):

		Three months ended March 31, 2009				Three months ended March 31, 2010				Remaining unamortized expense at March 31, 2010
Stock-based compensation		$	41			$	35			$	194

 

Outstanding Warrants as of March 31, 2010
Description	Issue Date		Exercise Price			Shares		Expiration Date
September 2007 Investor Warrants	9/26/2007		$	1.45		5,804			9/26/2012
May 2008 Broker Warrants	5/20/2008		$	0.02		45,133,832			5/20/2013
May 2008 Investor Warrants	5/22/2008		$	0.02		107,014,930			5/20/2013
August 2009 Employee Warrants	8/25/2009		$	0.02		15,660,000			8/25/2016
September 2009 Investor Warrants	9/15/2009		$	0.04		20,921,600			9/15/2012
October 2009 Investor Warrants	10/15/2009		$	0.04		3,052,976			10/15/2012
December 2009 Investor Warrants	12/15/2009		$	0.04		700,000			12/15/2012
Broker Warrants for 2009 Debt	12/31/2009		$	0.04		1,305,740			12/31/2012
March 2010 Investor Warrants	3/31/2010		$	0.04		30,080,282			3/31/2013
Broker warrants for 2010 Debt	3/21/2010		$	0.04		875,000			3/21/2013
Total warrants outstanding						224,750,164

The outstanding warrants related to the 2008 financing transactions contain price protection features whereby these instruments are protected separately for the life of the warrants. Under the price protection clause, if we issue warrants or convertible instruments, with certain exceptions, at a lower exercise price or conversion price than the remaining outstanding warrants, the exercise price of such warrants would be reduced to the lower price and the warrants exercisable would increase so that the total required cash investment of the warrant holder remains unchanged. During the quarter ended September 2009, we issued convertible notes to investors in the September 2009 convertible debt financing transaction convertible at $0.02 per share and this issuance triggered the price protection provision related to the original 2,118,599 previously outstanding price protected warrants; as such, we reduced the exercise price of the 2,118,599 warrants to $0.02 per share and increased the warrant shares to 152,148,762. No further resets have occurred through March 31, 2010.

 

On January 1, 2009, we adopted the new accounting guidance that requires warrants with certain types of anti-dilution ratchet features be accounted for as liabilities, where previously they had been accounted for as equity. Prior to this new accounting guidance, these ratchet provisions were only evaluated under prior accounting guidance, and because these ratchet provisions are generally within a company’s control, they did not trigger liability or derivative accounting. We determined that the original 2,118,599 outstanding warrants that include ratchet features fall under the new accounting guidance and the fair value of the warrants must be recorded as a liability and marked-to-market each reporting period with the changes in the fair value recorded as income/expense in the consolidated statement of operations.

 

On January 1, 2009, the fair value of the outstanding warrants was $67,000 and was recorded as a liability in the account entitled embedded derivatives of convertible debt and warrants with the corresponding reduction to additional paid-in capital. The assumptions used for the Black-Scholes option pricing model at January 1, 2009 were a term of 4.3 years, volatility of 143.12%, and a risk-free interest rate of 1.46%.

 

During the quarter ended March 31, 2009, we recorded an decrease related to the fair value of the outstanding warrants of $3,000 a gain in the account entitled non-cash items related to debt discounts and deferred financing fees and the valuation of conversion features and warrants on the consolidated statements of operations. The fair value of the outstanding warrants was $64,000 on March 31, 2009. The assumptions used for the Black-Scholes option pricing model for the quarter ended March 31, 2009 used a term of 3.5 years, volatility of 180%, and a risk-free interest rate of 1.8%.

As a result of the issuance of convertible notes in early October 2009, we no longer had enough unissued authorized shares to settle all outstanding equity instruments, including convertible preferred stock, convertible debt, options and warrants.  Therefore, in accordance with the applicable accounting guidance, all non-employee warrants were required to be recorded as liabilities from that point and marked-to-market at each period until we have sufficient unissued authorized shares to settle all outstanding equity instruments.  As a result, we reclassified the fair value of all non-employee warrants not already recorded as liabilities totaling $837,000 as of October 1, 2009 from additional paid-in capital to embedded derivatives of convertible debt and warrants.

 

 

 

 

 

 

 

8.             Net Loss Per Share

		Three Months ended March 31,
(in thousands, except per share amounts)
		2010				2009
BASIC AND DILUTED
Weighted average number of common shares outstanding			418,771				36,515
Number of shares for computation of net loss per share			418,771				36,515
Net loss attributable to common stockholders		$	(2,244	)		$	(6,043	)
Net loss per share - basic and diluted		$	(0.01	)		$	(0.17	)

 

 

Mr. Per Bystedt, our Chairman of the Board and Chief Executive Officer, is personally involved in our refinancing and capital raising activities. Mr. Bystedt is the beneficial holder of approximately 82.4 million shares of our common stock, or approximately 12%, of the Company’s outstanding shares of common stock as of December 31, 2009 on a fully diluted basis, and is the beneficial owner of Iwo Jima SARL. Mr. Bystedt purchased $16,000 of convertible notes as part of the 2010 convertible debt financing transaction that may be converted into 819,500 shares of our common stock and also received a warrant that, when exercised, can be converted into 419,750 shares of our common stock at a conversion price of $0.04 per share. Mr. Bystedt through his company, Iwo Jima SARL, entered into a consulting agreement in lieu of an employment agreement with us whereby he has earned a total of $55,000 for his services for the three months ended March 31, 2010. We did not pay any of the amount owed to Iwo Jima SARL during the three months ended March 31, 2010, and $55,000 is included in our accrued expenses at March 31, 2010. In addition, Iwo Jima SARL converted $163,000 of amounts owed to it for Mr. Bystedt’s consulting services as of December 31, 2009 into convertible notes that may be converted into 8,167,614 shares of our common stock and also received a warrant that, when exercised, can be converted into 4,083,807 shares of our common stock at a conversion price of $0.04 per share.

 

 

11.          Subsequent Events

 

 

 

 

 

 

 

 

 

 

 

 

As a result of the factors discussed above, we recorded a net loss of $2.2 million for the three month period ended March 31, 2010, compared to a net loss of $5.0 million in the comparable period in 2009.
 

actual versus anticipated licensing of our technology;

our actual versus anticipated operating expenses;

the timing of our OEM customer product shipments;

the timing of payment for our technology licensing agreements;

our actual versus anticipated gross profit margin;

our ability to raise additional capital, if necessary; and

our ability to secure credit facilities, if necessary.

Depreciation and amortization		$	2
Stock-based compensation expense			1,619
Debt discounts and deferred financing fees and the valuation    of conversion features and warrants			(65)
Total net non-cash items included in cash used in our operations		$	1,556

 

Item 4.   Controls and Procedures

	●	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;
	●	exploring the suitability of further upgrades to our accounting system to complement the new management reporting  system software described above; and
	●	Management will perform an assessment of the effectiveness of our internal control over financial reporting and implement appropriate internal controls on weaknesses determined, if any, documenting, and then testing, the effectiveness of those controls.

 

 

On March 21, 2010, we issued 875,000 shares of our common stock and a warrant to purchase 875,000 of our common stock an exercise price of $0.04 per share to Davisa Ltd, a company controlled by Mr. Mats Dahlin, a member of the Board of Directors of Neonode Technologies AB, for services provided for the private placement of convertible note and warrant in the March 2010 financing transaction.

 

 

Exhibit #	Description
2.1	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 will furnish a copy of any omitted schedule to the Commission upon request )
2.2	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 )
3.1	Amended and Restated Certificate of Incorporation of Neonode Inc., dated April 17, 2009 (incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q filed on August 4, 2009).
3.2	Bylaws, as amended through December 5, 2007
4.1	Certificate of Designations, Preferences and Rights of the Series A and Series B Preferred Stock dated 29 December 2008 (incorporated by reference as Exhibit 4.1 of our Current Report on Form 8-K filed on December 31, 2008 )
4.2	Certificate of Increase of Designation of Series B Preferred Stock dated 2 January 2009
4.3	Certificate of Increase of Designation of Series B Preferred Stock dated 28 January 2009

10.1	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 )
10.2	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 )
10.3	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 )
10.4	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 )
10.5	Convertible Promissory Note (incorporated by reference to Exhibit 10.24 of our Current Report on Form 8-K filed on October 2, 2007 )
10.6	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 )

 

 

10.7	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 )
10.8	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 )
10.11	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 )+
10.12	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 )+
10.13	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 )+
10.14	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 )+
10.15	Note Conversion Agreement, dated December 31, 2008 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on December 31, 2008)
10.16	Share Exchange Agreement, dated December 30, 2008 (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on December 31, 2008)
10.17	Series A Stock Subscription Agreement, dated December31, 2008 (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on December 31, 2008)
10.18	Warrant Conversion Agreement, dated December 31, 2008 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on December 31, 2008)
10.19	Employment Agreement with Per Bystedt  (incorporated by reference to Exhibit 10.19  to our Annual Report on Form 10-K filed on April 15, 2009)
10.20	Employment Agreement with Thomas Eriksson (incorporated by reference to Exhibit 10.20  to our Annual Report on Form 10-K filed on April 15, 2009)
10.21	Employment Agreement with Magnus Goertz  (incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K filed on April 15, 2009)
10.22	Convertible Note Agreement, dated September 9, 2009 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on September14, 2009 )
10.23	Convertible Promissory Note (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on September 14, 2009 )
10.24	Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on September 14, 2009 )
10.25	Convertible Note Agreement, dated January 18, 2010 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 23, 2010 )
10.26	Convertible Promissory Note (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on February 23, 2010 )
10.27	Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 23, 2010 )
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002