Attached files

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EX-3.1.1 - CERT AMENDMENT - Neonode, Incf10k2010ex3i_neonode.htm
EX-10.19 - NOTE - Neonode, Incf10k2010ex10xix_neonode.htm
EX-10.17 - EMPLOYMENT AGREEMENT - Neonode, Incf10k2010ex10xvii_neonode.htm
EX-10.18 - LOAN AGREEMENT - Neonode, Incf10k2010ex10xviii_neonode.htm
EX-32.1 - CERTIFICATION PURSUANT TO USC 18 SECTION 1350 - Neonode, Incf10k2010ex32i_neonode.htm
EX-31.1 - CERTIFICATION OF PEO - Neonode, Incf10k2010ex31i_neonode.htm
EX-23.1 - ACCOUNTANTS CONSENT - Neonode, Incf10k2010ex23i_neonode.htm
EX-10.20 - WARRANT - Neonode, Incf10k2010ex10xx_neonode.htm
EX-31.2 - CERTIFICATION OF PFO - Neonode, Incf10k2010ex31ii_neonode.htm
EX-21.1 - SUBSIDARIES OF THE REGISTRANT - Neonode, Incf10k2010ex21_neonode.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the fiscal year ended December 31, 2010
 
or
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the transition period from ________ to _________
Commission File No. 0-8419

NEONODE INC.
(Exact name of Registrant as specified in its charter)

Delaware
94-1517641
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification Number)

Sweden Linnegatan 89, SE-115 23 Stockholm, Sweden
USA 651 Byrdee Way, Lafayette, CA 94549
(Address of principal executive offices and Zip Code)

Sweden + 46 8 667 17 17
USA + 1 925 768 0620
(Registrant's Telephone Numbers, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
NONE

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý

 
 
 


 

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 ý No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer ¨
Accelerated filer ¨
 
Non-accelerated filer ¨
Smaller reporting company ý
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes ¨ No ý

The approximate aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price for the registrant’s common stock on June 30, 2010 (the last business day of the second quarter of the registrant’s current fiscal year) as reported on the OTC BB, was $8,199,674.

The number of shares of the registrant’s common stock outstanding as of March 31, 2011 was 27,279,672.
The number of shares of the registrant’s Series A Preferred stock outstanding as of March 31, 2011 was 83.
The number of shares of the registrant’s Series B Preferred stock outstanding as of March 31, 2011 was 101.
 
Neonode Inc. affected a 25-to-1 reverse stock split on the opening of business on March 28, 2011. All per share amounts and calculations in this Annual Report and the accompanying consolidated financial statements have been calculated to reflect the effects of the reverse stock split.
 
DOCUMENTS INCORPORATED BY REFERENCE

Exhibits incorporated by reference are referred to in Part IV.
 
 

 
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NEONODE INC.

2010 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS
 
PART I
 
   
4  
13  
18  
18  
18  
19  
       
PART II
 
   
19  
19  
19  
32  
33  
73  
73  
74  
       
PART III
 
   
75  
80  
85  
87  
89  
       
PART IV
 
   
90  
       
92  

 
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SPECIAL NOTE ON FORWARD LOOKING STATEMENTS

Certain statements set forth in or incorporated by reference in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, without limitation, our expectations regarding the adequacy of anticipated sources of cash, planned capital expenditures, the effect of interest rate increases, and trends or expectations regarding our operations. Words such as “may,” “will,” “should,” “believes,” “anticipates,” “expects,” “intends,” ”plans,” “estimates” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Readers are cautioned that the forward-looking statements reflect management’s estimates only as of the date hereof, and we assume no obligation to update these statements, even if new information becomes available or other events occur in the future. Actual future results, events and trends may differ materially from those expressed in or implied by such statements depending on a variety of factors, including, but not limited to those set forth under “Item 1A Risk Factors” and elsewhere in this Annual Report on Form 10-K.

PART I
 
BUSINESS

We provide optical infrared touchscreen solutions for handheld and small to midsized consumer and industrial electronic devices. We license our touchscreen technology to Original Equipment Manufacturers (“OEMs”) and Original Design Manufacturers (“ODMs”) who imbed our touchscreen technology into electronic devices that they develop and sell. The cornerstone of our solution is our innovative optical infrared touchscreen technology, zForce®. Our patented zForce® technology offers a number of benefits compared to other touch screen technologies currently on the market. Our optical infrared technology offers clients lower cost and more functional alternatives to other touch screen technologies. zForce® also consumes less power than our competitor's solutions, is able to function in a wide temperature range, requires no screen overlay and thus offers a much clearer picture while at the same time accommodating multi-touch functionality. zForce® combines full finger touch and high resolution pen support in the same solution.
 
Our technology licensing model allows us to focus on the development of solutions for multi-touch enabled screens and thus we do not have to contend with the financial and logistical burden of manufacturing products, which is handled by our ODM/OEM clients. We license the right to use zForce® and software which, together with standard components from partners, creates a complete optical touch screen solution. The zForce® multi-touch product is our latest release and is currently being integrated into products such as mobile phones, mobile internet devices, eReaders, digital picture frames, printers, GPS devices and tablet PC’s. It should be noted that our licensing model provides the added benefit of allowing us to grow sales exponentially without the need of increasing costs at anywhere near the same rate to support the sales growth.

Markets

We provide touch screen solutions for navigation for many of the world’s premier eReader OEMs. Our patented touch screen technology, zForce®, supports high resolution pen writing in combination with finger navigation including gestures, multi-touch, sweeps and much more. Unlike resistive and capacitive touch screens, zForce® touch screens have no overlay on top of the display window and provide a 100% clear viewing experience, free from reflection and parallax effects that is required for eReader touch screens. Neonode’s touch solution for portable devices is many times more cost effective than any other high performance touch solution in the market today, and we believe it is the only viable touch screen solution that will operate on the new revolutionary reflective display panels that will offer paper-like reading experience in almost any ambient lighting condition while greatly reducing power consumption. We believe that reflective display panels will be the future display panels of choice for all eReader, tablet PC, GPS devices and many mobile phone and other hand held devices.

 
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Industry projections, by the Yankee Group published on February 8, 2011, project that the number of eReaders sold will increase from the estimated 11 million eReaders sold in 2010 to a projected 72 million eReaders in 2014, reflecting the continued migration of paper book sales to electronic books. Based on the strength of our technology and engineering know-how, we believe we are well positioned to take advantage of the growth opportunity in the eReader market and to provide innovative, value-added human interface solutions for each of the key end-user preferences.  We believe that the end-user reading experience will be enhanced by the adoption of reflective display panels, including additional functionality, such as multi-touch gesture recognition. We believe we are well positioned within the eReader market as our zForce® product line allows us to address the entire eReader market.

In addition, we believe our intellectual property portfolio, engineering know-how, technological expertise and experience in providing touch screen solutions to major OEMs of portable electronic devices position us to be a key technological enabler for multiple consumer electronic devices including tablet PCs, mobile phones, digital picture frames, remote controls, and global positioning devices, as well as a variety of other mobile, handheld, wireless, and entertainment devices. We believe our existing technologies with our emphasis on low cost, ease of use, small size, low power consumption, advanced functionality, durability, and reliability enable us to serve multiple aspects of the markets for these products, as well as for other electronic devices.

We anticipate that our touch screen solutions for low-cost high-volume mobile phones will constitute an important percentage of our future net revenue. Our ongoing success in serving the low-cost high-volume mobile phone market will depend upon a number of factors, including:  (i) the continued growth of the overall mobile phone market, (ii) the utilization of high-functionality interactive infrared touchscreens rather than mechanical buttons or capacitive/resistive touchscreens, as the interface for application access and control in those products,  and (iii) our ability to demonstrate to mobile phone OEMs the advantages of our touch screen solutions in terms of price, performance, usability, size, durability, power consumption, and industrial design possibilities.

Industry projections for the low-cost mobile phone market for the period from 2011 through 2013 predict a compound annual growth rate of 21%, which reflects the trend towards greater functionality in low-cost mobile phone products to meet and address the expanded needs and expectations of the consumer-oriented market. These products require a low-cost, simple, durable, and intuitive touch screen solution to enable the user to navigate efficiently through menus and scroll through information contained in the host device. We believe we are well positioned to take advantage of this growing market based on our technology, engineering know-how, and the acceptance of our touchscreen solutions by OEMs in this market.

Our History

    Neonode Inc. (the “Company”), formerly known as SBE, Inc., was incorporated in the State of Delaware on September 4, 1997.

On August 10, 2007, SBE, Inc. consummated a reverse merger transaction with Neonode Inc. (the “Merger”), and SBE, Inc.’s name was subsequently changed to “Neonode Inc.” on the completion of the Merger. Prior to the Merger, Neonode Inc. had been incorporated in the State of Delaware in 2006 and was the parent of Neonode AB, a company founded in February 2004 and incorporated in Sweden. Following the closing of the Merger, the business and operations of Neonode Inc. prior to the Merger became the primary business and operations of the newly-combined company. The newly-combined company’s headquarters is located in Stockholm, Sweden.

Through our previously wholly-owned subsidiary, Neonode AB, we developed our touchscreen technology and an optical touchscreen mobile phone product, the N2.  We began shipping the N2 to our first customers in July 2007 but faced difficult circumstances in finding a viable market for our N2 mobile phone and subsequently discontinued the manufacturing of mobile phones and the operations of Neonode AB.

 
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      2008 Corporate Restructuring

In 2008, as a result of our inability to sell a sufficient number of mobile phones to support our operations, we took the following actions to restructure and refinance the Company:

  
On December 9, 2008, Neonode AB filed a petition for bankruptcy in compliance with the Swedish Bankruptcy Act (1987:672).  As of that date, Neonode AB ceased to be owned and operated by Neonode Inc., and Neonode Inc. ceased to have any financial obligations related to the accounts payable or other debts of Neonode AB.
 
  
On December 29, 2008, we entered into a Share Exchange Agreement with Neonode Technologies AB (f/k/a AB Cypressen AB nr 9683), a Swedish engineering company, and the stockholders of Neonode Technologies AB:  Iwo Jima SARL, Wirelesstoys Sweden AB, and Athemis Ltd., pursuant to which we agreed to acquire all of the issued and outstanding shares of Neonode Technologies AB in exchange for the issuance of shares of Company’s Series A Preferred Stock to the Neonode Technologies AB stockholders.  Upon the closing of the transaction, Neonode Technologies AB became a wholly-owned subsidiary of the Company. The Neonode Technologies AB stockholders were employees of the Company and/or Neonode AB and, as such were related parties. The acquisition of Neonode Technologies AB by Neonode Inc. did not qualify as a business combination, and accordingly the fair value of the shares of Series A Preferred Stock issued to the sellers of Neonode Technologies AB shares were accounted for as compensation.  As there was an 18 month service requirement related to the Neonode Inc. shares issued to the Neonode Technologies AB shareholders, the value of the Series A Preferred Stock was amortized to compensation expense over the 18 month service period beginning January 1, 2009.

  
On December 30, 2008, we entered into a restructuring transaction in which we converted the majority of the outstanding warrants and convertible debt that had been issued in previous financing transactions to shares of Series A and B Preferred Stock, respectively, that were convertible into shares of our common stock in accordance with the Company’s Certificate of Designation filed with the Delaware Secretary of State.

2009 Corporate Financing

  
During the period from August 25, 2009 through December 31, 2009, we completed a private placement of convertible notes totaling $987,000 that can be converted, at the holder’s option, into 1,973,966 shares of our Common Stock at a conversion price of $0.50 per share. The convertible note holders have the right to have the conversion price adjusted to equal the lower stock price if we issue stock or convertible notes at a lower conversion price than $0.50 during the period that the notes are outstanding. These convertible notes were originally due on December 31, 2010, but the due date has been extended until June 30, 2011.  They bear an annual interest rate of 7%, payable on June 30 and December 31 of each year that the convertible notes are outstanding.  In addition, we issued 986,983 three-year warrants to the convertible note holders with an exercise price of $1.00 per share.  The warrants may be exercised and converted to Common Stock, at the warrant holder’s option, beginning on the six-month anniversary date of issuance until the warrant expiration date.  We are not obligated to register the Common Stock related to the convertible debt or the warrants.

2010 Corporate Financing

  
During the period from January 1, 2010 through May 20, 2010, we received $1.8 million in proceeds related to a private placement of convertible notes and stock purchase warrants that can be converted, at the holder’s option, into 3,518,287 shares of our Common Stock at a conversion price of $0.50 per share and 1,760,711 stock purchase warrants that have an exercise price of $1.00 per share. The convertible note holders have the right to have the conversion price adjusted to equal the lower stock price if we issue stock or convertible notes at a lower conversion price than $0.50 during the period that the notes are outstanding. These convertible notes were originally due on December 31, 2010, but the due date has been extended until June 30, 2011.  They bear an annual interest rate of 7%, payable on June 30 and December 31 of each year that the convertible notes are outstanding. The warrants may be exercised and converted to Common Stock, at the warrant holder’s option, beginning on the six month anniversary date of the issuance until the warrant expiration date. We are not obligated to register the Common Stock related to the convertible debt or the warrants.

 
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During September and October 2010, we entered into two different types of amendments with the holders of the convertible notes and the holders of the stock purchase warrants issued in the Fall 2009 and Spring 2010 financing transactions.  All of the holders of the convertible notes entered into an amendment pursuant to which the due date of the convertible notes was extended until June 30, 2011.  A majority of the holders of the stock purchase warrants entered into an amendment pursuant to which they exercised their previously granted warrants at a discounted exercise price of $0.88 per share and was granted a replacement three-year warrant for each original warrant exercised.  When exercised, the replacement warrants can be converted into 2,766,856 shares of our common stock at an exercise price of $1.38 per share.  A total of 2,766,856 warrants were exercised at the discounted exercise price of $0.88 per share, and a total of $2.4 million was raised by the Company through these warrant exercises.  We issued a total of 2,766,856 shares of common stock and replacement warrants to the exercising warrant holders.
 
Technologies

Our touchscreen solutions are based on our patented zForce® and Neno™ hardware and software technology. zForce® is our optical infrared touchscreen technology that supports one-handed navigation, allowing the user to operate the functionality with finger gestures passing over the screen. Neno™ is our software-based user interface.

zForce® has been patented in several countries including the US and has several patents-pending in the US. It uses infrared light that is projected as a grid over the screen. The infrared light pulses a full screen up to 120 times a second so that the grid is constantly being refreshed. Coordinates are produced on the screen and are then converted into mathematical algorithms when a user's fingers move across the screen. This input method is unique to Neonode and is enabled by the zForce® technology.

Currently, there are two dominant types of touchscreen technologies available in the market - capacitive and resistive. Capacitive technology is the technology that the Apple iPhone uses and resistive technology is what is found on most stylus-based PDAs.  Resistive technology is pressure sensitive technology. Best used for detailed work and for selection of a particular spot on a screen, resistive technology is not useful for sweeping gestures or motion, such as zooming in and out.  Capacitive technology, which is used on a laptop computer mouse pad, is very good for sweeping gestures and motion. The screen actually reacts to the finger’s tiny electric impulses. Capacitive touchscreens work best if the user has unimpeded contact between his finger and the screen.

Our zForce® optical touchscreen technology has a number of key advantages over each of these technologies, including:

 
  No additional layers are added to the screen that may dilute the screen contrast and clarity. Layering technology is required to activate the capacitive and resistive technologies and can be very costly;
 
 
  The zForce® grid technology is more responsive than the capacitive screen technology and, as a result, is quicker and less prone to misreads. It allows movement and sweeping motions as compared to point-sensitive, stylus-based resistive screens;
 
 
  zForce®, an abbreviation for zero force necessary, obviates the need to use any force to select or move items on the screen as would be the case with a stylus;
 
 
  zForce® is cost-efficient due to the lower cost of materials and extremely simple manufacturing process when compared to the expensive layered capacitive and resistive screens;
 

 
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  zForce® allows multiple methods of input, such as simple finger taps to hit keys, sweeps to zoom in or out, and gestures to write text or symbols directly on the screen;
 
 
  zForce® is one of the few  viable touch screen solution that will operate on well on the new revolutionary reflective display panels that will offer paper-like reading experience in almost any ambient lighting condition while greatly reducing power consumption. Manufacturers of reflective display panels are targeting eReader, mobile phone and tablet PC markets because these devices require the clear viewing screen and low power consumption of the reflective display panels; and
 
 
  zForce® incorporates some of the best functionalities of both the capacitive and resistive touch screen technologies. It works in all climates and, unlike the competing technologies, can be used with thick gloves. In addition, zForce® allows for waterproofing of the device.
 
Because of its uniqueness and flexibility, we believe that our zForce® technology presents a tremendous licensing opportunity for Neonode. The market is vast, given the current rapid increase in touchscreen-based devices such as eReaders, mobile phones, Tablet PCs, media players, printers and GPS navigation devices.

Intellectual Property

We believe that innovation in product engineering, sales, marketing, support, and customer relations, and protection of this proprietary technology and knowledge, will impact our future success. In addition to certain patents that are pending, we rely on a combination of copyright, trademark, trade secret laws and contractual provisions to establish and protect the proprietary rights in our products.

We have been issued patent protection of our invention named “On a substrate formed or resting display arrangement” in five countries, including the US and through a Patent Cooperation Treaty (“PCT”) application and in 24 designated countries through an application to the European Patent Office (“EPO”). We applied for a patent in Sweden relating to a mobile phone and have also applied for a patent in the United States regarding software named “User Interface.” We have 17 other patent applications pending in the US.
 
        We have been granted trademark protection for the word NEONODE in the European Union (“EU”), Sweden, Norway, and Australia. In addition, we have been granted protection for the figurative mark NEONODE in Sweden. Additional applications for the figurative trademark are still pending in Switzerland, China, Russia, and the United States. In addition, our touch screen technology name zForce® is now an official trademark registered by the US Patent and Trademark Office.

Our “User Interface” may also be protected by copyright laws in most countries, including Sweden and the EU (which do not grant patent protection for the software itself), if the software is new and original. Protection can be claimed from the date of creation.

Consistent with our efforts to maintain the confidentiality and ownership of our trade secrets and other confidential information, and to protect and build our intellectual property rights, we require our employees and consultants, and certain customers, manufacturers, suppliers and other persons with whom we do business or may potentially do business, to execute confidentiality and invention assignment agreements upon commencement of a relationship with us, typically extending for a period of time beyond termination of the relationship.

Distribution, Sales and Marketing

We consider both OEMs and ODMs and their contract manufacturers to be our primary customers. Both the OEMs, ODMs and their contract manufacturers may determine the design and pricing requirements and make the overall decision regarding the use of our user interface solutions in their products. The use and pricing of our interface solutions will be governed by a technology licensing agreement.

 
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Our sales staff solicits prospective customers and our sales personnel receive substantial technical assistance and support from our internal engineering resources because of the highly technical nature of our product solutions. We expect that sales will frequently result from multi-level sales efforts that involve senior management, design engineers, and our sales personnel interacting with our potential customers’ decision-makers throughout the product development and order process.

Our sales are normally negotiated and executed in U.S. Dollars or Euros.

Our sales force and marketing operations are managed out of our corporate headquarters in Stockholm, Sweden, and our current sales force is comprised of sales offices located in Stockholm, Korea and the US.

Research and Development

We continue to invest in research and development of current and emerging technologies that we deem critical to maintaining our competitive position in the touchscreen user interface markets. Many factors are involved in determining the strategic direction of our product development focus, including trends and developments in the marketplace, competitive analyses, market demands, business conditions, and feedback from our customers and strategic partners. In fiscal years 2010 and 2009, we spent $1.9 million and $1.0 million, respectively, on research and development activities.

We carefully monitor innovations in other technologies and are constantly seeking new areas for application of zForce®. We have developed a technology roadmap that we believe will result in a steady stream of new innovations and areas of use.

Our research and development is predominantly in-house, but is also done in close collaboration with external partners and specialists. Our development areas can be divided into the following areas:

  ●  
Software
  ●  
Optical
  ●  
Mechanical
  ●  
Electrical

Recent Developments

  
On March 25, 2011, we filed a Certificate of Amendment of our Amended and Restated Certificate of Incorporation affecting a reverse stock split of the Company’s issued and outstanding shares of Common stock and Preferred Stock at a ratio of twenty-five-to-one (the “Reverse Split”).  The Certificate of Amendment provides that each twenty-five (25) outstanding shares of the Corporation’s Common Stock, par value $0.001 per share, will be exchanged and combined, automatically, without further action, into one (1) share of common stock, and each twenty-five (25) outstanding shares of the Corporation’s Preferred Stock, par value $0.001 per share, will be exchanged and combined, automatically, without further action, into one (1) share of Preferred stock.  The Reverse Split was declared effective on March 28, 2011 and has been reflected in this Annual Report on Form 10-K.

  
In March 2011, we entered into new convertible loan agreements (each a “Convertible Loan Agreement”) with investors who participated in our 2009 and 2010 financing transactions (the “Investors”) and who had been issued common stock purchase warrants with exercise prices of $0.50 per share, $1.00 per share, and $1.38 per share (the “Current Warrants”).  Pursuant to the Convertible Loan Agreements, each Investor exercised some or all of its outstanding Current Warrants at the applicable exercise price ($0.50 per share, $1.00 per share, and/or $1.38 per share), and provided us with a convertible loan, bearing interest at a rate of seven percent (7%) per annum, that matures on March 1, 2014.

 
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Each Investor has the option at any time prior to the repayment of its loan to convert the loan into fully-paid and non-assessable restricted shares of our common stock, at a price of $2.50 per share.  The loan will automatically be converted into restricted shares of our common stock in the event that on or before the loan due date either (a) our common stock is traded at a price per share of $6.25 or higher for five (5) consecutive trading days, or (b) we consummate a financing in the amount of at least $5 million.  In the event that the loan principal and accrued interest is not repaid by us by the due date, and the Investor has not previously converted the loan, the Investor’s sole remedy for such non-payment shall be the payment of additional annual interest at a rate of 10% per year.  The accrued interest will be payable on June 30th and December 31st of each year.

In addition,  we issued to each Investor new five-year common stock purchase warrants, with an exercise price of $3.13 per share (the “New Warrants”), with each investor receiving (i) a number of New Warrants equal to fifty percent (50%) of the number of Current Warrants exercised by such Investor under its Convertible Loan Agreement, and (ii) a number of New Warrants that is equal in value to twenty-five percent (25%) of the Investor’s loan to us.  The New Warrants may be exercised by cash payment or through cashless exercise by the surrender of warrant shares having a value equal to the exercise price of the portion of the warrants being exercised.
 
The Investors exercised an aggregate of 493,426 outstanding Current Warrants, for an aggregate investment of $515,000 in the Company, and loaned the Company an aggregate of $4.2 million. In addition, we issued to the Investors New Warrants for the purchase of an aggregate of 669,753 of our restricted shares of common stock.
 
  
We have recently developed prototype products and are engaged in product design discussions with several large global OEMs and ODMs that are in the process of qualifying our touchscreen technology for incorporation in various products, such as digital picture frames, GPS devices, eReaders, Touch PC, mobile phones, printer and mobile internet devices. The development and product release cycle for these products may take 6 to 18 months.

  
On March 4, 2011, we signed a technology licensing agreement with a top ten global OEM to integrate our zForce® touch screen technology into a series of products.  In conjunction with the signing of this technology license agreement, the OEM agreed to pay us $50,000 in non-recurring engineering development fees. We are deferring the engineering development fee revenue until such time as the engineering work has been completed. We expect to complete all services under this contract by June 30, 2011.
 
  
On January 28, 2011, our Board of Directors approved certain changes to Neonode’s management team.   Thomas Eriksson, one of our founders and current Chief Executive Officer of Neonode Technologies AB, Neonode’s wholly-owned subsidiary, was appointed Neonode’s Chief Executive Officer, effective as of January 28, 2011, replacing Mr. Per Bystedt who resigned from his position as Neonode’s Chief Executive Officer, effective as of January 28, 2011.  Mr. Bystedt assumed the role of Executive Chairman and continues to serve as the Chairman of the Board of Directors.
 
  
On January 4, 2011, we signed a technology licensing agreement with a global retail and internet based OEM to integrate our zForce® touch screen technology into a series of products.  In conjunction with the signing of this technology license agreement, the OEM agreed to pay us $65,000 in non-recurring engineering development fees. We are deferring the engineering development fee revenue until such time as the engineering work has been completed. We expect to complete all services under this contract by March 31, 2011.
 
  
On December 30, 2010, we signed a technology license agreement with an OEM related to our touchscreen technology for a series of eReaders.  In conjunction with the signing of this technology license agreement, the OEM agreed to pay us $65,000 in non-recurring engineering development fees. We are deferring the engineering development fee revenue until such time as the engineering work has been completed. We expect to complete all services under this contract by March 31, 2011.

 
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On June 18, 2010, we signed a technology license agreement with Sony Corporation related to our touchscreen technology for a series of eReaders. In conjunction with the signing of this technology license agreement, Sony Corporation issued an initial purchase order for $475,000 of touchscreen licenses. We are deferring the technology license fee revenue until such time as the warranty period expires on March 18, 2011.

Overview of the Touchscreen Market and Competition

Competing Touchscreen Technologies:
       
Today there are different touchscreen technologies available in the market. All of them with different or slightly different profiles, power consumption, level of maturity, and cost price:

  
Resistive -- uses conductive and resistive layers separated by thin space;
  
Surface acoustic wave -- uses ultrasonic waves that pass over the touchscreen panel;
  
Capacitive and projected capacitive -- a capacitive touchscreen panel is coated with a material, typically indium tin oxide, that conducts a continuous electrical current across the sensor. When the sensor's 'normal' capacitance field (its reference state) is altered by another capacitance field, e.g., someone's finger, electronic circuits located at each corner of the panel measure the resultant 'distortion' in the sine wave characteristics to detect a touch;
  
Infrared -- uses infrared beams that are broken by finger or heat from the finger sensed from a camera to detect a touch;
  
Strain gauge -- uses a spring mounted on the four corners and strain gauges are used to determine deflection when the screen is touched;
  
Optical imaging -- uses two or more image sensors placed around the edges (mostly the corners) of the screen and a light source to create a shadow of the finger;
  
In-cell optical touch technology -- embeds photo sensors or conductive sensors directly into an LCD glass. By integrating the touch function directly into an LCD glass, the LCD acts like a low resolution camera to “see” the shadow of the finger;
  
Dispersive signal technology -- uses sensors to detect the mechanical energy in the glass that occur due to a touch; and
  
Acoustic pulse recognition -- uses more than two piezoelectric transducers located at some positions of the screen to turn the mechanical energy of a touch (vibration) into an electronic signal.

Touchscreen Technologies Competitors:
 
Company
Technology
3M
Capacitive, Dispersive Signal Touch
Synaptics
Capacitive sensors and IC controllers
ATMEL
Capacitive touch IC controllers
Cypress
Capacitive touch IC controllers
Maxim
Capacitive touch IC controllers
RPO
Optical wave guide
Nextwindow
Optical with camera sensor
Zytronic
Capacitive
Tyco Electronics
Capacitive, Resistive, Surface Wave,
Touch International
Resistive and Capacitive
Mass Multimedia Inc.
All touchscreen technologies
Young Fast
Capacitive sensor and module maker
TPK
Capacitive (provides the capacitive touch sensor for the Apple iPhone)

 
 
11

 
 
Today’s market leading touch technologies, resistive and capacitive technologies make use of a “touch sensor/window” or an overlay in combination with a controller IC to function. In comparison zForce use a “lightguide” (to reflect and focus light) together with some standard IC components to operate.
 
Neonode licenses the complete solution to the customers, and thus there is no need for a 3rd party to assemble the touch sensor with the controller (called a module maker) that adds cost to the complete solution.
 
Below is a comparison table for resistive, capacitive (2 types) and zForce touch technologies. Some of zForce unique selling points include low power, cost and weight, in combination with a 100 % transparent touch window.
 
 
Technology License Agreements

As of December 31, 2010, we have entered into four technology license agreements with customers. We signed two additional technology license agreements with customers subsequent to December 31, 2010.
 
We our dependent on a few customers, and the loss of any one of these customers could have a materially adverse effect on our future revenue stream.  In the short term, we anticipate that we will remain dependant on a limited number of customers for substantially all of our future revenue. 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.

Our accounts receivable as of December 31, 2010 was earned from six customers. Our revenue for the year ended December 31, 2010 was earned from seven customers of whom two customers accounted for approximately 84% of our net revenue for the year. Our customers are located in the US, Europe and Asia.

 
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Employees

On December 31, 2010, we had fourteen full-time employees and one part-time employee. We augment our staff with consultants on an “as needed” basis. Our full-time and our part-time employees are located in our corporate headquarters in Stockholm, Sweden, and one employee is located in a branch office in the United States. None of our employees are represented by a labor union. We have experienced no work stoppages. We believe our employee relations are positive.
 
ITEM 1A.     RISK FACTORS
 
In addition to the other information in this Annual Report on Form 10-K, stockholders or prospective investors should carefully consider the following risk factors:

Risks Related To Our Business

We may require additional capital to fund our operations, which capital may not be available on commercially attractive terms or at all.

We may require sources of capital in addition to cash on hand to continue operations and to implement our business plan. We project that we have sufficient liquid assets to continue operating at least the next twelve months. We are currently evaluating different financing alternatives, including but not limited to selling shares of our common or preferred 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, 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 plan, which could have a negative effect on our business, results of operations, and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.
 
We have never been profitable and we anticipate significant additional losses in the future.

Neonode Inc. was formed in 1997 and reconstituted in 2006 as a holding company, owning and operating Neonode AB, which had been formed in 2004. We had been primarily engaged in the business of developing and selling mobile phones. Following the liquidation of Neonode AB, we implemented a new strategy for our business.  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. We were not successful in selling mobile phones and have refocused our business on licensing our touchscreen technology. We may not be successful in entering the technology licensing business. Our success will depend on many factors, including, but not limited to:

 
   the growth of touchscreen interface usage;
 
   the efforts and success of our OEM and other customers;
 
   the level of competition faced by us; and
 
   our ability to meet customer demand for engineering support, new technology 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.

 
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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.

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, technology, and services that our customers and end users choose to buy. If we are unsuccessful at developing and introducing new products, technology, 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, technology, 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 if 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.
 
As we introduce new or enhanced products or integrate new technology into new or existing products, we face risks including, among other things, disruption in customers’ ordering patterns, excessive levels of older product inventories, inability to deliver sufficient supplies of new products to meet customers’ demand, possible product and technology defects, and potentially unfamiliar sales and support environments. Premature announcements or leaks of new products, features, or technologies may exacerbate some of these risks. Our failure to manage the transition to newer products or the integration of newer technology into new or existing products could adversely affect our business, results of operations, and financial condition.

We are dependent on the ability of our customers to design, manufacture and sell their products that incorporate our touchscreen technologies.

Our products and technologies are licensed to other companies which must be successful in designing, manufacturing and selling the products that incorporate our technologies. If our customers are not able to design, manufacture or sell their products, or are delayed in producing their products, our revenues, profitability, and liquidity, as well as our brand image, may be adversely affected.

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 technologies, especially as we expand into new market segments. 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.

 
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We are dependent on a few customers.

Currently, we have entered into license agreements with six customers.  Since we are dependent on a few customers, the loss of any customer could have a materially adverse effect on our future revenue stream.

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 with 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 us 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 our intellectual property rights. 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.
 
As part of our business strategy, we target customers and relationships with suppliers and original equipment manufacturers in countries with large populations and propensities for adopting new technologies. However, many of these countries do not address misappropriation of intellectual property nor deter others from developing similar, competing technologies or intellectual property. Effective protection of patents, copyrights, trademarks, trade secrets and other intellectual property may be unavailable or limited in some foreign countries. In particular, the laws of some foreign countries in which we do business may not protect our intellectual property rights to the same extent as the laws of the United States. As a result, we may not be able to effectively prevent competitors in these regions from infringing our intellectual property rights, which could reduce our competitive advantage and ability to compete in those regions and negatively impact our business.

 
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If we are unable to obtain key technologies from third parties on a timely basis, 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 if they 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 releases 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.

Changes in financial accounting standards or practices may cause unexpected fluctuations in and adversely affect our reported results of operations.
 
Any change in financial accounting standards or practices that cause a change in the methodology or procedures by which we track, calculate, record and report our results of operations or financial condition or both could cause fluctuations in, and adversely affect, our reported results of operations and cause our historical financial information not to be reliable as an indicator of future results.

Wars, terrorist attacks or other threats beyond our 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 the 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
 
During the 2009 fiscal year, due to our lack of cash resources, we were unable to obtain a timely review of our interim financial statements or a timely audit of our 2009 financial statements by our registered independent accountants.
 
During the 2009 fiscal year, due to our lack of cash resources, we were unable to obtain a timely review of our interim financial statements or a timely audit of our 2009 financial statements by our registered independent accountants in accordance with the Exchange Act’s reporting requirements and Rule 10-01(d) of the Securities and Exchange Commission Regulation S-X.  Although our 2009 financial statements have since been audited, our failure to have complied with these SEC requirements could adversely affect the value of our common stock.  In addition, our failure in 2009 to satisfy the current public information requirement of Rule 144 means that the reduced Rule 144 holding period prior to the resale of our unregistered stock is unavailable to holders of our unregistered stock until we are current for twelve months.  This may adversely affect a stockholder’s ability to resell our stock and cause our share price to decline.

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 touchscreen technologies, 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.

 
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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:
 
 
actual or anticipated fluctuations in our operating results or future prospects;
 
our announcements or our competitors’ announcements of new products;
 
the public’s reaction to our press releases, our other public announcements, and our filings with the SEC;
 
strategic actions by us or our competitors, such as acquisitions or restructurings;
 
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
 
changes in accounting standards, policies, guidance, interpretations or principles;
 
changes in our growth rates or our competitors’ growth rates;
 
developments regarding our patents or proprietary rights or those of our competitors;
 
our inability to raise additional capital as needed;
 
concern as to the efficacy of our products;
 
changes in financial markets or general economic conditions;
 
sales of common stock by us or members of our management team; and
 
changes in stock market analyst recommendations or earnings estimates regarding our common stock, other comparable companies, or our industry generally.
 
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.

 
17

 

Our common stock is currently traded on the OTC Bulletin Board Market. Our stock price and liquidity may continue to be impacted.

Our common stock is traded on the OTC Bulletin Board market, which is generally considered a less efficient and less prestigious market than other markets, such as the Nasdaq Capital Market. The price and liquidity of our stock may continue to be adversely affected as a result of our common stock trading on the OTC Bulletin Board Market.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.
 
ITEM 2.     PROPERTIES

Our subsidiary, Neonode Technologies AB, entered into a month-to-month lease with Vasakronan Fastigheter AB for approximately 2,000 square feet of office space located at Linnegatan 89, Stockholm, Sweden for approximately $6,000 per month. The annual payment for this space equates to approximately $72,000.

In addition, we lease office space located in Lafayette, California that is provided by our Chief Financial Officer on a rent-free basis.
 
On March 18, 2011, we entered into a twelve month lease with CA-Santa Clara Office Center Limited Partnership for approximately 1,781 square feet of office space located at 2700 Augustine Drive, Santa Clara, California, USA for approximately $2,600 per month.

ITEM 3.      LEGAL PROCEEDINGS
  
On December 9, 2008, Empire Asset Management (“Empire”), a broker dealer that acted as our financial advisor and exclusive placement agent in previous private placement transactions, initiated a law suit against us in the Supreme Court of the State of New York alleging that the Corporation misrepresented the success of its business to induce Empire’s customers to invest in us. We entered into a settlement agreement dated July 9, 2010. The lawsuit was dismissed on September 13, 2010.
 
On May 11, 2009, Mr. David Berman initiated a lawsuit against us in the Supreme Court of the State of New York alleging that the Corporation misrepresented the success of its business to induce Mr. Berman to invest in us.  Mr. Berman, who was a client of Empire, invested $549,860 in our private placement offerings on March 4, 2008 and May 16, 2008, and purchased an additional 6,516 shares totaling $251,082 in the aftermarket. We entered into a settlement agreement dated October 11, 2010. The lawsuit was dismissed on October 13, 2010.
 
On October 2, 2009, Xerox Corporation (“Xerox”) initiated a law suit against the Company in the Superior Court of California alleging that the Company breached an equipment lease agreement with Xerox and demanding payment of $108,592.81 plus interest, late payment charges, and legal costs. On August 16, 2010, we entered into a settlement agreement that required us to pay a total of $15,000. The lawsuit was dismissed on October 8, 2010.


 
18

 

ITEM 4.      (Removed and Reserved)
     
PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Effective January 2, 2009, our common stock was quoted on the Pink Sheets under the symbol NEON.PK and effective January 26, 2009, our common stock has been quoted on the Over the Counter Bulletin Board Market (OTCBB) under the symbol NEON.OB. From March 28, 2011 through April 15, 2011, the symbol is converted to “NEOND” as a result of our reverse stock split. The table below sets forth the high and low sales prices of our common stock as reported on OTCBB. This information has been adjusted to reflect the 1-for-25 reverse stock split that was effective March 28, 2011.  As of December 31, 2010, there were approximately 2,634 holders of record of our common stock.
 
Fiscal Quarter Ended
 
   
March 31
   
June 30
   
September 30
   
December 31
 
Fiscal 2010
                       
High
  $ 1.00     $ 1.25     $ 2.00     $ 2.00  
Low
  $ 0.50     $ 0.50       0.75     $ 1.50  
Fiscal 2009
                               
High
  $ 1.50     $ 1.25     $ 1.25     $ 1.00  
Low
  $ 0.50     $ 0.50     $ 0.50     $ 0.50  

There are no restrictions on our ability to pay dividends; however, it is currently the intention of our Board of Directors to retain all earnings, if any, for use in our business and we do not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of dividends will depend, among other factors, upon our earnings, capital requirements, operating results and financial condition.

ITEM 6.      SELECTED FINANCIAL DATA
  
Not applicable.

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 do not assume any obligation to update these statements. Actual events or results may differ materially from the results discussed in or implied by the forward-looking statements. The following discussion should be read in conjunction with the company’s consolidated financial statements for the years ended December 31, 2010 and 2009 and the related notes included therein.

 
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Overview

        We provide optical touchscreen solutions for handheld and small to midsized consumer and industrial electronic devices. We license our touchscreen technology to Original Equipment Manufacturers (“OEMs”) and Original Design Manufacturers (“ODMs”) who embed our touchscreen technology into electronic devices that they develop and sell. The cornerstone of our solution is our innovative optical touchscreen technology, zForce®. Our patented zForce® technology offers a number of benefits compared to other touch screen technologies. Our optical technology offers clients low cost and more functional alternatives to other touch screen technologies. zForce® also consumes less power than competitor's screens, is able to function in a wide temperature range, requires no screen overlay and thus offers a much clearer picture while at the same time accommodating multi-touch functionality.
 
            Our technology licensing model allows us to focus on the development of solutions for multi-touch enabled screens and thus we do not have to contend with the financial and logistical burden of manufacturing products, which is handled by our ODM/OEM clients. We license the right to use zForce® and software which, together with standard components from partners, creates a complete optical touch screen solution. The zForce® multi-touch product is our latest release and is currently being integrated into products such as mobile phones, mobile internet devices, eReaders, digital picture frames, printers, GPS devices and tablet PC’s. It should be noted that our licensing model provides the added benefit of allowing us to grow sales exponentially without the need of increasing costs at anywhere near the same rate to support the sales growth.

Through our formerly wholly-owned subsidiary, Neonode AB, we developed our touchscreen technology and an optical touchscreen mobile phone product, the Neonode N2. On December 9, 2008, Neonode AB filed for liquidation under the Swedish bankruptcy laws.  Effective with Neonode AB’s bankruptcy filing on December 9, 2008, Neonode Inc. was no longer in the mobile phone business and was relieved of any financial obligations related to the accounts payable or other debts of Neonode AB.

            We have not generated sufficient cash from the sale of our products or licensing of our technology to support our operations and have incurred significant losses. During the years ended December 31, 2010 and 2009, we raised approximately $4.0 million and $1.9 million, respectively, net cash proceeds though the sale of our securities and convertible debt. In the first quarter of 2011 we raised approximately $4.7 million through the sale of our securities and convertible debt. We expect this cash plus cash generated from the license of our technology to support our operations for at least the next 12 months.

We have incurred net operating losses and negative operating cash flows since inception. As of December 31, 2010, we had an accumulated deficit of $112.1 million. We expect to incur additional losses and may have negative operating cash flows through the end of 2011. Although we have been able to fund our operations to date, there is no assurance that our capital raising efforts will be able to attract the additional capital or other funds needed to sustain our operations.

Our success is dependent on our obtaining sufficient capital or operating cash flows to fund our operations and to development of our technology and on our bringing such technology to the worldwide market. To achieve our objectives, we may be required to raise additional capital through public or private financings or other arrangements. It cannot be assured that such financings will be available on terms attractive to us, if at all. Such financings may be dilutive to stockholders and may contain restrictive covenants.
 
In addition to the immediate risks relating to our ability to continue as a going concern and to obtain funding under the current market conditions, we are subject to certain risks common to technology-based companies in similar stages of development. See “Risk Factors” above. Principal risks include risks relating to the uncertainty of growth in market acceptance for our technology, a history of losses since inception, our ability to remain competitive in response to new technologies, the costs to defend, as well as risks of losing, patents and intellectual property rights, a reliance on our future customers’ ability to develop and sell products that incorporate our technology, the concentration of our operations in a limited number of facilities, the uncertainty of demand for our technology in certain markets, our ability to manage growth effectively, our dependence on key members of our management and development team, our limited experience in conducting operations internationally, and our ability to obtain adequate capital to fund future operations.

 
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Critical Accounting Policies and Estimates

The preparation of our consolidated 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 wholly-owned subsidiary based in Sweden, Neonode Technologies AB.

All inter-company accounts and transactions have been eliminated in consolidation. Our accounting policies affecting our financial condition and results of operations are more fully described in Note 2 to our consolidated financial statements. Certain of our accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. The historical experience and assumptions form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenue and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following are some of the more critical accounting policies and related judgments and estimates used in the preparation of our consolidated financial statements.

Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires making estimates and assumptions that affect, at the date of the consolidated financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates. Significant estimates include, but are not limited to, collectibility of accounts receivable, recoverability of long-lived assets, the valuation allowance recorded related to our deferred tax assets, the fair value of derivative instruments, and the fair value of securities such as options and warrants issued for stock-based compensation and in certain financing transactions.

Concentration of Credit and Business Risks
 
In the short term, we anticipate that we will depend on a limited number of customers for substantially all of our future revenue. 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.

Our accounts receivable as of December 31, 2010 was earned from six customer. Our revenue for the year ended December 31, 2010 was earned from seven customers of whom two customers accounted for approximately 84% of our net revenue for the year. Our customers are located in the US, Europe and Asia.
 
Revenue Recognition

Engineering Services:

We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were preformed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue.  Generally, we recognize revenue as the engineering services stipulated under the contact are completed and accepted by our customers.  

 
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               Licensing Revenues:

We also derive revenue from the licensing of internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that varied by licensee. The IP licensing agreements generally include a nonexclusive license for the underlying IP. Fees under these agreements may include license fees relating to our IP and royalties payable following the 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. We defer the technology license fee revenue until such time as the warranty period stipulated in the license agreement expires. During the warranty period, we agree to correct software issues, as detailed in the underlying technology license agreements.

Hardware Products:

We may from time-to-time develop custom hardware products for our customers that incorporate our touchscreen technology. Our policy is to recognize revenue from hardware product sales when title transfers and risk of loss has passed to the customer, which is generally upon shipment of our hardware products to our customers. We will estimate expected sales returns and record the amount as a reduction of revenue and cost of hardware and other revenue at the time of shipment. To date, we have not sold any hardware products.

Software Products:

We may derive revenues from software licensing.  We will account for the licensing of software in accordance with accounting guidance and such guidance requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (“VSOE”) of fair value exists for those elements.

For software license arrangements that do not require significant modification or customization of the underlying software, we will recognize new software license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of software; (2) we deliver the products; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. We initially will defer all revenue related to the software license and maintenance fees until such time that we are able to establish VSOE for these elements of our software products.  Revenue deferred under these arrangements will be recognized to revenue over the expected contract term. We will also continue to defer revenues that represent undelivered post-delivery engineering support until the engineering support has been completed and the software product is accepted.  To date, we have not sold any software products.

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 our customers 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 its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors, including the length of time the receivables are past due and our historical collection experience with customers. We did not have any accounts receivable at December 31, 2009. We have $151,000 of accounts receivable at December 31, 2010.
 

 
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Debt Issuance Costs

Debt issuance costs represent costs incurred in connection with the issuance of the convertible notes payable. Debt issuance costs are amortized over the term of the financing instrument on a straight-line basis, which approximates the effective interest method.

Advertising

Advertising costs are expensed as incurred. Advertising costs for the year ended December 31, 2010 and 2009 were approximately $28,000 and $48,000, respectively.

Product Research and Development
 
Research and Development (“R&D”) costs are expensed as incurred. R&D costs are accounted for in accordance with accounting guidance. Research and development costs consists mainly of personnel related costs in addition to some external consultancy costs such as testing, certifying, and measurements.  Research and development costs for the year ended December 31, 2010 and 2009 were approximately $1.9 million and $1.0 million, respectively.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets ranging from three to five years as follows:

Computer equipment
3 years
Furniture and fixtures
5 years

Equipment purchased under capital leases is amortized on a straight-line basis over the estimated useful life of the asset.
 
Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.

Long-Lived Assets

We assess any impairment by estimating the future cash flow from the associated asset in accordance with accounting guidance. 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 measure the cost of employee services received in exchange for an award of equity instruments, including share options, based on the fair value of the award on grant date, and recognize it as compensation expense over the period the employee is required to provide services in exchange for the award, usually the vesting period, net of estimated forfeitures. We account for equity instruments issued to non-employees in accordance with accounting guidance, which requires that such equity instruments be recorded at their fair value and the unvested portion be 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.

 
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Foreign Currency Translation and Transaction Gains and Losses

The functional currency of our foreign subsidiary is the applicable local currency, the Swedish Krona. The translation from Swedish Krona to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or losses resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations. For the years ended December 31, 2010 and 2009, our foreign currency transaction losses totaled $23,000 and $0, respectively.

Liabilities for Warrants and Embedded 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 as conversion features that contain anti-dilution rights. Such embedded derivatives are assessed at inception of the contract and every reporting period, depending on their characteristics, and are accounted for as separate derivative financial instruments pursuant to accounting guidance, if such embedded conversion features, if freestanding, would meet the classification of a liability. Accounting guidance requires that we analyze all material contracts and determine whether or not they contain embedded derivatives. Any such embedded conversion features that meet the above criteria 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 as an increase or decrease to non-cash charges.

Similarly, if warrants meet the criteria in accordance with accounting guidance to be classified as liabilities, then the fair value of the warrants are recorded on the consolidated balance sheet at their fair values, and any changes in such fair values are recorded each period in the consolidated statements of operations as an increase or decrease to non-cash charges.

Accounting for Debt Issued with Detachable Stock Purchase Warrants and Beneficial Conversion Features

We account for debt issued with stock purchase warrants by allocating 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, if the warrants are equity instruments. The relative fair value of the warrants are recorded as a debt discount and amortized to expense over the life of the related debt using the straight line method, which approximates the effective interest method. At each balance sheet date, we make a determination if these warrant instruments should be classified as liabilities or equity, and reclassify them if the circumstances dictate.  

In certain instances, the Company enters into convertible notes that provide for an effective or actual rate of conversion that is below market value, and the embedded conversion feature does not qualify for derivative treatment (a “BCF”).  In these instances, we account for the value of the BCF as a debt discount, which is then amortized to expense over the life of the related debt using the straight-line method, which approximates the effective interest method.

Net Loss Per Share

Net loss per share amounts have been computed based on the weighted average number of shares of common stock outstanding during the period. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the year ended December 31, 2010 and 2009, respectively, exclude the potential common stock equivalents, as the effect would be anti-dilutive.

 
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Comprehensive Loss

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

Income taxes

We account for income taxes in accordance with accounting guidance. Accounting guidance requires recognition of deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated 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 the accounting guidance.

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of December 31, 2010 and 2009. 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 the accounting, which provisions included a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions accounted for in accordance with the accounting guidance. As a result of the implementation of the accounting guidance, we did not recognize an increase in the liability for unrecognized tax benefits and a decrease in the related reserve of the same amount. Therefore, upon implementation of the applicable accounting guidance, we recognized no material adjustment to the January 1, 2007 balance of retained earnings. As of December 31, 2010, we had no unrecognized tax benefits.

 Cash Flow Information

Cash flows in foreign currencies have been converted to U.S. dollars at an approximate weighted average exchange rate for the respective reporting periods. The weighted average exchange rate for the consolidated statements of operations was 7.21 and 7.65 Swedish Krona to one U.S. Dollar for the years ended December 31, 2010 and 2009, respectively. The exchange rate for the consolidated balance sheets was 6.78 and 7.21 Swedish Krona to one U.S. Dollar as of December 31, 2010 and 2009, respectively.  

Fair Value of Financial Instruments

We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, payables and derivatives are deemed to approximate fair value due to their short maturities. The carrying amounts of convertible debt cannot be reasonably determined since no quoted market prices exist for these instruments and quoted prices for similar instruments cannot be located.  

New Accounting Pronouncements

In September 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU 2009-13”), Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), which amends the revenue guidance under ASC Topic 605, Revenue Recognition, which describes the accounting for multiple-element arrangements. ASU 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how arrangement consideration shall be measured and allocated to the separate units of accounting in the arrangement. ASU 2009-13 is effective on a prospective basis for the Company’s fiscal year 2011, with earlier adoption permitted. The Company is currently evaluating the adoption of ASU 2009-13 and the impact that ASU 2009-13 will have on its consolidated financial statements.

 
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In September 2009, the FASB issued ASU 2009-14, Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”), which excludes tangible products containing software components and non-software components that function together to deliver product’s essential functionality from scope of ASC Topic 985, Software, which describes the accounting for software revenue recognition. ASU 2009-14 is effective on a prospective basis for the Company’s fiscal year 2011, with earlier adoption permitted. The Company is currently evaluating the impact that ASU 2009-14 will have on its consolidated financial statements.

Results of Operations

Effective January 2, 2009, our common stock was quoted on the Pink Sheets under the symbol NEON.PK and effective January 26, 2009, our common stock has been quoted on the Over the Counter Bulletin Board Market (OTCBB) under the symbol NEON.OB.

We restructured and recapitalized our business on December 31, 2008 to focus our business on the development of our zForce® touchscreen solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. Our sales are targeted at OEM’s and ODM’s which produce handheld devices for the digital lifestyle consumer products market, including portable digital music and video players, eReaders, digital cameras, mobile phones, and other electronic devices which may utilize our customized touchscreen solutions.

As of December 31, 2010, we signed four technology license agreements with customers. We have also developed prototype products and are engaged in product engineering design discussions with several other global OEM and ODMs who are in the process of qualifying our touch screen technology for incorporation in various products such as digital picture frames, GPS devices, e-book readers, Touch PC, mobile phones and mobile internet devices. The development and product release cycle for these products may take six months to one year.

We currently have six customers for our touchscreen technology. Sony Corporation  (Sony) began shipments of their eReader products in September 2010, but we will not recognize any revenue from the sales of the Sony eReaders until March 18, 2011, the date the initial warranty period ends.  Koobe Inc. shipped a small number of eReaders to the Chinese market at the end of December 2010 and we recognized approximately $3,000 in revenue from these sales. Two of our other customers under contract are expected to begin shipping products in June 2011. Under the terms of one of the contracts, the customer will pre-purchase $3.0 million of technology licenses prior to shipment of their first product.
 
Net Revenues

Net revenues for the year ended December 31, 2010 was $440,000. Our net revenues for the year ended December 31, 2010 includes $387,000 in fees for engineering design services $50,000 for the sale of components and $3,000 from technology license fees, respectively, related to our touch screen solution for our customers. We did not have any net revenues for the year ended December 31, 2009.

On December 29, 2009, we signed an engineering services agreement with an OEM to provide engineering services over a three-month period in 2010 related to the development of a touchscreen application for a mobile phone product. The value of this agreement was approximately $167,000, which has been recognized as revenue in the year ended December 31, 2010.  The technology license agreement that we signed with Sony on June 18, 2010 included payment related to engineering services we provided in the development of a touchscreen application for a series of e-book readers. Through December 31, 2010 we earned approximately $201,000 under this agreement, which has been recognized as revenue in the year ended December 31, 2010.  The technology license agreement that we signed with an OEM on July 15, 2010 included payment related to engineering services we provided in the development of a touchscreen application for an automobile touch pad. Through December 31, 2010 we earned approximately $37,000 under this agreement, which has been recognized as revenue in the year ended December 31, 2010. 

 
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In conjunction with the signing of the technology license agreement with Sony, they issued an initial purchase order for $475,000 of touchscreen licenses. Sony began shipping its first eReader product on September 1, 2010. We are deferring the technology license fee revenue until such time as the warranty period expires, on March 18, 2011. During the warranty period, the Company agrees to correct software issues, as detailed in the technology license agreement.

    Drivers of the touch screen market include mobile phones, printers, laptops, tablet PCs, eReaders, navigation screens, etc. The proliferation and mass market acceptance of touch screens have prompted new applications and uses for existing and new offerings, thus making the production and utilization of these modules one of the fastest growing tech segments. The typical sales cycle is 9-18 months with new customers while existing customer lead times are typically 6-9 months. During the initial cycle, there are three phases: evaluation, design, and commercial.  In the evaluation phase, prospects validate the Neonode technology using a Neonode evaluation kit and may produce short runs. During the design phase, true product development begins, with solution definition occurring as well.  This phase tends to be the longest and it should be noted that this phase is where delays typically occur, drawing out the term of the overall cycle.  In the final phase, commercialization, the customer enters into full production mode, and Neonode earns license revenue.
 
Gross Margin

Gross margin was $172,000 and $0 for the years ended December 31, 2010 and 2009, respectively. Our cost of revenues includes the direct cost of production of the components plus the costs of engineering consultants to complete the engineering design contract.

Product Research and Development

Product research and development expenses for the year ended December 31, 2010 were $1.9 million compared to $1.0 million for year ended December 31, 2009.  Factors that contributed to the increase in R&D costs include an increase in patent filing costs, travel and prototype materials costs related to customer development projects.

    We continue to pursue and expand R&D expenditures on the development of our touchscreen and other technologies. We have a development roadmap based on our touchscreen and other technologies. As of December 31, 2010, we have eight employees and one part-time consultant in our R&D department.

Sales and Marketing

Sales and marketing expenses for the year ended December 31, 2010 were $566,000 compared to $346,000 for the year ended December 31, 2009. This increase in 2010 as compared to 2009 is primarily related to the addition of three sales personnel and an increase in travel expenses.
 
Our sales activities focuses primarily on OEM and ODM customers who will integrate our touchscreen technology into their products, and the OEM and ODM customers will sell and market their products to their customers.
 
General and Administrative

General and administrative expenses for the year ended December 31, 2010 were $3.6 million compared to $1.6 million for the year ended December 31, 2009. This increase in 2010 as compared to 2009 is primarily related to an increase in non-cash fair value of warrants issued to employees and legal expenses.

    As of December 31, 2010, we have three employees and one part-time consultant in our G&A department fulfilling management and accounting responsibilities.

 
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Amortization of Fair Value of Stock Issued to Related Parties for Purchase of Neonode Technologies AB

On December 29, 2008, we entered into a Share Exchange Agreement with Neonode Technologies AB and the stockholders of Neonode Technologies AB:  Iwo Jima SARL, Wirelesstoys AB, and Athemis Ltd (the ”Neonode Technologies AB Stockholders”), pursuant to which we agreed to acquire all of the issued and outstanding shares of Neonode Technologies AB in exchange for the issuance of 19,800 shares of the Company’s Series A Preferred stock.  Pursuant to the terms of the Share Exchange Agreement, upon the closing of the transaction, Neonode Technologies AB became a wholly owned subsidiary of the Company.   The Neonode Technologies AB Stockholders are or were employees of us and/or Neonode AB, and as such are related parties.

The fair value of the conversion feature of the 19,800 shares of Series A Preferred shares issued to the related parties to acquire Neonode Technologies AB that was converted to a total of 9,516,447 shares of our common stock was $9.5 million based on our stock price on March 31, 2009, the date our shareholders approved the increased conversion ratio.  Because this transaction is essentially the issuance of shares to key employees for their continued service to enhance the Company, the $9.5 million revised fair value of the common stock is being amortized to compensation expense at the rate of $1.6 million per quarter for six quarters beginning January 1, 2009. The amortization of the $9.5 million in compensation expense related the value of the stock issued to the related parties to acquire Neonode Technologies AB was completed on June 30, 2010. For the year ended December 31, 2009, $6.3 million and for the year ended December 31, 2010 $3.2 million, respectively, has been recorded as compensation expense in our consolidated statements of operations.

Interest and Other Expense

Interest expense for the year ended December 31, 2010 was $179,000, compared to $60,000 for the year ended December 31, 2009. The increase is primarily due to an increase in the debt outstanding from $1.1 million at December 31, 2009 to $2.8 million at December 31, 2010.
 
Foreign Currency Translation and Transaction Gains and Losses

The functional currency of our foreign subsidiary is the applicable local currency, the Swedish Krona. The translation from Swedish Krona to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or losses resulting from translation are included as a separate component of accumulated other comprehensive loss. Gains or losses resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations. Foreign currency transaction losses were $23,000 and $0 during the years ended December 31, 2010 and 2009, respectively.

Non-Cash Items Related to Debt Discounts and Deferred Financing Fees and the Valuation of Conversion Features and Warrants

Non-Cash Valuation for Conversion Features and Warrants  
                                                                                             
            In May 2008, the FASB issued accounting guidance related to convertible debt cash settlements. This accounting guidance clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). Additionally, this accounting guidance specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This accounting guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and requires retrospective application for all periods presented.
 
FASB also issued accounting guidance, which addresses whether or not a derivative is indexed to an entity’s own stock. This accounting guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and requires retrospective application for all periods presented. This accounting guidance requires that warrants with downside ratchet to be accounted for as liabilities that previously 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 the company’s control, they did not trigger liability or derivative accounting.  Now under the new accounting guidance they do.

 
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On January 1, 2009, we adopted the new accounting guidance. We determined that the 84,744 outstanding warrants that include anti-dilution 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 on the consolidated statement of operations.

Related to the derivative liabilities associated with the conversion features and warrants issued in the 2009 and 2010 convertible debt financings, we recorded a net increase in the carrying amount of those liabilities due to the changes in fair value. During the years ended December 31, 2010 and 2009, we recorded a loss on change in fair value of derivative liabilities of $16.3 million and $2.8 million, respectively. We also reclassified $19.3 million and $0 of derivative liabilities to additional paid-in capital during the years ended December 31, 2010 and 2009, respectively.

Gain on Conversion and Forgiveness of Accounts Payable
 
We converted approximately $53,000 of our accounts payable to 31,716 shares of our common stock on January 26, 2009. The fair value of the shares of common stock issued to settle the accounts payable was $23,000 based on our stock price on January 26, 2009. We recorded $23,000 as common stock additional paid in capital and the difference of $30,000 is include in gain on conversion and forgiveness of accounts payable on our consolidated statements of operations for the year ended December 31, 2009.

Deemed Dividend to Preferred Stockholders
 
On December 31, 2008, we issued 4,488 shares of Series A Preferred Stock that at the date of issuance had a conversion rate of one share of common stock for each share of Series A Preferred Stock to investors in a private placement transaction that raised $1.1 million.  On March 31, 2009, our shareholders approved a resolution to increase the conversion ratio to 480.63 shares of common stock for each share of Series A Preferred Stock. The fair value of the conversion of the 4,488 shares of Series A Preferred Stock issued to the investors in the private placement transaction that will be converted to a total of 2,156,883 shares of our common stock was $1.0 million based on our stock price on March 31, 2009, the date our shareholders approved the increased conversion ratio.  On December 31, 2008, the $2.4 million fair value of the Series A Preferred Stock issued prior to the shareholder approval is included in Series A Preferred Stock in the shareholders’ equity. On March 31, 2009, we recorded the $1.0 million increase in the fair value as an increase in common stock additional paid-in-capital and as a deemed dividend to preferred shareholders for the year ended December 31, 2009.

 Loss on Troubled Debt Restructuring

On March 31, 2009, our shareholders approved a resolution increasing the conversion ratio from one-to-one to 480.63 shares of common stock for each share of Series A Preferred Stock. Upon conversion, the shares of Series A Preferred Stock will convert into 16,447,600 shares of our common stock.
 
The fair value of the conversion of the 9,771 shares of Series A Preferred Stock issued to the convertible debt holders that will be converted to 4,696,054 shares of our common stock at a later date was $4.7 million based on our stock price on March 31, 2009.  On December 31, 2008, the $2.4 million fair value of the Series A Preferred Stock issued prior to the shareholder approval is included in Series A Preferred Stock in the shareholders’ equity. On March 31, 2009, we recorded the $2.3 million increase in the fair value as an increase in additional paid-in-capital and as a loss on troubled debt restructuring  on our consolidated statements of operations for the year ended December 31, 2009.

On December 31, 2008, we issued 3,712 shares of Series B Preferred Stock to warrant holders to convert their warrants to equity. On March 31, 2009, our shareholders approved a resolution increasing the conversion ratio from one-to-one to 132.07 shares of common stock for each share of Series B Preferred Stock. Upon conversion, the shares of Series B Preferred Stock will convert into 490,222 shares of our common stock.

The fair value of the conversion of the 3,712, shares of Series B Preferred Stock issued to the warrant holders that will be converted to 490,222 shares of our common stock at a later date was $490,000 based on our stock price on March 31, 2009.  On December 31, 2008, the $2,000 fair value of the Series B Preferred Stock issued prior to the shareholder approval is included in Series B Preferred Stock in the shareholders’ equity. On March 31, 2009, we recorded the $488,000 million increase in the fair value as an increase in additional paid-in-capital on the consolidated balance sheets and as a loss on troubled debt restructuring on our consolidated statements of operations for the year ended December 31, 2009.

 
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Income Taxes

    Our effective tax rate was 0% in the year ended December 31, 2010 and 2009, respectively. We recorded valuation allowances in 2010 and 2009 for deferred tax assets related to net operating losses due to the uncertainty of realization.

Net Loss
 
    As a result of the factors discussed above, we recorded a net loss of $31.6 million for the year ended December 31, 2010, compared to a net loss of $14.9 million in the comparable period in 2009.    

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 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.

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 repayment of liabilities in the ordinary course of business.  Although we have been able to fund our operations to date, there is no assurance that cash flow from our operations or our capital raising efforts will be able to 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.

    We have not generated sufficient cash from the sale of our products or licensing of our technology to support our operations and have incurred significant losses. During the years ended December 31, 2010 and 2009, we raised approximately $4.0 million and $1.9 million, respectively, net cash proceeds through the sale of our securities and convertible debt. In the first quarter of 2011, we raised approximately $4.7 million from the sale of our securities and convertible debt. We now have sufficient cash to operate for the remainder of 2011. We expect to receive sufficient cash from customer license agreements to operate for at least the next twelve months. In addition, one of our customers has committed to pre-purchasing $3.0 million of technology licenses at the point they begin product shipment. Their first product shipments are projected to begin in the late second quarter of 2011.

    We have six current active customers for our touchscreen technology. In most circumstances, our target customers will have to successfully integrate our technology into their products and then sell those products to their customers before we will receive any cash from technology license agreements.

 
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    Our cash is subject to interest rate risk. We invest primarily on a short-term basis. Our financial instrument holdings at December 31, 2010 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.

    At December 31, 2010, we had cash of $911,000, as compared to $28,000 at December 31, 2009. In the year ended December 31, 2010, $3.1 million of cash was used in operating activities, primarily as a result of our net loss increased by the following non-cash items (in thousands):

Depreciation and amortization
 
$
11
 
Stock-based compensation expense
   
5,430
 
Loss on debt extinguishment
   
2,416
 
Fair value of stock issued in settlements
   
647
 
Debt discounts and deferred financing fees and the valuation of conversion features and warrants
   
19,963
 
Total adjustments to reconcile net loss to net cash used in operating activities
 
$
28,467
 

    Adjusted working capital deficit (current assets less current liabilities not including non-cash liabilities related to warrants and embedded derivatives) was $3.2 million at December 31, 2010, compared to an adjusted working capital deficit of $1.9 million at December 31, 2009.

    In the years ended December 31, 2010 and 2009, we purchased $14,000 and $27,000, respectively of fixed assets, consisting primarily of computers and engineering equipment.

    During the year ended December 31, 2010, we received proceeds from a private placement of convertible notes totaling $1.6 million and converted $163,000 of accounts payable to convertible debt that can be converted, at the holder’s option, into 3,521,423 shares of our common stock at a conversion price of $0.50 per share. The convertible note holders have the right to have the conversion price adjusted to equal the lower stock price if we issue common stock or convertible notes at a lower conversion price than $0.50 during the period that the notes are outstanding. These convertible notes that were due on December 31, 2010 were extended until June 30, 2011and bear an annual interest rate of 7%, payable on June 30 and December 31 of each year that the convertible notes are outstanding. In addition, we issued 1,760,711 three year warrants to the convertible note holders with an exercise price of $1.00 per share (see below). 
 
During September and October 2010, all of the holders of the convertible notes and the holders of the stock purchase warrants issued in the 2009 and 2010 Senior Secured Convertible Debt Financing Transactions extended the maturity date of their convertible debt from December 31, 2010 to June 30, 2011 under the same terms and conditions as the original notes. Holders of 2,766,856 stock purchase warrants also exercised their previously granted three-year warrants with an exercise price of $1.00 at a discounted exercise price of $0.88 per share. A total of approximately $2.4 million was raised under this transaction and participants in the warrant repricing transaction received a total 2,766,856 shares of our common stock and 2,766,856 replacement three-year warrants with an exercise price of $1.38 for each warrant exercised.
 
    Historically, 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. In the first quarter of 2011, we raised approximately $4.7 million from the sale of our securities and convertible debt. We believe we now have sufficient cash to operate for the remainder of 2011. We also expect to receive sufficient cash from customer license agreements to operate for the next twelve months. In addition, one of our customers has committed to pre-purchasing $3.0 million of technology licenses at the point they begin product shipment. Their first product shipments are projected to begin in the late second quarter of 2011.

 
31

 

We may 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 may be forced to seek credit line facilities from financial institutions, additional private equity investment or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

 
32

 

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Financial Statements
 
Page
 
       
Financial Statements
     
       
Report of Independent Registered Public Accounting Firm
    34  
         
Consolidated Balance Sheets at December 31, 2010 and 2009
    35  
         
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
    36  
         
Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss for the years ended December 31, 2010 and 2009
    37-38  
         
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
    39  
         
Notes to Consolidated Financial Statements
    40  
         
 


 
33

 
 

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Neonode Inc.

We have audited the accompanying consolidated balance sheets of Neonode Inc. (a Delaware corporation) and subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ deficit and comprehensive loss, and cash flows for each of the years in the two year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Neonode Inc. and subsidiary at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the liquidity section of Note 1 to the consolidated financial statements, the Company has incurred significant operating losses and has used substantial amounts of working capital in its operations since inception, and at December 31, 2010, has a working capital deficit of $9.9 million and an accumulated deficit of $112.2 million. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in the liquidity section of Note 1.  The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that might result from the outcome of this uncertainty.

/s/ KMJ Corbin & Company, LLP

Costa Mesa, California
March 31, 2011 


 
34

 
 
NEONODE INC.
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
             
   
As of
December
31, 2010
   
As of
December
31, 2009
 
ASSETS
           
Current assets:
           
Cash
  $ 911     $ 28  
Accounts receivable
    151        
Debt issuance costs, net
    4       26  
Prepaid expenses and other current assets
    161       110  
Total current assets
    1,227       164  
Property, plant and equipment, net
    24       20  
Other assets
          28  
Total assets
  $ 1,251     $ 212  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities:
               
Accounts payable
  $ 442     $ 699  
Accrued expenses
    643       993  
Deferred revenue
    540        
Convertible debt, net of discounts
    2,772       361  
Embedded derivatives of convertible debt and warrants
    6,718       4,507  
Total current liabilities
    11,115       6,560  
                 
Total liabilities
  $ 11,115     $ 6,560  
                 
Commitments and contingencies (Note 11)
               
                 
Stockholders’ deficit:
               
Series A Preferred Stock, 899,081 shares authorized with par value of $0.001 per share; 166 and 3,446 shares issued and outstanding at December 31, 2010 and 2009, respectively. (In the event of dissolution, each share of Series A Preferred stock has a liquidation preference equal to par value of $0.001 over the shares of common stock)
           
Series B Preferred Stock, 108,850 shares authorized with par value of $0.001; 141 and 691 shares issued and outstanding at December 31, 2010 and 2009, respectively. (In the event of dissolution, each share of Series B Preferred stock has a liquidation preference equal to par value of $0.001 over the shares of common stock)
           
Common stock, 848,000,000 and 698,000,000 shares authorized at December 31, 2010 and 2009, respectively, with par value of $0.001; 21,816,602 and 16,658,894 shares issued and outstanding at December 31, 2010 and 2009, respectively
    22       17  
Additional paid-in-capital
    102,360       74,288  
Accumulated other comprehensive loss
    (63 )     (96 )
Accumulated deficit
    (112,183 )     (80,557 )
Total stockholders’ deficit
    (9,864 )     (6,348 )
Total liabilities and stockholders’ deficit
  $ 1,251     $ 212  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
35

 
 
 
NEONODE INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
             
   
Years ended
December 31,
 
   
2010
   
2009
 
Net revenues
  $ 440     $  
Cost of revenues
    268        
Gross margin
    172        
                 
Operating expenses:
               
Product research and development
    1,873       999  
Sales and marketing
    566       346  
General and administrative
   
3,588
     
1,623
 
Amortization of fair value of stock issued to related parties for purchase of
    3,168       6,337  
Neonode Technologies AB (formerly AB Cypressen)
               
Total operating expenses
   
9,195
     
9,305
 
                 
Operating loss
    (9,023 )     (9,305 )
                 
Other (expense) income:
               
Interest and other expense
    (179 )     (60 )
Gain on conversion and forgiveness of accounts payable
          30  
Loss on troubled debt restructuring
          (2,741 )
Loss on extinguishment of debt
    (2,416 )      
Non-cash items related to debt discounts and deferred financing fees and the valuation of conversion features and warrants
    (19,963 )     (2,844 )
Total other expense
    (22,558 )     (5,615 )
Loss before provision for income taxes     (31,581 )     (14,920
Provision for income taxes
    45       1  
Net loss
    (31,626 )     (14,921 )
                 
Deemed dividend to preferred stockholders
          (1,035 )
Net loss attributable to common stockholders
  $ (31,626 )   $ (15,956 )
                 
Loss attributable to common stockholders per common share:
               
                 
Basic and diluted loss per share
  $ (1.73 )   $ (1.61 )
Basic and diluted – weighted average shares used in per share computations
    18,293       9,898  
 
The accompanying notes are an integral part of these consolidated financial statements.

 
36

 

NEONODE INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT AND COMPREHENSIVE LOSS
(Amounts in thousands)
 
                                                                         
 
 
Common
stock shares
issued
   
Common
stock
amount
   
Additional
paid-in- capital
   
Series A
Preferred
stock
shares
issued
   
Series A
Preferred
stock amount
   
Series B
Preferred
stock
shares
issued
   
Series B
Preferred
stock amount
   
Stock
subscription
receivable
   
Accumulated
other
comprehensive
loss
   
Accumulated
deficit
   
Total
Stockholders’
equity (deficit)
   
Other
comprehensive
loss
 
Balances, January 1, 2009
   
1,402
    $
2
   
64,583
     
34
   
     
4
   
   
(1,035
)
 
   
(64,601
)
 
(1,051
)
 
 
                                                                                               
Employee stock option and warrant compensation expense
   
     
     
453
     
     
     
     
     
     
     
     
453
     
 
                                                                                               
Amortization of fair value of stock issued to related parties for purchase of Neonode Technologies AB (formerly AB Cypressen)
   
     
     
6,337
     
     
     
     
     
     
     
     
6,337
     
 
                                                                                               
Common stock issued to settle accounts payable
   
31
     
     
23
     
     
     
     
     
     
     
     
23
     
 
                                                                                               
Common stock issued to settle lawsuit
   
48
     
     
35
     
     
     
     
     
     
     
     
35
     
 
                                                                                               
Exchange of Series A Preferred Stock for common stock
   
14,779
     
15
     
(15
   
(31
)
   
 
   
     
     
     
     
     
     
 
                                                                                               
Exchange of Series B Preferred Stock for common stock    
399
     
     
     
     
     
(3
)
   
 
   
     
     
     
     
 
                                                                                               
Loss on troubled debt restructuring related to the modification of conversion feature of preferred stock
   
     
     
2,741
     
     
     
     
     
     
     
     
2,741
     
 
                                                                                               
Fair value of warrants reclassified to derivative liabilities due to adoption of new accounting standard
   
     
     
(67
)
   
     
     
     
     
     
     
     
(67
)
   
 
                                                                                               
Deemed dividend to preferred stockholders
   
     
     
1,035
     
     
     
     
     
     
     
(1,035
)
   
     
 
                                                                                               
Proceeds received from subscription  receivable
   
     
     
     
     
     
     
     
1,035
     
     
     
1,035
     
 
                                                                                               
Reclassification of warrants to derivative liabilities due to insufficient authorized shares
   
     
     
(837
)
   
     
     
     
     
     
     
     
(837
)
 
 
                                                                                               
Foreign currency translation adjustment
   
     
     
     
     
     
     
     
     
(96
)
   
     
(96
)
   
(96
)
                                                                                               
Net loss
   
     
     
     
     
     
     
     
     
     
(14,921
)
   
(14,921
)
 
 
(14,921
)
                                                                                                 
Comprehensive loss
                                                                                          $
(15,017
)
                                                                                                 
Balances, December 31, 2009
   
16,659
   
$
17
   
$
74,288
     
3
   
$
     
1
   
$
   
$
   
$
(96
)
 
$
(80,557
)
 
$
(6,348
)
  
 
 
 
 
 
37

 
 
 
 
   
Common
stock shares
issued
     
Common
stock
amount
     
Additional
paid-in- capital
     
Series A
Preferred
stock
shares
issued
     
Series A
Preferred
stock amount
     
Series B
Preferred
stock
shares
issued
     
Series B
Preferred
stock amount
     
Stock
subscription
receivable
     
Accumulated
other
comprehensive
loss
     
Accumulated
deficit
     
Total
Stockholders’
equity (deficit)
     
Other
comprehensive
loss
 
                                                                                                 
Employee stock option and warrant compensation expense
   
     
     
2,262
     
     
     
     
     
     
     
     
2,262
         
                                                                                                 
Amortization of fair value of stock issued to related parties for purchase of Neonode  Technologies AB (formerly AB Cypressen)
   
             
3,168
     
     
     
     
     
     
     
     
3,168
         
                                                                                                 
Reclassification of derivative liabilities to additional paid-in-capital
   
     
     
19,286
     
     
     
     
     
     
     
     
19,286
         
                                                                                                 
Common stock issued to settle lawsuits    
498
     
     
647
     
     
     
     
     
     
     
     
647
         
                                                                                                 
Exchange of Series A Preferred Stock for common stock
   
1,577
     
2
     
(2
)    
(3
)
   
 
   
     
     
     
     
     
         
                                                                                                 
Exchange of Series B Preferred Stock for common stock
   
73
     
     
     
     
     
(1
)
   
     
     
     
     
         
                                                                                                 
Common stock issued upon conversion of debt including beneficial conversion feature amounts
   
186
     
     
179
                     
     
     
     
     
     
179
         
                                                                                                 
Common stock issued to brokers
   
57
     
     
65
     
     
     
     
     
     
     
     
65
         
                                                                                                 
Proceeds from issuance of warrants    
     
      49      
     
     
     
     
     
     
      49          
                                                                                                 
Common stock issued to investors in the 2010 warrant repricing financing transaction
   
2,767
     
3
     
2,418
     
     
     
     
     
     
     
     
2,421
         
                                                                                                 
Foreign currency translation adjustment
   
     
     
     
     
     
     
     
     
33
     
     
33
      33  
                                                                                                 
Net loss
   
     
     
     
     
     
     
     
     
     
(31,626
)
   
(31,626
)
   
(31,626
)
                                                                                                 
Comprehensive loss
   
     
     
     
     
     
     
     
     
     
     
    $
(31,593
)
                                                                                                 
Balances, December 31, 2010
   
21,817
   
$
22
   
$
102,360
     
   
$
     
   
$
   
$
   
$
(63
)
 
$
(112,183
)
 
$
(9,864
)
    
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.


 
38

 
 
NEONODE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
             
   
Years ended
December 31,
 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net loss
  $ (31,626 )   $ (14,921 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Stock-based compensation expense
    5,430       6,790  
Fair value of common stock issued in settlements
    647       35  
Depreciation and amortization
    11       8  
Loss on sale of property and equipment
          30  
Gain on conversion of accounts payable to equity
          (30 )
Loss on troubled debt restructuring
          2,741  
Loss on extinguishment of debt
    2,416        
Debt discounts and deferred financing fees and the valuation of conversion features and warrants
    19,963       2,844  
Changes in operating assets and liabilities:
               
Accounts receivable
    (146 )     (52 )
Prepaid expenses and other current assets
    (16 )     (12 )
Other assets
          (28 )
Accounts payable and other accrued expense