Unassociated Document
SCHEDULE
14A
(RULE
14a-101)
INFORMATION
REQUIRED IN PROXY STATEMENT
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a)
of
the Securities Exchange Act of 1934
(Amendment
No. 1)
Filed
by
the Registrant x
Filed
by
a Party other than the Registrant o
Check
the
appropriate box:
x Preliminary
Proxy Statement
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o Confidential,
for Use
of the Commission Only (as permitted by Rule
14a-6(e)(2))
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o Definitive
Proxy
Statement
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o Definitive
Additional
Materials
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x Soliciting
Material Under Rule 14a-12
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SBE,
INC.
(Name
of
Registrant as Specified In Its Charter)
Not
applicable
(Name
of
Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
x Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1)
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Title
of each class of securities to which transaction applies: Common
Stock,
par value $0.001 per share, of the Registrant (the “Common
Stock”).
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(2)
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Aggregate
number of securities to which transaction applies:
28,379,000
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(3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11: Pursuant to Section 14(g)(1)(i) of the
Securities Exchange Act of 1934, $30.70 per $1,000,000 of the proposed
value.
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(4)
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Proposed
maximum aggregate value of transaction: $52,650,903
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(5)
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Total
fee paid: $1,616.35
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x
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Fee
paid previously with preliminary materials.
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid
previously. Identify the previous filing by registration statement
number,
or the form or schedule and the date of its filing.
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(1)
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Amount
previously paid: N/A
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(2)
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Form,
Schedule or Registration Statement No.: N/A
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(3)
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Filing
Party: N/A
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(4)
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Date
Filed: N/A
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SBE,
Inc.
[_____________],
2007
Dear
Stockholder:
You
are
cordially invited to attend the Special Meeting of Stockholders of SBE, Inc.
to
be held on August 10, 2007 at our offices located at 4000 Executive Parkway,
Suite 200, San Ramon, California 94583. The meeting will begin promptly at
9:00 a.m. California time.
The
items
of business to be considered at the special meeting are listed in the following
Notice of Special Meeting and are more fully addressed in the proxy statement
included with this letter. The items you will be asked to approve at the special
meeting relate to our proposed acquisition of Neonode Inc., an increase in
the
number of shares authorized for issuance under the 2006 Equity Incentive Plan
and the amendment and restatement of our Amended and Restated Certificate of
Incorporation to (i) effect a stock combination (reverse stock split) of either
1-for-2 or 1-for-3, with the specific ratio to be determined by our board of
directors, pursuant to which every two or three shares
of
outstanding common stock, as applicable, would be reclassified into one share
of
common stock; (ii) increase the authorized shares of common stock from
25,000,000 to 40,000,000 and (iii) change our name from SBE, Inc. to “Neonode
Inc.”
Our
board
of directors carefully considered each of the above proposals and recommends
that you vote in favor of each. We are excited about the opportunities for
the
combined company and believe that the combined company will be able to create
substantially more stockholder value than could be achieved by the companies
individually.
Whether
or not you plan to attend the special meeting in person, it is important that
your shares be represented and voted at the meeting.
Please
date, sign, and return your proxy card promptly in the enclosed envelope to
ensure that your shares will be represented and voted at the special meeting,
even if you cannot attend. If you attend the special meeting and are the
stockholder of record, you may vote your shares in person even though you have
previously signed and returned your proxy.
On
behalf
of your board of directors, thank you for your investment in and continued
support of SBE, Inc.
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Sincerely,
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/s/
Greg Yamamoto
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Greg
Yamamoto
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President
and Chief Executive Officer
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SBE,
INC.
NOTICE
OF SPECIAL
MEETING
OF STOCKHOLDERS
To
Be Held On August 10, 2007
To
the
Stockholders of SBE, Inc.:
You
are
cordially invited to attend the Special Meeting of Stockholders of SBE, Inc,
a
Delaware corporation
(the “Company”). The special meeting will be held 4000 Executive Parkway, Suite
200, San Ramon, California 94583. The meeting will begin promptly at 9:00 a.m.
California time.
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(1) To
consider and vote upon the adoption of the Agreement and Plan of
Merger
and Reorganization, dated January 19, 2007 and amended as of May
18, 2007,
between us and Neonode Inc., and to approve the merger of our
newly-formed, wholly-owned subsidiary, Cold Winter Acquisition
Corporation, with and into Neonode Inc.
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(2) To
consider and vote upon the approval of our 2006 Equity Incentive
Plan, as
amended to increase the number of shares authorized for issuance
under the
plan by 1,000,000 shares of common stock from an aggregate of 300,000
shares to 1,300,000 shares;
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(3) To
consider and vote upon the approval of an amendment and restatement
of our
Certificate of Incorporation to effect a stock combination (reverse
stock
split) of either 1-for-2 or 1-for-3, with the specific ratio to be
determined by our board of directors, pursuant to which every two
or three
shares of outstanding common stock, as applicable, would be reclassified
into one share of common stock;
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(4) To
consider and vote upon the approval of an amendment and restatement
of our
Certificate of Incorporation to increase the authorized shares of
common
stock from 25,000,000 to 40,000,000;
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(5) To
consider and vote upon the approval of an amendment and restatement
of our
Certificate of Incorporation to change the name of the Company from
“SBE,
Inc.” to “Neonode Inc.”; and
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(6) To
transact such other business as may properly come before the special
meeting or any adjournment thereof.
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These
items of business are more fully described in the Proxy Statement accompanying
this Notice.
The
record date for the special meeting is July 3, 2007. Only stockholders of record
at the close of business on that date may vote at the meeting or any adjournment
thereof.
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By
Order of the Board of Directors,
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/s/
David W. Brunton
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David
W. Brunton
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Secretary
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San
Ramon, California
[________],
2007
YOU
ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
WHETHER
OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE
THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH DOES
NOT REQUIRE ANY POSTAGE IF MAILED IN THE UNITED STATES,
IN ORDER TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING. EVEN IF YOU
HAVE
VOTED BY PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR
OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN A PROXY ISSUED
IN
YOUR NAME FROM THAT RECORD HOLDER IN ORDER TO VOTE IN
PERSON.
SUMMARY
OF THE MATERIAL TERMS OF THE MERGER
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1
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FORWARD-LOOKING
STATEMENTS
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3
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WHERE
YOU CAN FIND MORE INFORMATION
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3
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QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS
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4
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SUMMARY
OF THE PROXY STATEMENT
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8
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RISK
FACTORS
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11
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Risk
Relating to the Merger
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11
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Risk
Relating to Neonode and the Combined Company after the
Merger
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12
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THE
COMPANIES
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21
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SBE
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21
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Neonode
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21
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PROPOSAL
1 - THE MERGER PROPOSAL
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22
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General
Description of the Merger
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22
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Background
of the Merger
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22
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Reasons
for the Merger
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24
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Recommendation
of our Board of Directors
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25
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Opinion
of our Financial Advisor
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25
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Regulatory
Approvals relating to the Merger
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29
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Dissenters’
Rights Relating to the mergers
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29
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Interests
of Certain Persons in the Merger
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29
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THE
MERGER AGREEMENT
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30
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General
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30
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Effective
Time of the Merger
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30
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Treatment
of Stock Options
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30
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Treatment
of Warrants to Purchase Stock
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30
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Surrender
and Exchange of Share Certificates
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30
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Representations
and Warranties
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31
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Certain
Covenants
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33
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Conditions
to Closing of the Merger
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36
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Termination
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37
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Waivers
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38
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Amendments
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38
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Fees
and Expenses
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38
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Accounting
Treatment of the Merger
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38
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Registration
Rights
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38
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Voting
Agreement; Neonode Stockholder Vote
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39
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Past
Contacts, Transactions or Negotiations
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39
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Loan
to Neonode
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39
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Recommendation
of our Board of Directors
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39
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PROPOSAL
2 - APPROVAL OF OPTION PLAN INCREASE
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40
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PROPOSAL
3 - APPROVAL OF REVERSE STOCK SPLIT
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46
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PROPOSAL
4 - APPROVAL OF INCREASE IN AUTHORIZED SHARES
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51
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PROPOSAL
5 - APPROVAL OF NAME CHANGE
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52
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SBE’S
BUSINESS
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53
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS
OF OPERATIONS OF SBE
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56
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NEONODE’S
BUSINESS
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70
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS
OF OPERATIONS OF NEONODE
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71
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FINANCIAL
STATEMENTS - SBE, INC.
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85
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FINANCIAL
STATEMENTS - NEONODE INC.
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85
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UNAUDITED
PRO FORMA FINANCIAL STATEMENTS.
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85
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COMPARATIVE
PER SHARE DILUTION INFORMATION
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85
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COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
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86
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DIRECTORS
AND EXECUTIVE OFFICERS OF SBE FOLLOWING THE MERGER
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88
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Board
of Directors
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88
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Executive
Officers
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89
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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90
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OTHER
MATTERS
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92
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Annex
A -
Agreement and Plan of Merger and Reorganization and Amendment No. 1
thereto
Annex
B -
Amended and Restated Certificate of Incorporation
Annex
C -
2006 Equity Incentive Plan
Annex
D -
Opinion of Seidman & Company, Inc.
Annex
E -
Financial Statements - SBE
Annex
F -
Financial Statements - Neonode
Annex
G -
Unaudited Pro Forma Financial Statements
Except
as
otherwise specifically noted, “SBE,” “we,” “our,” “us” and similar words in this
proxy statement refer to SBE, Inc. and its subsidiaries. References to “Neonode”
shall mean Neonode Inc. and its wholly-owned subsidiary, Neonode
AB.
SUMMARY
OF THE MATERIAL TERMS OF THE MERGER
On
January 19, 2007, we entered into an Agreement and Plan of Merger and
Reorganization with Cold Winter Acquisition Corporation, a Delaware corporation
and wholly-owned subsidiary of SBE, referred to in this proxy as the merger
sub,
and Neonode Inc., a Delaware corporation. We amended this agreement as of
May 18, 2007. In this proxy statement, we refer to this agreement, as amended,
as the merger agreement. We contemplate that, subject to the terms and
conditions of the merger agreement, Merger Sub will be merged with and into
Neonode, with Neonode continuing after the merger as the surviving corporation
and a wholly-owned subsidiary of SBE. It is anticipated that our name will
be
changed to “Neonode Inc.” and that Neonode’s name will be modified in connection
with the completion of the merger. See
the
section entitled “The Merger Proposal— General Description of the
Merger.”
Neonode
is a Sweden-based developer and manufacturer of multimedia mobile handsets.
See
the
section entitled “Business of Neonode.” After
the
merger is completed, the combined company’s headquarters will be in Stockholm,
Sweden, where Neonode’s corporate headquarters and research and development
activities are located.
The
amended merger agreement provides that SBE will issue, on a pre-split basis,
3.5319 shares of its common stock (as adjusted for stock splits and combinations
affecting either the SBE stock or Neonode stock) for each share of Neonode
common stock outstanding at closing, and that it will assume all outstanding
options and warrants to purchase Neonode common stock such that each option
and
warrant will become exercisable for 3.5319 (as adjusted for stock splits and
combinations affecting either the SBE stock or Neonode stock) shares of SBE
common stock for each share of Neonode common stock subject to such option
or
warrant. Although the exact number of shares to be issued in the merger will
be
determined at closing, it is currently estimated that SBE will issue
approximately 20.4 million shares of its common stock in exchange for
outstanding shares of Neonode common stock and will assume options and warrants
exercisable for approximately 8.0 million additional shares of SBE common
stock.
See the
section entitled “The Merger Agreement — Merger Consideration.”
The
board
of directors of SBE has unanimously approved the merger agreement. Neonode
and SBE have made customary representations, warranties and covenants in the
merger agreement. See
the
section entitled “The Merger Agreement — Representations and Warranties.”
Neonode’s
and SBE’s covenants include, among others, that (i) each company will conduct
its business in the ordinary course consistent with past practice during the
interim period between the execution of the merger agreement and the effective
time of the merger, except that SBE was permitted to complete its proposed
sale
of its embedded business to One Stop Systems, Inc., (ii) each company will
not
engage in certain types of transactions during such interim period, (iii) each
company will call, hold and convene a meeting of its stockholders to consider
adoption of the merger agreement, (iv) subject to certain exceptions, the board
of directors of each company will recommend to its stockholders that they adopt
the merger agreement, (v) neither company will solicit proposals relating to
alternative business combination transactions, and (vi) subject to certain
exceptions, neither company will enter into discussions concerning or provide
confidential information in connection with any proposals for alternative
business combination transactions. See
the
section entitled “The Merger Agreement — Certain Covenants.”
Completion
of the merger is subject to customary closing conditions, including, among
other
things, (i) adoption of the merger agreement by Neonode’s and SBE’s
stockholders; (ii) the absence of any order or injunction prohibiting the
consummation of the merger; (iii) the accuracy of the representations and
warranties of each party and (iv) compliance of each party with its covenants
and the execution of six-month lockup agreements by all holders of Neonode
securities are conditions to closing. See
the
section entitled “The Merger Agreement — Conditions to Closing of the Merger.”
The
merger agreement also contains certain termination rights for both SBE and
Neonode, and further provides that, upon a party’s termination of the merger
agreement under specified circumstances, such party may be required to pay
the
other party a termination fee. See
the
section entitled “The Merger Agreement — Termination.”
In
addition, stockholders will be asked to vote on proposals to approve an
amendment to our equity incentive plan to increase the number of shares
authorized for issuance under the plan by 1,000,000 shares of common stock
to an
aggregate of 1,300,000 shares. Stockholders are also being asked to vote on
three proposals to amend and restate our Certificate of Incorporation to (i)
effect a stock combination (reverse stock split) of either 1-for-2 or 1-for-3,
with the specific ratio to be determined by our board of directors, pursuant
to
which every two or three shares of outstanding common stock, as applicable,
would be reclassified into one share of common stock, (ii) increase the
authorized shares from 25,000,000 shares to 40,000,000 shares, and (iii) change
our name to “Neonode Inc.” Our board of directors may adjourn the special
meeting, if necessary, to permit further solicitation of proxies in the event
that there are insufficient votes at the time of the special meeting to adopt
the merger proposal or any of the proposals to amend the equity incentive plan
or amend and restate the certificate of incorporation. See the sections entitled
“Proposal 2 - Approval of Option Plan Increase,” “Proposal 3 - Approval of
Reverse Stock Split,” “Proposal 4 - Approval of Authorized Shares Increase,” and
“Proposal 5 - Approval of Name Change.”
All
of
the current members of our board of directors are expected to resign as
directors of SBE following the merger, with the exception of John Reardon,
who
is currently also a director of Neonode Inc. Upon completion of the merger,
we
expect the board of directors of SBE to consist of Per Bystedt, Susan Major,
John Reardon, Magnus Goertz and Johan Ihrfelt. We expect the executive officers
of SBE at such time to be Mikael Hagman, David Brunton, Thomas Eriksson and
Tommy Hallberg. See section entitled “Directors and Executive Officers of SBE
Following the Merger.”
FORWARD-LOOKING
STATEMENTS
The
information in this proxy statement contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Statements
that are not historical in nature, including statements about beliefs and
expectations, are forward-looking statements. Words such as “may,” “will,”
“should,” “estimates,” “predicts,” “believes,” “anticipates,” “plans,”
“expects,” “intends” and similar expressions are intended to identify these
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. You are cautioned that these 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 “Risk
Factors” and elsewhere in this proxy statement. Important factors that might
cause or contribute to such a discrepancy include, but are not limited
to:
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the
timing and success of our proposed transaction with
Neonode;
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the
effect of the transaction on our market
price;
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the
factors discussed under “Risk Factors,” beginning on page [___];
and
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other
risks referenced from time to time in our filings with the Securities
and
Exchange Commission, or SEC.
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WHERE
YOU CAN FIND MORE INFORMATION
We
are a
reporting company and file annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, proxy statements or other information that we file at the SEC’s public
reference room at 100 F Street N.E., Room 1580, Washington, D.C., 20549. You
can
also request copies of these documents by writing to the SEC and paying a fee
for the copying costs. Please call the SEC at 1-800-SEC-0330 for more
information about the operation of the public reference room. Our public filings
with the SEC are also available on the web site maintained by the SEC
at
http://www.sec.gov.
We
have
supplied all information in this proxy statement relating to SBE. Neonode has
supplied all information in this proxy statement relating to Neonode. Seidman
& Co., Inc. has supplied the information regarding its fairness
opinion.
SBE,
INC.
4000
Executive Parkway, Suite 200
San
Ramon, California 94583
PROXY
STATEMENT
FOR
THE SPECIAL
MEETING
OF STOCKHOLDERS
To
Be Held On August 10, 2007
The
Special Meeting of Stockholders of SBE, Inc. will be held on August 10,
2007, at 4000 Executive Parkway, Suite 200, San Ramon, California 94583,
beginning promptly at 9:00 a.m., local time. The enclosed proxy is
solicited by our board of directors. It is anticipated that this proxy statement
and the accompanying proxy card will be first mailed to holders of our common
stock on or about July 10, 2007.
QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS
Why
am I receiving this proxy statement and proxy card?
You
are
receiving a proxy statement and proxy card because you own shares of our common
stock. This proxy statement describes the issues on which we would like you,
as
a stockholder, to vote. It also gives you information on these issues so that
you can make an informed decision.
Who
can vote at the special meeting?
Only
stockholders of record at the close of business on July 3, 2007 will be entitled
to vote at the special meeting. On this record date, there were [_______]
shares
of common stock outstanding and entitled to vote.
Stockholder
of Record: Shares Registered in Your Name
If
on
July
3,
2007
your
shares were registered directly in your name with our transfer agent, American
Stock Transfer & Trust, then you are a stockholder of record. As a
stockholder of record, you may vote in person at the meeting or vote by proxy.
Whether or not you plan to attend the meeting, we urge you to fill out and
return the enclosed proxy card to ensure your vote is counted.
Beneficial
Owner: Shares Registered in the Name of a Broker or Bank
If
on
July
3, 2007
your
shares were held, not in your name, but rather in an account at a brokerage
firm, bank, dealer, or other similar organization, then you are the beneficial
owner of shares held in “street name” and these proxy materials are being
forwarded to you by that organization. The organization holding your account
is
considered to be the stockholder of record for purposes of voting at the special
meeting. As a beneficial owner, you have the right to direct your broker or
other agent on how to vote the shares in your account. You are also invited
to
attend the special meeting. However, since you are not the stockholder of
record, you may not vote your shares in person at the meeting unless you request
and obtain a valid proxy from your broker or other agent.
What
is being voted on?
You
are
being asked to vote on the following five proposals:
Proposal
1 —
To adopt the merger agreement and approve the merger;
Proposal
2 ---
To consider and vote upon the approval of our 2006 Equity Incentive Plan, as
amended to increase the number of shares authorized for issuance under the
plan
by 1,000,000 shares of common stock from an aggregate of 300,000 shares to
1,300,000 shares;
Proposal
3
--- To consider and vote upon the approval of an amendment and restatement
of our Certificate of Incorporation to effect a stock combination (reverse
stock
split) of either 1-for-2 or 1-for-3, with the specific ratio to be determined
by
our board of directors, pursuant to which every two or three shares of
outstanding common stock, as applicable, would be reclassified into one share
of
common stock;
Proposal
4 --- To
consider and vote upon the approval of an amendment and restatement of our
Certificate of Incorporation to increase the authorized shares of common stock
from 25,000,000 to 40,000,000; and
Proposal
5 --- To
consider and vote upon the approval of an amendment and restatement of our
Certificate of Incorporation to change the name of the company from “SBE, Inc.”
to “Neonode Inc.”
Do
the share amounts presented in this proxy statement give effect to the proposed
reverse split?
No.
All
share amounts reflected in this proxy statement give effect to the 1-for-5
reverse split effected by SBE on April 2, 2007, but do not give effect to the
additional reverse split proposed for approval in this proxy
statement.
How
do I vote?
For
each
of the matters to be voted on, you may vote “For” or “Against” or abstain from
voting. The procedures for voting are fairly simple:
Stockholder
of Record: Shares Registered in Your Name
If
you
are a stockholder of record, you may vote in person at the special meeting
or
vote by proxy using the enclosed proxy card. To vote using the proxy card,
simply complete, sign and date the enclosed proxy card and return it promptly
in
the envelope provided. If you return your signed proxy card to us before the
special meeting, we will vote your shares as you direct. Whether or not you
plan
to attend the meeting, we urge you to vote by proxy to ensure your vote is
counted. You may still attend the meeting and vote in person if you have already
voted by proxy. If you would like to vote in person, come to the special meeting
and we will give you a ballot when you arrive.
Beneficial
Owner: Shares Registered in the Name of Broker or Bank
If
you
are a beneficial owner of shares registered in the name of your broker, bank,
or
other agent, you should have received a proxy card and voting instructions
with
these proxy materials from that organization rather than from us. Simply
complete and mail the proxy card to ensure that your vote is counted. To vote
in
person at the special meeting, you must obtain a valid proxy from your broker,
bank, or other agent. Follow the instructions from your broker or bank included
with these proxy materials, or contact your broker or bank to request a proxy
form.
How
many votes do I have?
On
each
matter to be voted upon, you have one vote for each share of common stock you
own as of July 3, 2007.
How
are votes counted?
Votes
will be counted by the inspector of election appointed for the meeting, who
will
separately count “For” and “Against” votes, abstentions and broker non-votes.
Abstentions and broker non-votes will be counted towards the vote total for
each
proposal other than Proposal 2 and will have the same effect as “Against” votes.
Abstentions will be counted towards the vote total for Proposal 2, and will
have
the same effect as an “Against” vote, but broker non-votes will have no
effect.
If
your
shares are held by your broker as your nominee (that is, in “street name”), you
will need to obtain a proxy form from the institution that holds your shares
and
follow the instructions included on that form regarding how to instruct your
broker to vote your shares. If you do not give instructions to your broker,
the
shares will be treated as broker non-votes.
How
many votes are needed to approve each proposal?
To
be
approved, each of Proposal 1 (the merger proposal), Proposal 3 (the reverse
stock split proposal), Proposal 4 (the authorized share increase proposal)
and
Proposal 5 (the name change proposal) must receive the affirmative vote of
the
holders of a majority of the outstanding shares of our common stock on the
record date. If you do not vote or abstain from voting on any of these
proposals, it will have the same effect as an “Against” vote. Broker non-votes
will have the same effect as “Against” votes. To be approved, Proposal 2 (the
equity incentive plan increase proposal) must receive a “For” vote from the
holders of a majority of the outstanding shares represented in person or by
proxy and entitled to vote at the special meeting. If those present do not
vote,
or abstain from voting, it will have the same effect as an “Against” vote.
Broker non-votes will have no effect.
What
is the quorum requirement?
A
quorum
is necessary to hold a valid meeting. A quorum will be present if a majority
of
the outstanding shares are represented in person or by proxy at the special
meeting. On the record date, there were [____] shares of SBE common stock
outstanding and entitled to vote. Thus, at least [_____] shares must be
represented in person or by proxy at the special meeting in order to have a
quorum.
Your
shares will be counted towards the quorum only if you submit a valid proxy
(or
one is submitted on your behalf by your broker, bank or other nominee) or if
you
vote in person at the meeting. Abstentions and broker non-votes will be counted
towards the quorum requirement. If there is no quorum, a majority of the votes
present at the special meeting may adjourn the special meeting to another
date.
What
if I return a proxy card but do not make specific
choices?
If
you
return a signed and dated proxy card without marking any voting selections,
your
shares will be treated as broker non-votes and will have the same effect as
“Against” votes.
Who
is paying for this proxy solicitation?
We
will
pay for the entire cost of soliciting proxies. In addition to these mailed
proxy
materials, our directors and employees may also solicit proxies in person,
by
telephone or by other means of communication. Directors and employees will
not
be paid any additional compensation for soliciting proxies. We may also
reimburse brokerage firms, banks and other agents for the cost of forwarding
proxy materials to beneficial owners.
What
does it mean if I receive more than one proxy card?
If
you
receive more than one proxy card, it means that your shares are registered
in
more than one name or are registered in different accounts. Please complete,
sign and return each
proxy
card to ensure that all of your shares are voted.
Can
I change my vote after submitting my proxy?
Yes.
You
can revoke your proxy at any time before the final vote at the meeting. If
you
are the record holder of your shares, you may revoke your proxy in any one
of
three ways:
|
•
|
You
may submit another properly completed proxy card with a later
date;
|
|
•
|
You
may send a written notice that you are revoking your proxy to our
Secretary at 4000 Executive Parkway, Suite 200, San Ramon, California
94583; or
|
|
•
|
You
may attend the special meeting and vote in person. However, simply
attending the special meeting will not, by itself, revoke your
proxy.
|
If
your
shares are held by your broker or bank as a nominee or agent, you should follow
the instructions provided by your broker or bank.
When
do you expect the merger to be completed?
We
plan
to complete the transactions as soon as possible after the special meeting,
subject to the satisfaction or waiver of certain conditions to the transactions,
which are described in this proxy statement. We cannot predict when, or if,
these conditions will be satisfied or waived.
What
risks should I consider in evaluating the merger?
You
should consider the risks described under the heading “Risk Factors” beginning
on page [__].
Does
the board of directors recommend approval of the proposals at the special
meeting?
Yes.
After careful consideration, our board of directors recommends that our
stockholders vote FOR each of the proposals.
Who
can help answer my questions about the proposals?
If
you
have additional questions about these proposals, you should contact David
Brunton, our Chief Financial Officer, at (925) 355-7700.
How
can I find out the results of the voting at the special
meeting?
Preliminary
voting results may be announced at the special meeting. Final voting results
will be published in our quarterly report on Form 10-Q for the quarter in which
the special meeting occurs.
SUMMARY
OF THE PROXY STATEMENT
The
following summary, together with the previous question and answer section,
provides an overview of the proposals discussed in this proxy statement and
presented in the attached annexes. The summary also contains cross-references
to
the more detailed discussions elsewhere in the proxy statement. This summary
may
not contain all of the information that is important to you. To understand
the
proposals fully, and for a more complete description of the terms of the each
proposal, you should carefully read this entire proxy statement and the attached
annexes in their entirety.
The
Companies (see page [__])
SBE
Historically,
we designed, manufactured and sold embedded hardware products including wide
area network (WAN) and local area network (LAN) network interface cards (NICs)
and central processing units (CPUs) to original equipment manufacturers (OEMs)
who
embed
our hardware products into their products for the communications
markets.
Our
embedded hardware business generated almost all of our sales and net cash flow.
Effective with the sale of our embedded hardware business to One Stop Systems
on
March 30, 2007, we
no
longer participate in the embedded hardware markets. We transferred our entire
inventory and the engineering and test equipment associated with the embedded
hardware business to One Stop Systems.
Since
the
sale of our embedded hardware business on March 30, 2007, our only business
is
designing and providing software-based storage networking solutions for an
extensive range of business critical applications, including Disk-to-Disk
Back-up and Disaster Recovery. Our products deliver an affordable, expandable,
and easy-to-use portfolio of software solutions designed to enable optimal
performance and rapid deployment across a wide range of next generation storage
systems. We sell standards-based storage software solutions to OEMs, system
integrators and value added resellers (VARs) who embed our software into their
IP
storage area network (IP SAN) and network attached storage (NAS) systems
to provide data storage solutions for the small and medium business (SMB)
enterprise storage markets. Our storage software products have not gained wide
acceptance in the storage markets and have not generated significant sales
to
date.
Neonode
Neonode
was founded in Sweden and develops, manufactures and sells multimedia mobile
phones based on a unique user interface with a focus on design, enhanced user
experience and customization. Neonode released its first phone, the N1, in
2004.
Neonode has developed multimedia mobile phones that convert the functionality
of
a desktop computer to a mobile phone interface. In addition to connecting to
any
GSM supported cellular telephone network, Neonode’s multimedia mobile phones
allow the user to watch movies in full screen, play music videos, play music,
take pictures with its two mega pixel camera and play games, all with internet
pod casting capabilities. Neonode’s patent pending user interface incorporates
true one hand - on screen - navigation with a simple user interface that
recognizes gestures rather than defined keys. Neonode’s interface features a
large display without physical buttons using the smallest handset in the mobile
phone industry. Neonode’s design is based on its patent pending zForce ™ and
Neno™ software technology. zForce™ allows the user to operate the functionality
of the phone with one finger.
In
February 2007, Neonode showcased its new mobile phone, the N2, at the 3GSM
World
Congress in Barcelona, Spain.
Neonode
expects to begin shipping its N2 phone to its initial customers in mid-2007.
Neonode initially expects to sell its mobile phones through sales channels
that
include distributors and network operators located in Europe, Mexico, Latin
America and the United States.
The
Merger Proposal
Under
the
merger agreement, our newly-formed, wholly-owned subsidiary, Cold Winter
Acquisition Corporation (referred to in this proxy statement as Merger Sub)
will
merge with and into Neonode. The merger agreement contemplates that, subject
to
the terms and conditions of the merger agreement, Merger Sub will be merged
with
and into Neonode, with Neonode continuing after the merger as the surviving
corporation and a wholly-owned subsidiary of SBE. The securities offered in
the
merger will be issued pursuant to an exemption from registration under the
Securities Act of 1933 and may not be offered or sold by the holders thereof
absent registration or an applicable exemption from registration requirements.
The merger agreement provides that SBE will issue 3.5319 (as adjusted for stock
splits and combinations affecting either the SBE stock or Neonode stock) shares
of its common stock for each share of Neonode common stock outstanding at
closing, and that it will assume all outstanding options and warrants to
purchase Neonode common stock such that each option and warrant will become
exercisable for 3.5319 (as adjusted for stock splits and combinations affecting
either the SBE stock or Neonode stock) shares of SBE common stock for each
share
of Neonode common stock subject to such option or warrant. Although the exact
number of shares to be issued in the merger will be determined at closing,
it is
currently estimated that SBE will issue approximately 20.4 million shares of
its
common stock in exchange for outstanding shares of Neonode common stock and
will
assume options and warrants exercisable for approximately 8.0 million additional
shares of SBE common stock.
See the
section entitled “The Merger Agreement — Merger Consideration.” The
merger agreement is attached to this proxy statement as Annex A. We
encourage you to read the merger agreement carefully. Our board of directors
has
approved the merger agreement, and it is the binding legal agreement that
governs the terms of the merger.
Recommendation
of the Board of Directors
Our
board
of directors has determined that the merger and the issuance of shares of our
common stock as consideration in the merger, are fair to, and in the best
interests of, us and our stockholders and recommends that our stockholders
vote
FOR each of the transactions and the issuance of shares of our common stock
in
connection with these transactions.
To
review
the background and reasons for the transactions in detail, see “The Merger
Proposal— Reasons for the Merger” beginning on page [__].
Accounting
Treatment
The
former Neonode stockholders will hold a majority of the outstanding voting
securities of SBE upon completion of the merger. This transaction will be
accounted for as a reverse merger, with Neonode being the acquirer for
accounting purposes. The pre-acquisition financial statements (December 31
year
end) of the accounting acquirer, Neonode, will become the historical financial
statements of the combined companies and the historical financial statements
of
SBE for the periods prior to the date of the transaction (October 31 fiscal
year
end) will not be presented. This transaction will be accounted for as the
issuance of common stock by Neonode for the net assets
of
SBE, accompanied by a recapitalization to reflect the legally issued and
outstanding shares of the combined companies. Pre-acquisition stockholders’
equity of Neonode will be retroactively restated for the equivalent number
of
shares of SBE received by Neonode stockholders in the acquisition, with
differences between the par value of SBE and Neonode’s stock recorded as
additional paid in capital.
Regulatory
Approvals
We
are
not aware of any federal or state regulatory requirements that must be complied
with or approvals that must be obtained to consummate the merger and private
placement, other than the filing of (1) a certificate of merger with the
Secretary of State of the State of Delaware, (2) this proxy statement with
the SEC and (3) compliance with all applicable state securities laws regarding
the offering and issuance of the shares in connection with the transactions.
If
any additional approvals or filings are required, we will use our commercially
reasonable efforts to obtain those approvals and make any required filings
before completing the transactions.
Dissenters’
Rights
Our
stockholders are not entitled to exercise dissenters’ rights in connection with
the merger or the private placement.
Registration
Rights
After
completion of the merger, the combined company will be obligated to use its
best
efforts to register with the SEC the public resale the shares offered in the
merger, on the terms and subject to the conditions set forth in the merger
agreement.
Voting
Agreement; Neonode Stockholder Vote
In
connection with the execution of the merger agreement, the holders of
approximately 67% of Neonode’s outstanding capital stock entered into a voting
agreement with SBE and merger sub pursuant to which, among other things, such
holders agreed with SBE and Merger Sub to vote in favor of the merger and,
subject to certain exceptions, agreed not to dispose of any shares of Neonode
common stock held by such parties prior to the consummation of the merger.
Shortly following the execution of the original merger agreement and its
amendment, the stockholders of Neonode approved the merger and the merger
agreement by written consent.
Opinion
of Our Financial Advisor
In
connection with the merger, our board of directors received a written opinion
from Seidman & Company, Inc. as to the fairness of the merger consideration
to be paid by us, from a financial point of view and as of the date of the
opinion. The full text of Seidman’s written opinion is attached to this proxy
statement as Annex D. You are encouraged to read this opinion carefully in
its
entirety for a description of the assumptions made, matters considered and
limitations on the review undertaken.
The
Incentive Plan Proposal
The
2006
Equity Incentive Plan currently reserves 300,000 shares of our common stock.
The
Incentive Plan Proposal is to increase the number of shares authorized for
issuance under the plan from 300,000 to 1,300,000. The purpose of the plan
is to
provide our employees, directors and consultants, including those of Neonode
after the merger, with the opportunity to receive stock-based and other
long-term incentive grants in order to attract, retain and motivate key
individuals and to align their interests with those of our stockholders. The
2006 Equity Incentive Plan, as amended, is attached as Annex C to this proxy
statement. We encourage you to read the 2006 Equity Incentive Plan in its
entirety.
The
Certificate Amendment Proposals
There
are
three proposals relating to the amendment and restatement of our certificate
of
incorporation following completion of the Neonode merger. The first of these
proposals is to effect a stock combination (reverse stock split) of
either
1-for-2 or 1-for-3, with the specific ratio to be determined by our board of
directors, pursuant
to which every two or three shares of our outstanding common stock, as
applicable, would be reclassified into one share of common stock. The second
of
these proposals is to increase the authorized shares of common stock from
25,000,000 shares to 40,000,000 shares. The last of these proposals is to change
our name from “SBE, Inc.” to “Neonode Inc.”
Risk
Factors
In
evaluating the merger proposal, the incentive plan proposal, the reverse stock
split proposal, the authorized share proposal and the name change proposal,
you
should carefully read this proxy statement and especially consider the factors
discussed in the section entitled “Risk Factors.”
RISK
FACTORS
You
should consider carefully the following risk factors as well as other
information in this proxy statement and the documents incorporated by reference
herein or therein, as well as the risks set forth in our annual report on Form
10-K for the year ended October 31, 2006 and in subsequently-filed reports
on
Form 10-Q, in voting on the proposal relating to the merger. If any of the
following risks actually occur, our business, operating results and financial
condition could be adversely affected. This could cause the market price of
our
common stock to decline, and you may lose all or part of your investment.
Risk
Relating to the Merger
If
we are unable to complete the merger, our business may be adversely
affected.
If
the
merger is not completed, our business and the market price of our stock price
may be adversely affected. We currently anticipate that our available cash
balances, available borrowings and cash generated from operations will be
sufficient to fund our standalone operations through fiscal 2007. If we are
unable to complete the transaction, we may be unable to find another way to
grow
our business. Costs related to the transaction, such as legal, accounting and
financial advisor fees, must be paid even if the transaction is not completed.
In addition, even if we have sufficient funds to continue to operate our
business but the transaction is not completed, the current market price of
our
common stock may decline.
The
transactions will result in substantial dilution to our current
stockholders.
The
merger agreement provides that SBE will issue 3.5319 (as adjusted for stock
splits and combinations affecting either the SBE stock or Neonode stock) shares
of its common stock for each share of Neonode common stock outstanding at
closing, and that it will assume all outstanding options and warrants to
purchase Neonode common stock such that each option and warrant will become
exercisable for 3.5319 (as adjusted for stock splits and combinations affecting
either the SBE stock or Neonode stock) shares of SBE common stock for each
share
of Neonode common stock subject to such option or warrant. Although the exact
number of shares to be issued in the merger will be determined at closing,
it is
currently estimated that SBE will issue approximately 20.4 million shares of
its
common stock in exchange for outstanding shares of Neonode common stock and
will
assume options and warrants exercisable for approximately 8.0 million additional
shares of SBE common stock.
Immediately
following completion of the transaction, the shares, warrants and stock options
held by our existing stockholders are expected to represent approximately 9.5%
of our outstanding capital stock assuming the exercise in full of all
outstanding options and warrants.
The
Neonode stockholders will be able to direct our actions after the transaction,
and will replace our current management and board of directors.
We
may not realize any anticipated benefits from the
merger.
While
we
believe that the opportunities for the combined company are greater than our
current opportunities and that the combined company will be able to create
substantially more stockholder value than could be achieved by the companies
individually, there is substantial risk that the synergies and benefits sought
in the transactions might not be fully achieved. There is no assurance that
Neonode’s technology can be successfully produced and sold or that the financial
results of combined company will meet or exceed the financial results that
would
have been achieved by the companies individually. As a result, our operations
and financial results may suffer and the market price of our common stock may
decline.
The
exchange rate in the merger will not be adjusted even if there is an increase
in
the price of our common stock or a downturn in Neonode’s
business.
The
price
of our common stock at the time the merger may vary from its price at the date
of this proxy statement and at the date of the special meeting. Therefore,
the
shares that we issue in connection with the merger may have a greater value
than
the value of the same number of shares on the date of this proxy statement
or
the date of the special meeting. Variations in the price of our common stock
before the completion of the merger may result from a number of factors that
are
beyond our control, including actual or anticipated changes in our business,
operations or prospects, market assessments of the likelihood that the
transactions will be consummated and the timing thereof, regulatory
considerations, general market and economic conditions and other factors. At
the
time of the special meeting, you will not know the exact value of the shares
that we will issue in the merger. In addition, the stock market generally has
experienced significant price and volume fluctuations. These market fluctuations
could have a material effect on the market price of our common stock before
the
merger is completed, and therefore could materially increase the value that
we
will transfer to the stockholders of Neonode in the merger.
The
exchange rate in the merger agreement determining the number of shares to be
issued in the merger is based primarily on SBE’s net worth at closing and does
not take into account any change in the net worth, business, operations, assets,
liabilities, capitalization or prospects of Neonode occurring prior to the
closing.
Risk
Relating to Neonode and the Combined Company after the
Merger
Neonode’s
operating results are subject to fluctuations, and if Neonode fails to meet
the
expectations of securities analysts or investors, our stock price may decrease
significantly.
Neonode’s
operating results are difficult to forecast. Its future operating results may
fluctuate significantly and may not meet its expectations or those of securities
analysts or investors. If this occurs, the price of our common stock will likely
decline. Many factors may cause fluctuations in its operating results including,
but not limited to, the following:
· |
timely
introduction and market acceptance of new products and
services;
|
· |
changes
in consumer and enterprise spending
levels;
|
· |
quality
issues with its products;
|
· |
changes
in consumer, enterprise and carrier preferences for its products
and
services;
|
· |
loss
or failure of carriers or other key sales channel
partners;
|
· |
competition
from other mobile telephone or handheld devices or other devices
with
similar functionality;
|
· |
competition
for consumer and enterprise spending on other
products;
|
· |
failure
by its third party manufacturers or suppliers to meet its quantity
and
quality requirements for products or product components on
time;
|
· |
failure
to add or replace third party manufacturers or suppliers in a timely
manner;
|
· |
changes
in terms, pricing or promotional
program
|
· |
variations
in product costs or the mix of products
sold;
|
· |
failure
to achieve product cost and operating expense
targets;
|
· |
excess
inventory or insufficient inventory to meet
demand;
|
· |
seasonality
of demand for some of its products and
services;
|
· |
litigation
brought against us; and
|
· |
changes
in general economic conditions and specific market
conditions.
|
Any
of
the foregoing factors could have a material adverse effect on its business,
results of operations and financial condition.
Neonode
has not been profitable since its inception and anticipates significant
additional losses.
Neonode
Inc. was formed in 2006 as a holding company owning and operating Neonode AB,
which was formed in 2004, and has been primarily engaged in the business of
developing and selling mobile phones. Neonode has a limited operating history
on
which to base an evaluation of its business and prospects. Neonode’s 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. Neonode’s success will depend on many factors,
including, but not limited to: the growth of mobile telephone usage; the efforts
of its marketing partners; the level of competition faced by it; and its ability
to meet customer demand for products and ongoing service. There can be no
assurance that Neonode will succeed in addressing any or all of these risks,
and
the failure to do so would have a material adverse effect on its business,
operating results and financial condition.
In
addition, Neonode has experienced substantial net losses in each fiscal period
since its inception and, as of March 31, 2007, had an accumulated deficit of
$12.9 million. Neonode is continuing to experience net losses. Such net losses
and accumulated deficit resulted from its lack of substantial revenues and
the
significant costs incurred in the development of its products and
infrastructure. Neonode’s ability to continue as a going concern is dependent on
its ability to raise additional funds and implement its business plan.
Neonode’s independent registered public accountants stated in their opinion that
there is substantial doubt about its ability to continue as a going
concern.
Neonode’s
limited operating history and the emerging nature of its market, together with
the other risk factors described below, make prediction of its future operating
results difficult. There can also be no assurance that Neonode will ever achieve
significant revenues or profitability or, if significant revenues and
profitability are achieved, that they could be sustained.
Neonode
will require additional capital to fund its operations, which capital may not
be
available on commercially attractive terms or at all.
Neonode
requires sources of capital in addition to cash on hand to continue operations
and to implement its strategy. Neonode intends to seek credit line facilities
from financial institutions and/or additional equity investment. No assurances
can be given that Neonode would 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, Neonode may be unable to adequately fund its
business plans and it could have a negative effect on its 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 its common stock and cause the market price to fall
and
the issuance of debt securities could impose restrictive covenants that could
impair its ability to engage in certain business transactions.
If
Neonode fails to develop and introduce new products and services successfully
and in a cost effective and timely manner, it will not be able to compete
effectively and its ability to generate revenues will
suffer.
Neonode
operates in a highly competitive, rapidly evolving environment, and its success
depends on its ability to develop and introduce new products and services that
its customers and end users choose to buy. If Neonode is unsuccessful at
developing and introducing new products and services that are appealing to
its
customers and end users with acceptable quality, prices and terms, Neonode
will
not be able to compete effectively and its ability to generate revenues will
suffer.
The
development of new products and services is very difficult and requires high
levels of innovation. The development process is also lengthy and costly. If
Neonode fails to anticipate its end users’ needs or technological trends
accurately or is unable to complete the development of products and services
in
a cost effective and timely fashion, Neonode will be unable to introduce new
products and services into the market or successfully compete with other
providers.
As
Neonode introduces new or enhanced products or integrates new technology into
new or existing products, Neonode faces risks including, among other things,
disruption in customers’ ordering patterns, excessive levels of older product
inventories, delivering sufficient supplies of new products to meet customers’
demand, possible product and technology defects, and a potentially different
sales and support environment. Premature announcements or leaks of new products,
features or technologies may exacerbate some of these risks. Its failure to
manage the transition to newer products or the integration of newer technology
into new or existing products could adversely affect its business, results
of
operations and financial condition.
Neonode
is dependent on third parties to manufacture and supply its products and
components of its products.
Neonode’s
products are built by a limited number of independent manufacturers. Although
Neonode provides manufacturers with key performance specifications for the
phones, these manufacturers could:
·
|
manufacture phones with
defects that fail to perform to its specifications;
|
· |
fail
to meet delivery schedules; or
|
· |
fail
to properly service phones or honor warranties.
|
Any
of
the foregoing could adversely affect its ability to sell its products and
services, which, in turn, could adversely affect its revenues, profitability
and
liquidity, as well as its brand image.
Neonode may
become highly dependent on wireless carriers for the success of its
products.
Neonode’s
business strategy includes significant efforts to establish relationships with
international wireless carriers. We cannot assure you that Neonode will be
successful in establishing new relationships, or maintaining such relationships,
with wireless carriers or that these wireless carriers will act in a manner
that
will promote the success of its multimedia phone products. Factors that are
largely within the control of wireless carriers, but which are important to
the
success of its multimedia phone products, include:
· |
testing
of its products on wireless carriers’
networks;
|
· |
quality
and coverage area of wireless voice and data services offered by
the
wireless carriers;
|
· |
the
degree to which wireless carriers facilitate the introduction of
and
actively market, advertise, promote, distribute and resell its multimedia
phone products;
|
· |
the
extent to which wireless carriers require specific hardware and software
features on its multimedia phone to be used on their
networks;
|
· |
timely
build out of advanced wireless carrier networks that enhance the
user
experience for data centric services through higher speed and other
functionality;
|
· |
contractual
terms and conditions imposed on them by wireless carriers that, in
some
circumstances, could limit its ability to make similar products available
through competitive carriers in some market
segments;
|
· |
wireless
carriers’ pricing requirements and subsidy programs;
and
|
· |
pricing
and other terms and conditions of voice and data rate plans that
the
wireless carriers offer for use with its multimedia phone
products.
|
For
example, flat data rate pricing plans offered by some wireless carriers may
represent some risk to its relationship with such carriers. While flat data
pricing helps customer adoption of the data services offered by carriers and
therefore highlights the advantages of the data applications of its products,
such plans may not allow its multimedia phones to contribute as much average
revenue per user, or ARPU, to wireless carriers as when they are priced by
usage, and therefore reduces its differentiation from other, non-data devices
in
the view of the carriers. In addition, if wireless carriers charge higher rates
than consumers are willing to pay, the acceptance of its wireless solutions
could be less than anticipated and its revenues and results of operations could
be adversely affected.
Wireless
carriers have substantial bargaining power as Neonode enters into agreements
with them. They may require contract terms that are difficult for Neonode to
satisfy and could result in higher costs to complete certification requirements
and negatively impact its results of operations and financial condition.
Moreover, Neonode may not have agreements with some of the wireless carriers
with whom they will do business and, in some cases, the agreements may be with
third-party distributors and may not pass through rights to Neonode or provide
Neonode with recourse or contact with the carrier. The absence of agreements
means that, with little or no notice, these wireless carriers could refuse
to
continue to purchase all or some of its products or change the terms under
which
they purchase its products. If these wireless carriers were to stop purchasing
its products, Neonode may be unable to replace the lost sales channel on a
timely basis and its results of operations could be harmed.
Wireless
carriers also significantly affect Neonode’s ability to develop and launch
products for use on their wireless networks. If Neonode fails to address the
needs of wireless carriers, identify new product and service opportunities
or
modify or improve its multimedia phone products in response to changes in
technology, industry standards or wireless carrier requirements, its products
could rapidly become less competitive or obsolete. If Neonode fails to timely
develop products that meet carrier product planning cycles or fail to deliver
sufficient quantities of products in a timely manner to wireless carriers,
those
carriers may choose to emphasize similar products from its competitors and
thereby reduce their focus on its products which would have a negative impact
on
its business, results of operations and financial condition.
Carriers,
who control most of the distribution and sale of, and virtually all of the
access for, multimedia phone products could commoditize multimedia phones,
thereby reducing the average selling prices and margins for its products which
would have a negative impact on its business, results of operations and
financial condition. In addition, if carriers move away from subsidizing the
purchase of mobile phone products, this could significantly reduce the sales
or
growth rate of sales of mobile phone products. This could have an adverse impact
on its business, revenues and results of operations.
As
Neonode builds strategic relationships with wireless carriers, Neonode could
be
exposed to significant fluctuations in revenue for its multimedia phone
products.
Because
of their large sales channels, wireless carriers may purchase large quantities
of its products prior to launch so that the products are widely available.
Reorders of products may fluctuate quarter to quarter, depending on end-customer
demand and inventory levels required by the carriers. As Neonode develops new
strategic relationships and launches new products with wireless carriers, its
revenue could be subject to significant fluctuation based on the timing of
carrier product launches, carrier inventory requirements, marketing efforts
and
its ability to forecast and satisfy carrier and end-customer
demand.
The
mobile communications industry is highly competitive and many of Neonode’s
competitors have significantly greater resources to engage in product
development, manufacturing, distribution and
marketing.
The
mobile communications industry, in which Neonode is engaged, is a highly
competitive business with companies of all sizes engaged in business in all
areas of the world, including companies with far greater resources than the
combined company will have. There can be no assurance that other competitors,
with greater resources and business connections, will not compete successfully
against us in the future. Neonode’s competitors may adopt new technologies that
reduce the demand for its products or render its technologies obsolete, which
may have a material adverse effect on the cost structure and competitiveness
of
its products, possibly resulting in a negative effect on its revenues,
profitability or liquidity.
Neonode’s
future results could be harmed by economic, political, regulatory and other
risks associated with international sales and
operations.
Because
Neonode sells its products worldwide and most of the facilities where its
devices are manufactured, distributed and supported are located outside the
United States, its business is subject to risks associated with doing business
internationally, such as:
· |
changes
in foreign currency exchange rates;
|
· |
the
impact of recessions in the global economy or in specific sub
economies
|
· |
changes
in a specific country’s or region’s political or economic conditions,
particularly in emerging markets;
|
· |
changes
in international relations;
|
· |
trade
protection measures and import or export licensing
requirements;
|
· |
compliance
with a wide variety of laws and regulations which may have civil
and/or
criminal consequences for them and its officers and directors who
they
indemnify;
|
· |
difficulty
in managing widespread sales operations;
and
|
· |
difficulty
in managing a geographically dispersed workforce in compliance with
diverse local laws and customs.
|
In
addition, Neonode is subject to changes in demand for its products resulting
from exchange rate fluctuations that make its products relatively more or less
expensive in international markets. If exchange rate fluctuations occur, its
business and results of operations could be harmed by decreases in demand for
its products or reductions in margins.
While
Neonode sells its products worldwide, one component of its strategy is to expand
its sales efforts in countries with large populations and propensities for
adopting new technologies. Neonode has limited experience with sales and
marketing in some of these countries. There can be no assurance that Neonode
will be able to market and sell its products in all of its targeted
international markets. If its international efforts are not successful, its
business growth and results of operations could be harmed.
Neonode
must significantly enhance its sales and product development
organizations.
Neonode
will need to improve the effectiveness and breadth of its sales operations
in
order to increase market awareness and sales of its products, especially as
Neonode expands into new markets. Competition for qualified sales personnel
is
intense, and Neonode may not be able to hire the kind and number of sales
personnel Neonode is targeting. Likewise, its efforts to improve and refine
its
products require skilled engineers and programmers. Competition for
professionals capable of expanding its research and development organization
is
intense due to the limited number of people available with the necessary
technical skills. If Neonode is unable to identify, hire or retain qualified
sales marketing and technical personnel, its ability to achieve future revenue
may be adversely affected.
Neonode
is dependent on the services of its key personnel.
Neonode
will be dependent on its current management for the foreseeable future. The
loss
of the services of any member of management could have a materially adverse
effect on its operations and prospects.
If
third parties infringe its intellectual property or if Neonode is unable to
secure and protect its intellectual property, Neonode may expend significant
resources enforcing its rights or suffer competitive
injury.
Neonode’s
success depends in large part on its proprietary technology and other
intellectual property rights. Neonode relies on a combination of patents,
copyrights, trademarks and trade secrets, confidentiality provisions and
licensing arrangements to establish and protect its proprietary rights. Its
intellectual property, particularly its patents, may not provide them a
significant competitive advantage. If Neonode fails to protect or to enforce
its
intellectual property rights successfully, its competitive position could
suffer, which could harm its results of operations.
Neonode’s
pending patent and trademark applications for registration may not be allowed,
or others may challenge the validity or scope of its patents or trademarks,
including patent or trademark applications or registrations. Even if its patents
or trademark registrations are issued and maintained, these patents or
trademarks may not be of adequate scope or benefit to them or may be held
invalid and unenforceable against third parties.
Neonode
may be required to spend significant resources to monitor and police its
intellectual property rights. Effective policing of the unauthorized use of
its
products or intellectual property is difficult and litigation may be necessary
in the future to enforce its 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 its management from operating the
business. Despite its efforts, Neonode 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 its 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
its efforts to protect its 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 Neonode cannot assure you
that
it will be successful in asserting intellectual property claims. Attempts may
be
made to copy or reverse engineer aspects of its products or to obtain and use
information that Neonode regards as proprietary. Accordingly, Neonode cannot
assure you that it will be able to protect its proprietary rights against
unauthorized third party copying or use. The unauthorized use of its technology
or of its proprietary information by competitors could have an adverse effect
on
its ability to sell its products.
Neonode
has an international presence in countries whose laws may not provide protection
of its intellectual property rights to the same extent as the laws of the United
States, which may make it more difficult for it to protect its intellectual
property.
As
part
of its business strategy, Neonode’s target customers and relationships with
suppliers and original distribution manufacturers in countries with large
populations and propensities for adopting new technologies. However, many of
these countries do not address misappropriation of intellectual property or
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 Neonode
does business may not protect its intellectual property rights to the same
extent as the laws of the United States. As a result, Neonode may not be able
to
effectively prevent competitors in these regions from infringing its
intellectual property rights, which would reduce its competitive advantage
and
ability to compete in those regions and negatively impact its
business.
If
Neonode does not correctly forecast demand for its products, Neonode could
have
costly excess production or inventories or it may not be able to secure
sufficient or cost effective quantities of its products or production materials
and its revenues, cost of revenues and financial condition could be adversely
impacted.
The
demand for its products depends on many factors, including pricing and channel
inventory levels, and is difficult to forecast due in part to variations in
economic conditions, changes in consumer and enterprise preferences, relatively
short product life cycles, changes in competition, seasonality and reliance
on
key sales channel partners. It is particularly difficult to forecast demand
by
individual variations of the product such as the color of the casing, size
of
memory, etc. Significant unanticipated fluctuations in demand, the timing and
disclosure of new product releases or the timing of key sales orders could
result in costly excess production or inventories or the inability to secure
sufficient, cost-effective quantities of its products or production materials.
This could adversely impact its revenues, cost of revenues and financial
condition.
Neonode
relies on third parties to sell and distribute its products and Neonode relies
on their information to manage its business. Disruption of its relationship
with
these channel partners, changes in their business practices, their failure
to
provide timely and accurate information or conflicts among its channels of
distribution could adversely affect its business, results of operations and
financial condition.
The
distributors, wireless carriers, retailers and resellers who sell or may sell
and or distribute its products also sell products offered by its competitors.
If
its competitors offer its sales channel partners more favorable terms or have
more products available to meet their needs or utilize the leverage of broader
product lines sold through the channel, those wireless carriers, distributors,
retailers and resellers may de-emphasize or decline to carry its products.
In
addition, certain of its sales channel partners could decide to de-emphasize
the
product categories that Neonode offers in exchange for other product categories
that they believe provide higher returns. If Neonode is unable to maintain
successful relationships with these sales channel partners or to expand its
distribution channels, its business will suffer.
Because
Neonode intends to sell its products primarily to distributors, wireless
carriers, retailers and resellers, Neonode will be subject to many risks,
including risks related to product returns, either through the exercise of
contractual return rights or as a result of its strategic interest in assisting
them in balancing inventories. In addition, these sales channel partners could
modify their business practices, such as inventory levels, or seek to modify
their contractual terms, such as return rights or payment terms. Unexpected
changes in product return requests, inventory levels, payment terms or other
practices by these sales channel partners could negatively impact its business,
results of operations and financial condition.
Neonode
will rely on distributors, wireless carriers, retailers and resellers to provide
them with timely and accurate information about their inventory levels as well
as sell-through of products purchased from us. Neonode will use this information
as one of the factors in its forecasting process to plan future production
and
sales levels, which in turn will influences its public financial forecasts.
Neonode will also use this information as a factor in determining the levels
of
some of its financial reserves. If Neonode does not receive this information
on
a timely and accurate basis, its results of operations and financial condition
may be adversely impacted.
Distributors,
retailers and traditional resellers experience competition from Internet-based
resellers that distribute directly to end-customers, and there is also
competition among Internet-based resellers. Neonode also sells its products
directly to end-customers from its Neonode.com web site. These varied sales
channels could cause conflict among its channels of distribution, which could
harm its business, revenues and results of operations.
If
its multimedia phone products do not meet wireless carrier and governmental
or
regulatory certification requirements, Neonode will not be able to compete
effectively and its ability to generate revenues will
suffer.
Neonode
is required to certify its multimedia phone products with governmental and
regulatory agencies and with the wireless carriers for use on their networks.
The certification process can be time consuming, could delay the offering of
its
products on carrier networks and affect its ability to timely deliver products
to customers. As a result, carriers may choose to offer, or consumers may choose
to buy, similar products from its competitors and thereby reduce their purchases
of its products, which would have a negative impact on its products sales
volumes, its revenues and its cost of revenues.
Neonode
depends on its suppliers, some of which are the sole source and some of which
are its competitors, for certain components, software applications and elements
of its technology, and its production or reputation could be harmed if these
suppliers were unable or unwilling to meet its demand or technical requirements
on a timely and/or a cost-effective basis.
Neonode’s
multimedia products contain software applications and components, including
liquid crystal displays, touch panels, memory chips, microprocessors, cameras,
radios and batteries, which are procured from a variety of suppliers, including
some who are its competitors. The cost, quality and availability of software
applications and components are essential to the successful production and
sale
of its device products. For example, media player applications are critical
to
the functionality of its multimedia phone devices.
Some
components, such as screens and related integrated circuits, digital signal
processors, microprocessors, radio frequency components and other discrete
components, come from sole source suppliers. Alternative sources are not always
available or may be prohibitively expensive. In addition, even when Neonode
has
multiple qualified suppliers, Neonode may compete with other purchasers for
allocation of scarce components. Some components come from companies with whom
Neonode competes in the multimedia phone device market. If suppliers are unable
or unwilling to meet its demand for components and if Neonode is unable to
obtain alternative sources or if the price for alternative sources is
prohibitive, its ability to maintain timely and cost-effective production of
its
multimedia phone will be harmed. Shortages affect the timing and volume of
production for some of its products as well as increasing its costs due to
premium prices paid for those components. Some of its suppliers may be
capacity-constrained due to high industry demand for some components and
relatively long lead times to expand capacity.
If
Neonode is unable to obtain key technologies from third parties on a timely
basis and free from errors or defects, Neonode may have to delay or cancel
the
release of certain products or features in its products or incur increased
costs.
Neonode
licenses third-party software for use in its products, including the operating
systems. Its ability to release and sell its products, as well as its
reputation, could be harmed if the third-party technologies are not delivered
to
them in a timely manner, on acceptable business terms or contain errors or
defects that are not discovered and fixed prior to release of its products
and
Neonode is unable to obtain alternative technologies on a timely and cost
effective basis to use in its products. As a result, its product shipments
could
be delayed, its offering of features could be reduced or Neonode may need to
divert its development resources from other business objectives, any of which
could adversely affect its reputation, business and results of
operations.
Neonode’s
product strategy is to base its products on software operating systems that
are
commercially available to competitors.
Neonode’s
multimedia phone is based on a commercially available version of Microsoft’s
Windows CE. Neonode cannot assure you that it will be able to maintain this
licensing agreement with Microsoft and that Microsoft will not grant similar
rights to its competitors or that Neonode will be able to sufficiently
differentiate its multimedia phone from the multitude of other devices based
on
Windows CE.
In
addition, there is significant competition in the operating system software
and
services market, including proprietary operating systems such as Symbian and
Palm OS, open source operating systems, such as Linux, other proprietary
operating systems and other software technologies, such as Java and RIM’s
licensed technology. This competition is being developed and promoted by
competitors and potential competitors, some of which have significantly greater
financial, technical and marketing resources than Neonode has, such as Access,
Motorola, Nokia, Sony-Ericsson and RIM. These competitors could provide
additional or better functionality than Neonode does or may be able to respond
more rapidly than Neonode can to new or emerging technologies or changes in
customer requirements. Competitors in this market could devote greater resources
to the development, promotion and sale of their products and services and the
third-party developer community, which could attract the attention of
influential user segments.
If
Neonode is unable to continue to differentiate the operating systems that
Neonode includes in its mobile computing devices, its revenues and results
of
operations could be adversely affected.
The
market for multimedia phone products is volatile, and changing market
conditions, or failure to adjust to changing market conditions, may adversely
affect our revenues, results of operations and financial condition, particularly
given our size, limited resources and lack of
diversification.
Neonode
operates in the multimedia phone market which has seen significant growth during
the past years. Neonode cannot assure you that this significant growth in the
sales of multimedia devices will continue. If Neonode is unable to adequately
respond to changes in demand for its products, its revenues and results of
operations could be adversely affected. In addition, as its products mature
and
face greater competition, Neonode may experience pressure on its product pricing
to preserve demand for its products, which would adversely affect its margins,
results of operations and financial condition.
This
reliance on the success of and trends in its industry is compounded by the
size
of its organization and its focus on multimedia phones. These factors also
make
Neonode more dependent on investments of its limited resources. For example,
Neonode faces many resource allocation decisions, such as: where to focus its
research and development, geographic sales and marketing and partnering efforts;
which aspects of its business to outsource; and which operating systems and
email solutions to support. Given the size and undiversified nature of its
organization, any error in investment strategy could harm its business, results
of operations and financial condition.
Neonode’s
products are subject to increasingly stringent laws, standards and other
regulatory requirements, and the costs of compliance or failure to comply may
adversely impact its business, results of operations and financial
condition.
Neonode’s
products must comply with a variety of laws, standards and other requirements
governing, among other things, safety, materials usage, packaging and
environmental impacts and must obtain regulatory approvals and satisfy other
regulatory concerns in the various jurisdictions where its products are sold.
Many of its products must meet standards governing, among other things,
interference with other electronic equipment and human exposure to
electromagnetic radiation. Failure to comply with such requirements can subject
it to liability, additional costs and reputational harm and in severe cases
prevent them it selling its products in certain jurisdictions.
For
example, many of its products are subject to laws and regulations that restrict
the use of lead and other substances and require producers of electrical and
electronic equipment to assume responsibility for collecting, treating,
recycling and disposing of its products when they have reached the end of their
useful life. In Europe, substance restrictions began to apply to the products
sold after July 1, 2006, when new recycling, labeling, financing and
related requirements came into effect. Failure to comply with applicable
environmental requirements can result in fines, civil or criminal sanctions
and
third-party claims. If products Neonode sells in Europe are found to contain
more than the permitted percentage of lead or another listed substance, it
is
possible that Neonode could be forced to recall the products, which could lead
to substantial replacement costs, contract damage claims from customers, and
reputational harm. Neonode expects similar requirements in the United States,
China and other parts of the world.
As
a
result of these new European requirements and anticipated developments
elsewhere, Neonode is facing increasingly complex procurement and design
challenges, which, among other things, require them to incur additional costs
identifying suppliers and contract manufacturers who can provide, and otherwise
obtain, compliant materials, parts and end products and re-designing products
so
that they comply with these and the many other requirements applicable to
them.
Allegations
of health risks associated with electromagnetic fields and wireless
communications devices, and the lawsuits and publicity relating to them,
regardless of merit, could adversely impact our business, results of operations
and financial condition.
There
has
been public speculation about possible health risks to individuals from exposure
to electromagnetic fields, or radio signals, from base stations and from the
use
of mobile devices. While a substantial amount of scientific research by various
independent research bodies has indicated that these radio signals, at levels
within the limits prescribed by public health authority standards and
recommendations, present no evidence of adverse effect to human health, Neonode
cannot assure you that future studies, regardless of their scientific basis,
will not suggest a link between electromagnetic fields and adverse health
effects. Government agencies, international health organizations and other
scientific bodies are currently conducting research into these issues. In
addition, other mobile device companies have been named in individual plaintiff
and class action lawsuits alleging that radio emissions from mobile phones
have
caused or contributed to brain tumors and the use of mobile phones pose a health
risk. Although its products are certified as meeting applicable public health
authority safety standards and recommendations, even a perceived risk of adverse
health effects from wireless communications devices could adversely impact
use
of wireless communications devices or subject them to costly litigation and
could harm its reputation, business, results of operations and financial
condition.
Changes
in financial accounting standards or practices may cause unexpected fluctuations
in and adversely affect our reported results of
operations.
Any
change in financial accounting standards or practices that cause a change in
the
methodology or procedures by which Neonode tracks, calculates, records and
reports its results of operations or financial condition or both could cause
fluctuations in and adversely affect its reported results of operations and
cause its historical financial information to not be reliable as an indicator
of
future results.
Wars,
terrorist attacks or other threats beyond its control could negatively impact
consumer confidence, which could harm our operating
results.
Wars,
terrorist attacks or other threats beyond its control could have an adverse
impact on the United States, Europe and world economy in general, and consumer
confidence and spending in particular, which could harm its business, results
of
operations and financial condition.
THE
COMPANIES
SBE
Historically,
we designed, manufactured and sold hardware products including wide area network
(WAN) and local area network (LAN) network interface cards (NICs) and central
processing units (CPUs) to original equipment manufacturers (OEMs) who
embed
our hardware products into their products for the communications
markets..
Our
hardware business generated the majority of our sales and net cash flow.
Effective with the sale of our hardware business to One Stop Systems on March
30, 2007, we
no
longer participate in the embedded hardware markets. We transferred our entire
inventory and the engineering and test equipment associated with our hardware
business to One Stop Systems.
Since
the
sale of our hardware business, our only business is designing and providing
software-based storage networking solutions for an extensive range of business
critical applications, including Disk-to-Disk Back-up and Disaster Recovery.
Our
products deliver an affordable, expandable, and easy-to-use portfolio of
software solutions designed to enable optimal performance and rapid deployment
across a wide range of next generation storage systems. We sell standards-based
storage software solutions to OEMs, system integrators and value added resellers
(VARs) who embed our software into their IP
storage area network (IP SAN) and network attached storage (NAS) systems
to provide data storage solutions for the small and medium business (SMB)
enterprise storage markets. Our storage software products have not gained wide
acceptance in the storage markets and have not generated significant sales,
to
date.
We
were
incorporated in 1961 as Linear Systems, Inc. In 1976, we completed our initial
public offering. In July 2000, we acquired LAN Media Corporation, a privately
held company, to complement and grow our WAN adapter product line from both
a
hardware and software perspective. In August 2003, we acquired the products
and
technologies of Antares Microsystems to increase the functionality of our PCI
product line. In 2005, we acquired PyX Technologies, Inc., a company engaged
in
the development implementation and sale of Internet Small Computer System
Interface (iSCSI) software. In March 2007, we sold our hardware business to
One
Stop Systems, a company engages in the embedded hardware business.
Neonode
Neonode
was founded in Sweden and develops, manufactures and sells multimedia mobile
phones based on a unique user interface with a focus on design, enhanced user
experience and customization. Neonode released its first phone, the N1, in
2004.
Neonode has developed multimedia mobile phones that convert the functionality
of
a desktop computer to a mobile phone interface.
In
addition to connecting to any GSM supported cellular telephone network,
Neonode’s multimedia mobile phones allow the user to watch movies in full
screen, play music videos, play music, take pictures with its two mega pixel
camera and play games, all with internet pod casting capabilities.
Neonode’s mobile phones
utilize a
patent
pending user interface that
incorporates
true one -hand
-
on
-screen
-
navigation
with a user interface that recognizes gestures rather than defined keys.
This
interface
has
allowed
Neonode
to
design and manufacture a mobile phone with a large display without physical
buttons using the smallest handset in the mobile phone industry. Neonode’s
design is based on their patent pending zForce ™ and Neno™ software technology.
zForce™ is a new software based input system that supports one-hand navigation.
It allows the user to operate the functionality of the phone with one
finger.
In
February 2007, Neonode showcased its new mobile phone, the N2, at the 3GSM
World
Congress in Barcelona, Spain.
Neonode
expects to begin shipping its N2 phone to its initial customers in mid-2007.
Neonode initially expects to sell its mobile phones through sales channels
that
include distributors and network operators located in Europe, Mexico, Latin
America and the United States
PROPOSAL
1
THE
MERGER PROPOSAL
General
Description of the Merger
Under
the
merger agreement, our newly-formed, wholly-owned subsidiary, Cold Winter
Acquisition Corporation (referred to in this proxy statement as Merger Sub)
will
merge with and into Neonode. The merger agreement contemplates that, subject
to
the terms and conditions of the merger agreement, Merger Sub will be merged
with
and into Neonode, with Neonode continuing after the merger as the surviving
corporation and a wholly-owned subsidiary of SBE. The securities offered in
the
merger will be issued pursuant to an exemption from registration under the
Securities Act of 1933 and may not be offered or sold by the holders thereof
absent registration or an applicable exemption from registration requirements.
The merger agreement provides that SBE will issue 3.5319 (as adjusted for stock
splits and combinations affecting either the SBE stock or Neonode stock) shares
of its common stock for each share of Neonode common stock outstanding at
closing, and that it will assume all outstanding options and warrants to
purchase Neonode common stock such that each option and warrant will become
exercisable for 3.5319 (as adjusted for stock splits and combinations affecting
either the SBE stock or Neonode stock) shares of SBE common stock for each
share
of Neonode common stock subject to such option or warrant. Although the exact
number of shares to be issued in the merger will be determined at closing,
it is
currently estimated that SBE will issue approximately 20.4 million shares of
its
common stock in exchange for outstanding shares of Neonode common stock and
will
assume options and warrants exercisable for approximately 8.0 million additional
shares of SBE common stock.
Immediately
following completion of the transaction, the shares, warrants and stock options
held by our existing stockholders are expected to represent approximately 9.5%
of our outstanding capital stock assuming the exercise in full of all
outstanding options and warrants. The
merger agreement is attached to this proxy statement as Annex A. We
encourage you to read the merger agreement carefully. Our board of directors
has
approved the merger agreement, and it is the binding legal agreement that
governs the terms of the merger.
Background
of the Merger
On
August
21, 2006, our board of directors held a regular meeting and discussed the
strategic direction of SBE.
On
August
31, 2006, Mr. David Brunton, our Chief Financial Officer, signed a
non-disclosure agreement with a holding company that is in the initial stages
of
developing alternative fuel processing plants including ethanol and bio-diesel.
We entered into exploratory discussion about merging SBE with this
company.
From
September 1 through September 29, 2006, Mr. Brunton continued exploratory
discussions with the alternative fuel company.
On
September 21, 2006, our board of directors held a special meeting to discuss
the
overall strategic future of SBE, including the possible disposition of all
of
our assets and a merger with a viable company.
At that
meeting, our board of directors authorized
management to enter into discussions and negotiate term sheets for the
disposition of all or a portion of our assets, subject to final approval of
the
term sheet by the board of directors.
On
October 3, 2006, Mr. Greg Yamamoto, our Chief Executive Officer, was introduced
to the alternative fuel company, entered into a nondisclosure agreement with
the
alternative fuel company and held preliminary merger discussions.
On
October 3, 2006, Mr. Yamamoto and Mr. Brunton held an initial discussion with
Mr. Robert Giannini of Griffin Securities to discuss the prospect of SBE merging
with Neonode Inc. (Neonode) and entered into a nondisclosure agreement with
Neonode. Griffin Securities was retained by Neonode to act in the capacity
of an
investment advisor in a merger or initial public offering transaction.
From
October 3, 2006 through November 23, 2006, we held ongoing merger discussions
and due diligence with the alternative fuel company and Neonode.
On
October 12, 2006, our board of directors formed a Strategic Transaction
Committee comprising our independent board members to review and approve all
strategic alternatives presented to the board and appointed Mr. John Reardon
as
Chairman of the Committee.
On
October 23, 2006, Mr. Reardon was introduced to the alternative fuel company
and
held an information gathering discussion with them.
On
November 7, 2006, Mr. Reardon was introduced to Neonode and held an information
gathering discussion with Griffin Securities. Mr. Reardon was appointed to
the
Board of Director’s of Neonode in April 23, 2007.
From
October 2006 through the execution of the merger agreement with Neonode, Mr.
Yamamoto provided our board of directors with frequent status updates on the
potential merger with Neonode.
On
November 22, 2006, our board of directors approved a term sheet setting forth
nonbinding terms of a proposed merger with Neonode and instructed our management
to move forward with negotiating the terms of a merger with
Neonode.
On
November 23, 2006, we executed the term sheet with Neonode.
From
November 23, 2006 through January 19, 2007, Neonode engaged in a due diligence
investigation of SBE and SBE engaged in a due diligence investigation of
Neonode.
On
November 29, 2006, we notified the alternative fuel company that we were no
longer interested in a merger transaction.
From
December 1, 2006 through December 7, 2006, Mr. Yamamoto, Mr. Brunton and Mr.
Fang, our Executive Vice President, visited Neonode in Stockholm, Sweden
performing on-site due diligence.
On
December 3, 2006, we received the initial draft of the merger agreement from
our
counsel.
During
December 2006 through January 19, 2007, we continued our negotiations with
Neonode regarding the proposed merger and the terms of the merger
agreement.
On
December 13, 2006, we retained Seidman & Co., Inc. (Seidman) to analyze the
proposed merger and to determine the fairness of the proposed transaction,
from
a financial point of view, to our stockholders.
On
January 19, 2007, at a meeting of our board of directors, Seidman delivered
its
oral opinion (subsequently confirmed in writing) to our board of directors
that
the consideration to be received by SBE in the proposed merger is fair, from
a
financial point of view, to SBE’s stockholders. Thereafter, the board of
directors, together with management and SBE’s outside counsel, engaged in a full
discussion of the proposed transaction. After such discussion, the board of
directors determined that the transaction was advisable and in the best
interests of SBE and its stockholders, determined to recommend to SBE’s
stockholders that they approve the proposed transaction, and authorized SBE
management to execute the merger agreement in the form in which it was presented
to the board of directors.
On
January 19, 2007, we and Neonode signed the Agreement and Plan of Merger and
Reorganization. On the same day, we announced via press release the execution
of
the agreement and filed a corresponding Form 8-K with the Securities and
Exchange Commission.
On
March
30, 2007, we completed the sale of our embedded business to One Stop Systems,
Inc.
On
May 1,
2007, we held discussions with Griffin Securities, regarding amendment of the
merger agreement to fix the exchange ratio of common stock in the merger and
to
allow Neonode to issue up to $3 million in convertible notes and borrow $1
million from SBE.
On
May 3,
2007, we held additional discussions with Griffin Securities about amending
the
merger agreement to fix the exchange ratio of common stock in the merger at
3.5319 shares of SBE common stock for each share of Neonode common
stock.
On
May 4,
2007, management
briefed our board of directors about the terms of the proposed amendment to
the
merger agreement; and our board of directors instructed our management to move
forward with negotiations with Neonode.
On
May
10, 2007, our
board
of directors approved an amendment to the merger agreement with Neonode subject
to receipt of an opinion from Seidman & Co. that the terms of the proposed
amendment, are fair, from a financial point of view, to SBE’s stockholders and
instructed our management to finalize negotiations with Neonode.
On
May 7,
2007, we received initial drafts of the proposed merger agreement amendment
and
loan agreement from counsel to Neonode. We continued to negotiate the terms
of
such agreements through May 18, 2007.
On
May
17, 2007, Seidman delivered its oral opinion (subsequently confirmed in writing
on May 24, 2007) to our board of directors that the consideration to be received
by SBE in the proposed merger, pursuant to the terms of a proposed merger
agreement amendment, are fair, from a financial point of view, to SBE’s
stockholders.
On
May
17, 2007, the board of directors engaged in a full discussion of the proposed
transaction. After such discussion, the board of directors determined that,
subject to the board’s receipt of an updated fairness opinion regarding the
proposed merger, the transaction was advisable and in the best interests of
SBE
and its stockholders, determined to recommend to SBE’s stockholders that they
approve the proposed transaction, and authorized SBE management to execute
the
merger agreement amendment in the form presented to the board of
directors.
On
May
25, 2007, we entered into the amendment to the merger agreement and the loan
agreement with Neonode. On May 29, 2007, we announced via press release the
execution of the amendment and the loan agreement and filed a corresponding
Form
8-K with the SEC.
On
May
29, 2007, pursuant to an amendment to the merger agreement with Neonode, we
advanced Neonode $500,000 under an interest bearing secured note and advanced
an
additional $500,000 on June 15, 2007.
Reasons
for the Merger
Our
board
of directors considered a wide variety of factors in connection with its
evaluation of the merger. In light of the complexity of those factors, our
board
of directors did not consider it practicable to, nor did it attempt to, quantify
or otherwise assign relative weights to the specific factors it considered
in
reaching its decision. In addition, individual members of our board of directors
may have given different weight to different factors. Our board of directors
determined that the merger agreement and in the best interests of SBE and its
stockholders. Our board of directors relied on the analysis, experience,
expertise and recommendation of our management team, as well as Seidman, our
financial advisor, for analyses of the financial terms of the merger. See
“Opinion of Our Financial Advisor” on page [___].
Our
board
of directors did not undertake to make any specific determination as to whether
any particular factor, or any aspect of any particular factor, was favorable
or
unfavorable to its ultimate determination, but rather our board of directors
conducted an overall analysis of the factors described above, including
discussions with our management team and legal, financial and accounting
advisors.
In
addition, our board of directors consulted with our management team, as well
as
our financial advisor and legal counsel, and considered the
following:
|
1.
|
the
judgment, advice and analyses of our senior management, including
their
favorable recommendation of the
merger;
|
|
2.
|
alternatives
to the merger;
|
|
3.
|
the
presentations by and discussions with our senior management and
representatives of our counsel regarding the terms and conditions
of the
merger agreement and the merger;
and
|
|
4.
|
that
while the merger is likely to be completed, there are risks associated
with completing the merger and, as a result of conditions to the
completion of the merger, it is possible that the merger may not
be
completed even if approved by the stockholders of SBE and
Neonode.
|
The
foregoing discussion of the information and factors considered by our board
of
directors is not meant to be exhaustive, but includes the material information
and factors considered by our board of directors.
Recommendation
of Our Board of Directors
After
careful consideration, our board of directors determined that the merger is
fair
to and in the best interests of SBE and our stockholders. On the basis of the
foregoing, our board of directors approved and declared advisable the merger
and
recommends that you vote or give instructions to vote “FOR” the adoption of the
merger proposal.
Opinion
of Our Financial Advisor
The
full
text of the written opinion, which sets forth, among other things, the
assumptions made, general procedures followed, matters considered, limitations
on and qualifications made by Seidman & Co., Inc., or Seidman, in its
review, is set forth as Annex D to this proxy statement and is incorporated
herein by reference. The summary of Seidman’s opinion in this proxy statement is
qualified in its entirety by reference to the full text of the written opinion.
You are urged to read carefully Seidman’s written opinion in its entirety.
Seidman’s
opinion, which describes the assumptions made, matters considered and
limitations on the review undertaken by Seidman, is attached as Annex D to
this
proxy statement. Seidman’s opinion was directed solely to our board of directors
and addresses only the fairness to SBE, Inc. stockholders of the merger from
a
financial point of view. The Seidman opinion does not address any other aspect
of the merger and does not constitute a recommendation to any director,
stockholder or other person as to how to vote or act with respect to the
merger.
In
connection with rendering its opinion, Seidman reviewed the
following:
1. |
Agreement
and Plan of Merger and Reorganization, dated January 19,
2007;
|
2. |
Amendment
No. 1 to Agreement and Plan of Merger and Reorganization, dated May
18,
2007;
|
3. |
Background,
description and financial history of SBE,
Inc.
|
4. |
Securities
and Exchange Commission filings by SBE, Inc.,
including:
|
FORM
RECEIVED/PERIOD
8-K 4/19/07
(4/11/07)
8-K 4/4/07
(3/30/07)
8-K 3/23/07
(3/20/07)
8-K 3/16/07
(1/31/07)
10-Q
3/16/07
(1/31/07)
DEFM14A 3/7/07
10-K
1/29/07
(10/31/06)
8-K
1/22/07
(1/19/07)
8-K
1/12/07
(1/11/07)
5. |
Draft
proxy statement for SBE / Neonode
transaction;
|
6. |
Draft
of proposed Senior Secured Note dated May 16,
2007;
|
7. |
Proposed
Neonode / SBE $1 million Note Purchase
Agreement;
|
8. |
Background,
description, and financial history of Neonode
AB;
|
9. |
Presentation
of Neonode multimedia, smartphone cellular mobile handset
product;
|
10. |
Financial
estimates provided by Neonode for calendar years ending December
31, 2006
through December 31, 2008;
|
11. |
Due
diligence by SBE, Inc. relating to Neonode
AB;
|
12. |
Extrapolation
of near term projections provided by Neonode and performance of discounted
cash flow analyses;
|
13. |
Statistical
analyses of selected comparable companies with publicly-traded common
shares, and derivation of financial ratios typical of companies in
similar
SIC Codes to Neonode;
|
14. |
Conditions
in, and the outlook, for the mobile phone handset industry as of
April
2007;
|
15. |
Conditions
in, and the outlook for, the international economies, interest rates
and
financial markets proposed to be targeted by Neonode;
and
|
16. |
Other
studies, analyses, and investigations as it deemed
appropriate.
|
In
addition, Seidman spoke with members of the senior management of SBE, Inc.
to
discuss the operations, financial condition, future prospects and projected
operations and performance of SBE, Inc. and Neonode.
In
connection with rendering its opinion, Seidman performed a variety of financial
analyses, including those summarized below. These analyses were presented to
the
directors on May 24, 2007. The Seidman opinion necessarily is based upon
economic, market, financial and other conditions as they existed and can be
evaluated on the date of the opinion and does not address the fairness as a
result of the proposed transaction on any other date. The summary set forth
below does not purport to be a complete description of the analyses performed
by
Seidman in this regard. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to a partial analysis
or summary description. Accordingly, notwithstanding the separate analyses
summarized below, Seidman believes that its analyses must be considered as
a
whole and that selecting portions of its analyses and factors considered by
it,
without considering all of its analyses and factors, or attempting to ascribe
relative weights to some or all of its analyses and factors, could create an
incomplete view of the evaluation process underlying its opinion.
Fairness
to the shareholders of SBE of the proposed merger of SBE with Neonode
(“Transaction”) is determined by comparison of the fair market value of the
interests held by the shareholders of SBE before and after the subject
Transaction. In the instance of the subject Transaction, the relevant analysis
is the comparison of the fair market value of the merged SBE/Neonode and the
share exchange value of the Transaction to the present shareholders of SBE,
Inc.
relative to the fair market value of SBE, Inc. prior to and without the Neonode
transaction. If the pro rata share of the combined Neonode / SBE, Inc.
attributable to the present shareholders of SBE, Inc. is equal to or greater
than the current fair market value of their interest, then the Transaction
is
deemed to be fair to the shareholders of SBE, Inc. from a financial point of
view.
Because
Neonode is a privately-held company, a key component of the Seidman analysis
was
a determination of the fair market value of Neonode, for which Seidman employed
both market comparable and discounted cash flow valuation
methodologies.
This
summary does not purport to be a complete description of the analyses underlying
the opinion of Seidman. For each analysis described below, the material
forecasts and estimates that Seidman utilized were provided to it by management
of SBE, Inc. that were obtained, in turn, from management of Neonode.
Market
Comparable or Guideline Company Analysis.
The
valuation of the operating business of Neonode is based on generally accepted
and recommended procedures for valuing an on-going operating business,
designated the “market comparable approach.” In this valuation technique, the
market value of a company is established on the basis of market prices and
indicated market values of comparable companies with minority shares freely-
and
publicly-traded on various securities exchanges. Value is expressed in the
relationship of these market prices to selective balance sheet and operating
data of these market comparable companies, and derivation of market
capitalization factors.
The
following publicly-traded companies employed in the Seidman analysis have been
identified as approximately comparable to Neonode. None of the public companies
used in the public companies analysis described above is identical to Neonode.
Accordingly, an analysis of publicly traded comparable companies is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
companies and other factors that could affect the public trading value of the
comparable companies or company to which they are being compared.
· BSquare
Corp.
· Backweb
Technologies Ltd.
· DIJJI
Corp.
· Insignia
Solutions PLC
· Once
Voice Technologies Inc.
· Openwave
Systems Inc.
· Radvision
Ltd.
· Smith
Micro Software Inc.
· Oasys
Mobile, Inc.
· Ulticom
Inc.
In
employing the market comparable method of valuation, it typically is necessary
to compare over an historical period, typically three to five years, the
financial performance of the subject company with an appropriate universe of
“market comparable” companies which have common stock that is publicly-traded.
In-depth financial data for the market comparable companies are then presented
for easy comparison, and selective financial measurements and ratios are
computed and studied.
However,
Seidman observed that Neonode is a company with no operating history and no
earnings. Under the circumstances, Seidman focused on price/latest year revenues
of market comparable companies and applying the median multiple of this universe
to the projected revenues of Neonode in 2007 which is based on delivery
commencement of the Company’s smartphones in June 2007, and the annualization of
these six months of revenues. The median price/revenues multiple for the market
comparable companies is 1.85x. With Neonode annualized revenues for 2007
projected at approximately $39.5 million, an unadjusted valuation of capitalized
revenues approximating $73 million is indicated. As this is a projected value
for Neonode, and there is no history of operations, Seidman adjusted this
derived value by a 50% uncertainty factor, consistent with indicated returns
required by the market for a company such as Neonode, thus indicating a $36.5
million pro forma fair market value for Neonode.
Discounted
Cash Flow Analysis.
A
discounted cash flow analysis is a traditional valuation methodology used to
derive a valuation of an asset by calculating the “present value” of estimated
future cash flows of the asset. “Present value” refers to the current value of
future cash flows or amounts and is obtained by discounting those future cash
flows or amounts by a discount rate that takes into account macro-economic
assumptions and estimates of risk, the opportunity cost of capital, expected
returns and other appropriate factors. Seidman calculated discounted cash flow
analyses for Neonode employing financial forecasts for Neonode for calendar
years 2007 through 2011. Assuming discount rates as high as 50%, and terminal
growth rates of EBITDA in the year 2011 of as low as 5%, a range of present
values was derived for Neonode representing fair market value. The minimum
fair
market value of Neonode in the range approximates $21.1 million.
As
of the
date hereof, it observed that SBE sold its embedded hardware business on March
30, 2007, and its only remaining business is designing and providing
software-based storage networking solutions for an extensive range of business
critical applications, including Disk-to-Disk Back-up and Disaster Recovery.
These storage software products have not gained wide acceptance in the storage
markets and have not generated significant sales to date and continue to lose
money and drain cash from SBE. As of the September 30, 2007, projected closing
date of the proposed SBE /Neonode merger, management of SBE estimates it will
have substantially exhausted its remaining cash, and the only remaining assets
held by SBE would be the $1 million pre-merger loan receivable from Neonode
plus
the value attributable to SBE’s status as a publicly-traded company, estimated
to be worth no more than $1 million, and a $150,000 credit for transaction
costs.
At
the
projected date of closing, SBE, in the merger exchange, contributes $1,000,000
of cash in the form of its pre-merger loan to Neonode, plus an imputed
$1,000,000 for the value of a publicly-traded corporation, plus $150,000 for
transactions costs, for a total of $2.15 million. Seidman concluded that the
$1,000,000 imputed value for the publicly-traded corporation is believed fair
from a financial point of view. It also is noted that any indicated higher
value
might divert a potential partner to consider other options to obtain a public
market.
Seidman
observed that the market capitalization of SBE as of the May 24, 2007, date
of
its fairness opinion was approximately $5 million. Seidman believes that this
market capitalized value already reflects the pro forma combination with
Neonode. Prior to the SBE announcement on January 19, 2007, of the pending
sale
of its Embedded Products Division and of the prospective merger with Neonode,
SBE’s market capitalization doubled from $3.8 million on January 19, 2007, to a
high of $7.6 million on January 22, 2007, the next trading day. Thus, the market
capitalization of SBE subsequent to the announcement of the merger with Neonode
already had given weight to the merger with Neonode rather than to the
fundamentals of SBE, Inc. as a standalone entity. As a standalone entity,
Seidman is of the opinion that SBE value to its stockholders as of the projected
closing date of the Transaction is no more than the total of its $1 million
loan
receivable owed by Neonode plus the $1 million estimated value of its public
listing, or approximately $2 million.
It
is
indicated that the shareholders of SBE will receive approximately 10% of the
merged SBE / Neonode entity. Thus, since 10% of both the market comparable
and
discounted cash flow methodologies for valuing the merged SBE / Neonode entity
result in a value to SBE shareholders equal to or greater than the estimated
$2
million present value attributable to SBE, the proposed merger transaction
is
deemed to be fair to the shareholders of SBE, from a financial point of
view.
Seidman
assumed, without independent verification, that the financial forecasts and
projections it was provided, and upon which it relied, were reasonably prepared
and reflected the best currently available estimates and judgments by management
as to the future financial results of operations and financial performance
of
Neonode, and that such results of operations, synergies and financial
performance will be realized. Seidman also assumed that there had been no
material change in the assets, financial condition or business of Neonode since
the date of the most recent financial statements and projections made available
to it. Seidman further relied upon the assurance of management of SBE, Inc.
that
they are unaware of any facts that would make the information provided to
Seidman incomplete or misleading in any respect. Seidman assumed that the
transaction contemplated by the merger agreement will be substantially
consummated as described in the terms herein in the form reviewed by Seidman
and
that all representations and warranties therein of the parties thereto are
true
and accurate in all respects.
Seidman
did not independently verify the accuracy and completeness of the information
supplied to it with respect to Neonode and does not assume any responsibility
with respect to it. Seidman did not meet with or have any discussions with
any
representatives of Neonode. Seidman’s opinion was necessarily based on business,
economic, market and other conditions as they existed and could be evaluated
by
it as of the date of the Seidman opinion. It should be understood that
subsequent developments may affect the Seidman opinion and Seidman does not
have
any obligation to update, revise or reaffirm the Seidman opinion.
The
SBE
board of directors asked Seidman to opine on the fairness to its stockholders
of
the merger from a financial point of view. The Seidman opinion does not address
the relative merits of the merger as compared to other business strategies
that
might be available to SBE, Inc., nor does it address its underlying business
decision to proceed with the merger. Seidman did not make or take into account
any independent appraisal or valuation of any of Neonode or SBE, Inc.’s assets
or liabilities, contingent or otherwise. Seidman did not opine on any legal,
tax
or accounting issues concerning the merger, or any terms of the merger other
than the subject fairness. Seidman did not express an opinion with respect
to
the prices at which SBE, Inc. common stock might trade subsequent to disclosure
or consummation of the merger.
Seidman
did not recommend any specific exchange ratio to the board of directors or
that
any specific exchange ratio constituted the only appropriate exchange ratio
with
respect to the merger agreement. In addition, Seidman’s opinion and presentation
to the board of directors was one of many factors taken into consideration
by
the board of directors in making its decision to approve the merger.
Consequently, the Seidman analyses as described above should not be viewed
as
determinative of the opinion of the board of directors with respect to the
exchange ratio or whether our board of directors would have been willing to
agree to a different exchange ratio.
Seidman
is a New York City investment banking firm specializing in securities research,
analysis and valuations that has been in business since 1970 and is engaged
in a
broad range of investment banking and financial advisory activities, including
activities relating to corporate finance, mergers and acquisitions, leveraged
buyouts and private placements.
We
are
not aware of any federal or state regulatory requirements that must be complied
with or approvals that must be obtained to consummate the merger, other than
the
filing of (1) a certificate of merger with the Secretary of State of the
State of Delaware, (2) this proxy statement with the SEC and (3) compliance
with all applicable state securities laws regarding the offering and issuance
of
the shares in connection with the transactions. If any additional approvals
or
filings are required, we will use our commercially reasonable efforts to obtain
those approvals and make any required filings before completing the
transactions.
Dissenters’
Rights Relating to the Merger
Our
stockholders are not entitled to exercise dissenters’ rights in connection with
the merger or the private placement.
Interests
of Certain Persons in the Merger
Mr.
John
Reardon, a member of our board of directors, was recently named as a member
of
the board of directors of Neonode. He was not a member of Neonode’s board of
directors at the time the merger agreement was negotiated and executed by the
parties. It is expected that Mr. Reardon will continue as a member of our board
of directors after the merger. It is expected that Mr. David Brunton, our Chief
Financial Officer, will remain on as Chief Financial Officer of the combined
company after the merger. It is expected that all other employees, including
officers, and directors of SBE will resign effective as of the closing of the
merger.
THE
MERGER AGREEMENT
General
The
merger agreement provides that, subject to satisfaction of certain conditions,
our newly-formed, wholly-owned subsidiary, Cold Winter Acquisition Corporation,
referred to in this proxy statement as Merger Sub, will be merged with and
into
Neonode and that following the merger, Merger Sub will cease to exist as a
separate entity and we will continue as sole stockholder of Neonode, the
surviving entity in the merger.
We
entered into the merger agreement with Neonode on January 19, 2007 and amended
it as of May 18, 2007. The merger agreement is attached to this proxy statement
as Annex A. You should read the merger agreement carefully. It is the
agreement that governs the terms of the merger. The following information
summarizes the terms of the merger agreement.
Effective
Time of the Merger
The
consummation of the merger will take place on a date to be designated jointly
by
SBE and Neonode, which shall be no later than two business days after the last
condition to closing has been satisfied or waived. The merger will become
effective the merger agreement is filed with the Secretary of State of the
State
of Delaware.
Treatment
of Stock Options
At
the
effective time of the merger, each outstanding Neonode stock option, whether
vested or unvested, will be assumed by SBE. All rights to acquire Neonode stock
upon exercise of the Neonode options will be converted into rights to acquire
our common stock. All restrictions on the exercise of each such assumed options
will continue in full force and effect, and the term, exercisability, vesting
schedule and other provisions of the options will otherwise remain unchanged.
However, any option with a term in excess of ten years will have its term
reduced so that no assumed option will have a term in excess of ten years.
The
number of shares of our common stock that will be subject to the new stock
options and the exercise price per share of our common stock issuable upon
exercise of the new options will reflect the exchange calculation set forth
in
the merger agreement. We expect the exercise price of the assumed options will
be approximately $1.98 per share of our common stock issuable upon exercise
of
the assumed options.
Treatment
of Warrants to Purchase Stock
At
the
effective time of the merger, each outstanding Neonode warrant will be assumed
by SBE. All rights to acquire Neonode stock upon exercise of the Neonode
warrants will be converted into rights to acquire our common stock. All of
the
terms and conditions of the warrants will remain unchanged. The number of shares
of our common stock that will be subject to the new warrants and the exercise
price per share of our common stock issuable upon exercise of the new warrants
will reflect the exchange calculation set forth in the merger agreement.
Surrender
and Exchange of Share Certificates
As
soon
as reasonably practicable after the effective time of the merger, but in any
event no more than ten business days thereafter, we or our agent will send
to
the Neonode stockholders transmittal materials containing instructions on how
to
exchange of their stock certificates representing shares of Neonode common
stock
for certificates representing shares of our common stock that are payable to
them in connection with the merger. Upon surrender to us or our agent of their
stock certificate or certificates representing the shares of Neonode common
stock held immediately prior to the merger, and the acceptance of such
certificate or certificates by us or our agent in accordance with the
instructions to be provided by us or our agent, the Neonode stockholders will
receive that number of shares of our common stock equal to the number of shares
of our common stock that the Neonode stockholders are entitled to receive
pursuant to the exchange calculation set forth in the merger agreement. Neonode
stockholders that fail to exchange their stock certificates will not be entitled
to receive any dividends or other distributions payable by us after the closing
until their certificates are surrendered.
We
will
not issue any fractional shares in the merger. In lieu of fractional shares,
Neonode stockholders will receive a cash payment equal to the fractional share
amount multiplied by the average closing sale price of a share of our common
stock, as reported on the Nasdaq Capital Market, for each of the 10 consecutive
trading days immediately preceding the closing date of the merger.
Representations
and Warranties
The
merger agreement contains representations of Neonode relating to:
· proper
corporate organization, subsidiaries and similar corporate matters;
· organizational
documents and records;
· capital
structure;
· financial
statements and financial controls;
· absence
of certain changes from September 30, 2006 to January 19, 2007;
· assets
necessary for the conduct of the business;
· receivables;
· holding
of equipment and real property leases;
· intellectual
property rights;
· contracts;
· absence
of undisclosed liabilities;
· compliance
with legal requirements;
· compliance
with governmental authorization;
· taxes;
· employee
and employee benefits matters;
· environmental
matters;
· insurance;
· related
party transactions;
· absence
of litigation;
· authority,
binding nature of the merger agreement;
· non-contravention
of Neonode’s organizational documents, applicable legal requirements, applicable
governmental authorizations, and Neonode’s material agreements;
· vote
required in connection with the merger;
· financial
advisory fees; and
· the
absence of false or misleading statement of a material fact or the omission
of a
material fact.
The
merger agreement also contains representations of SBE and merger sub relating
to:
· proper
corporate organization, subsidiaries and similar corporate matters;
· organizational
documents and records;
· capital
structure;
· SEC
filings, financial statements and financial controls;
· absence
of certain changes from July 31, 2006 to January 19, 2007;
· assets
necessary for the conduct of the business;
· bank
accounts and receivables;
· ownership
of real property and real property leases;
· contracts;
· absence
of undisclosed liabilities;
· compliance
with legal requirements;
· compliance
with governmental authorization;
· compliance
with laws governing business practices;
· taxes;
· employee
and employee benefits matters;
· environmental
matters;
· insurance;
· absence
of litigation;.
· non-contravention
of SBE’s organizational documents, applicable legal requirements, applicable
governmental authorizations, and SBE’s material agreements;
· vote
required in connection with the merger;
· financial
advisors; and
· the
absence of false or misleading statement of a material fact or the omission
of a
material fact.
The
merger agreement contains customary representations and warranties made by
Neonode to SBE and Merger Sub and by SBE and Merger Sub to Neonode for purposes
of allocating the risks associated with the merger. The assertions embodied
in
the representations and warranties made by Neonode are qualified by information
set forth in a confidential disclosure schedule that was delivered in connection
with the execution of the merger agreement. While we do not believe that the
disclosure schedule contains information that securities laws require us to
publicly disclose, other than information that is being disclosed in this proxy
statement, the disclosure schedule may contain information that modifies,
qualifies and creates exceptions to the representations and warranties set
forth
in the merger agreement. Accordingly, you should not rely on any of these
representations and warranties as characterizations of the actual state of
facts, since they may be modified in important respects by the underlying
disclosure schedule. Moreover, information concerning the subject matter of
the
representations and warranties may have changed since the date of the merger
agreement, which subsequent information may or may not be fully reflected in
the
disclosure schedule Neonode delivered to us at signing and which may not be
delivered to us until the closing date of the merger.
Certain
Covenants
We
and
Neonode have each agreed in the merger agreement to take such actions as are
necessary, proper or advisable to complete the merger.
During
the period from January 19, 2007 through the effective time of the merger
(referred to in this proxy statement as the Pre-Closing Period), Neonode has
agreed to provide, and to cause its representatives to provide, us and our
representatives with reasonable access to Neonode’s representatives, personnel
and assets of the Neonode and to all existing books, records, tax returns,
work
papers and other documents and information relating to Neonode; and to provide
us and our representatives with copies of such existing books, records, tax
returns, work papers and other documents and information relating to Neonode,
and with such additional financial, operating and other data and information
regarding Neonode, as we may reasonably request.
Neonode
has further agreed that during the Pre-Closing Period it shall:
· |
conduct
its business and operations in the ordinary course, in substantially
the
same manner as such business and operations have been conducted prior
to
January 19, 2007;
|
· |
use
reasonable efforts to preserve intact its current business organization,
keep available the services of its current officers and key employees
and
maintain its relations and good will with suppliers, customers, landlords,
creditors, employees and other persons having business relationships
with
Neonode;
|
· |
keep
in full force certain insurance policies;
and
|
· |
cause
its officers to report regularly (but in no event less frequently
than
monthly) to us concerning the status of Neonode’s
business.
|
Finally,
Neonode has agreed that during the Pre-Closing Period, subject to certain
exceptions, it will not, except as consented to by SBE:
· |
declare,
accrue, set aside or pay any dividend or make any other distribution
in
respect of any shares of capital stock, and shall not repurchase,
redeem
or otherwise reacquire any shares of capital stock or other securities
(except that Neonode may repurchase shares of its common stock from
former
employees pursuant to the terms of existing restricted stock purchase
agreements);
|
· |
sell,
issue or authorize the issuance of (i) any capital stock or other
security, (ii) any option or right to acquire any capital stock or
other
security, or (iii) any instrument convertible into or exchangeable
for any
capital stock or other security for below the fair market value (except
that Neonode shall be permitted to issue shares of its common stock
to
employees upon the exercise of outstanding Neonode options or to
holders
of outstanding Neonode warrants upon the exercise of such warrants
and
convertible promissory notes for an aggregate amount of up to $3.0
million
in connection with its convertible note
financing);
|
· |
amend
or waive any of its rights under, or permit the acceleration of vesting
under, (i) any provision of the Neonode stock option plan, (ii) any
provision of any agreement evidencing any outstanding Neonode option,
or
(iii) any provision of any restricted stock purchase
agreement;
|
· |
amend
or permit the adoption of any amendment to Neonode’s certificate of
incorporation (except to increase the number of shares of Neonode
common
stock authorized to 10,000,000 shares) or bylaws, or effect or permit
Neonode to become a party to any acquisition transaction,
recapitalization, reclassification of shares, stock split, reverse
stock
split or similar transaction;
|
· |
form
any subsidiary or acquire any equity interest or other interest in
any
other entity;
|
· |
make
any capital expenditure, except for capital expenditures that, when
added
to all other capital expenditures made on behalf of Neonode between
January 19, 2007 and the closing of the merger, do not exceed $350,000
per
month on a cumulative basis;
|
· |
(i)
enter into, or permit any of the assets owned or used by it to become
bound by, any contract that is or would constitute a material contract
of
Neonode, or (ii) amend or prematurely terminate, or waive any material
right or remedy under, any such
contract;
|
· |
(i)
acquire, lease or license any right or other asset from any other
person,
(ii) sell or otherwise dispose of, or lease or license, any right
or other
asset to any other person, or (iii) waive or relinquish any right,
except
for assets acquired, leased, licensed or disposed of by Neonode pursuant
to contracts that are not material contracts of
Neonode;
|
· |
(i)
lend money to any person (except that Neonode may make routine travel
advances to employees in the ordinary course of business), or (ii)
incur
or guarantee any indebtedness for borrowed
money;
|
· |
(i)
establish, adopt or amend any employee benefit plan or (ii) pay any
bonus
or make any profit sharing payment, cash incentive payment or similar
payment to, or increase the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to,
any of
its directors, officers or key
employees;
|
· |
not
change any of its methods of accounting or accounting practices in
any
material respect;
|
· |
not
make any tax election; and
|
· |
not
commence or settle any material legal
proceeding.
|
During
the Pre-Closing Period, we agreed to provide, to cause our representatives
to
provide, Neonode and its representatives with reasonable access to our
representatives, personnel and assets and to all existing books, records, tax
returns, work papers and other documents and information relating to SBE; and
to
provide Neonode and its representatives with copies of such existing books,
records, tax returns, work papers and other documents and information relating
to us, and with such additional financial, operating and other data and
information regarding us, as Neonode may reasonably request.
We
further agreed that during the Pre-Closing Period we will:
· |
conduct
our business and operations in the ordinary course, in substantially
the
same manner as such business and operations have been conducted prior
to
January 19, 2007, other than the sale of our embedded hardware business
to
One Stop Systems, Inc. (referred to in this proxy statement as One
Stop)
and the sale or shut down of our remaining business operation as
soon as
practicable;
|
· |
keep
in full force certain insurance policies to the extent necessary
and to
obtain certain other insurance coverage;
and
|
· |
cause
our officers to report regularly (but in no event less frequently
than
monthly) to Neonode concerning the status of our
business.
|
Finally,
we agreed that during the Pre-Closing Period, subject to certain exceptions,
we
will not, except as consented to by Neonode:
· |
subject
to certain limitations, declare, accrue, set aside or pay any dividend
or
make any other distribution in respect of any shares of capital stock,
and
shall not repurchase, redeem or otherwise reacquire any shares of
capital
stock or other securities (except that we may repurchase shares of
our
common stock from former employees pursuant to the terms of existing
restricted stock purchase
agreements);
|
· |
subject
to certain limitations, sell, issue or authorize the issuance of
(i) any
capital stock or other security, (ii) any option or right to acquire
any
capital stock or other security, or (iii) any instrument convertible
into
or exchangeable for any capital stock or other security (except that
we
will be permitted to issue shares of its common stock to employees
upon
the exercise of outstanding SBE options or to holders of outstanding
SBE
warrants upon the exercise of such
warrants);
|
· |
amend
or waive any of our rights under, or permit the acceleration of vesting
under, (i) any provision of the SBE stock option plan, (ii) any provision
of any agreement evidencing any outstanding SBE option, or (iii)
any
provision of any restricted stock purchase
agreement;
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· |
amend
or permit the adoption of any amendment to our certificate of
incorporation or bylaws, or effect or permit SBE to become a party
to any
acquisition transaction, recapitalization, reclassification of shares,
stock split, reverse stock split or similar transaction, other than
to
effect one or more reverse stock splits as we deem necessary or
appropriate to maintain our listing on the Nasdaq Capital
Market;
|
· |
form
any subsidiary or acquire any equity interest or other interest in
any
other entity;
|
· |
make
any capital expenditure, except in the ordinary course of our business
in
a manner that is not inconsistent with the sale of our embedded hardware
business to One Stop or the sale or shut down of our remaining business
operations;
|
· |
(i)
acquire, lease or license any right or other asset from any other
person,
or (ii) waive or relinquish any right except , except in the ordinary
course of our business in a manner that is not inconsistent with
the sale
of our embedded hardware business to One Stop or the sale or shut
down of
our remaining business operations;
|
· |
(i)
lend money to any person (except that we may make routine travel
advances
to employees in the ordinary course of business), or (ii) incur or
guarantee any indebtedness for borrowed
money;
|
· |
subject
to certain limitations (i) establish, adopt or amend any employee
benefit
plan or (ii) pay any bonus or make any profit sharing payment, cash
incentive payment or similar payment to, or increase the amount of
the
wages, salary, commissions, fringe benefits or other compensation
or
remuneration payable to, any of our key
employees;
|
· |
not
change any of our methods of accounting or accounting practices in
any
material respect;
|
· |
not
make any tax election; and
|
· |
not
commence or settle any material legal
proceeding.
|
The
merger agreement also contains additional covenants of the parties, including
covenants regarding:
· |
making
certain filings and obtaining certain
consents;
|
· |
the
filing of this proxy statement and holding the special
meeting;
|
· |
the
preparation of an information statement regarding the merger for
the
Neonode stockholders and holding a meeting of the Neonode stockholders
for
purposes of approving the merger;
|
· |
state
and federal securities law compliance;
|
· |
restrictions
on issuing press releases or public statements regarding the
merger;
|
· |
causing
certain of the Neonode directors, officers, note holders and stockholders
to enter into voting and affiliate agreements;
|
· |
using
commercially reasonable efforts to maintain the listing of our common
stock on the Nasdaq Capital Market and reasonable best efforts to
list the
shares of our common stock to be issued in connection with the merger
on
the Nasdaq Capital Market;
|
· |
providing
notification of certain events;
|
· |
subject
to certain exceptions, terminating all of our employees effective
at the
effective time;
|
· |
post-closing
directors and certain corporate governance matters;
|
· |
limitations
during the Pre Closing Period or until the termination of the merger
agreement, if earlier, providing that neither party shall (a) solicit
or
encourage or facilitate the initiation or submission of any expression
of
interest, inquiry, proposal or offer from any person relating to
a
possible acquisition transaction; (b) participate in any discussions
or
negotiations or enter into any agreement with, or provide any non
public
information to, any person relating to or in connection with a possible
acquisition transaction; or (c) consider, entertain or accept any
proposal
or offer from any person relating to a possible acquisition transaction;
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· |
registration
rights; and
|
· |
certain
indemnification obligations with respect to our directors and executive
officers from and after the effective time of the merger for a period
of
three years.
|
Conditions
to Closing of the Merger
Under
the
merger agreement, the obligations of the parties to consummate the merger are
subject to certain mutual closing conditions including, among other
things:
· |
the
accuracy of the representations and warranties made by the parties
in the
merger agreement;
|
· |
compliance
with all of the covenants and obligations required to be complied
with or
performed at or prior to the closing of the
merger;
|
· |
that
no person shall have commenced or threatened to commence any legal
proceeding, challenging or seeking recovery of a material amount
of
damages in connection with the merger, (b) seeking to prohibit or
limit
the exercise by us of any material right pertaining to our ownership
of
stock of the surviving entity following the completion of the
merger;
|
· |
that
since January 19, 2007 there has been no Material Adverse Effect
(as
defined in the merger agreement);
|
· |
all
consents required to be obtained in connection with the merger shall
have
been obtained and shall be in full force and effect;
|
· |
approval
by our stockholders and the Neonode stockholders of the merger and
the
transactions contemplated by the
merger;
|
· |
holders
of no more than 5% of the outstanding Neonode common stock will have
elected to exercise their dissenters’ rights in connection with the
merger;
|
· |
the
sale of the embedded hardware business to One Stop shall be completed;
and
|
· |
that
no temporary restraining order, preliminary or permanent injunction
or
other order preventing the completion of the merger shall have been
issued
by any court of competent jurisdiction and remain in effect, and
there
shall not be any legal requirement enacted or deemed applicable to
the
merger that makes completion of the merger
illegal.
|
In
addition, our obligation to consummate the merger is subject to certain closing
conditions including, among other things:
· |
that
we shall have received certain agreements or other documents set
forth in
the merger agreement, including, but not limited to, a legal opinion
of
Hahn & Hessen LLP, counsel to Neonode, dated as of the closing date
and addressed to us covering certain agreed upon
matters;
|
· |
that
we shall have received a stockholder questionnaire and lock-up agreement
from each of the stockholders, warrant holders and option holders
of
Neonode;
|
· |
Neonode
shall have filed a FIRPTA notice with the Internal Revenue
Service;
|
· |
we
shall have received a complete copy of the audited financial statements
of
Neonode;
|
Finally,
Neonode’s obligation to consummate the merger is subject to certain closing
conditions including, among other things:
· |
that
Neonode shall have received certain agreements or other documents
set
forth in the merger agreement; and
|
· |
all
of our existing officers and directors shall have resigned effective
as of
the effective date.
|
Termination
The
merger agreement may be terminated prior to the closing by mutual consent of
us
and Neonode. In addition, either party may terminate the merger agreement under
the following circumstances:
· |
if
it is reasonably determined by that party that timely satisfaction
of any
of the conditions precedent to the obligations of that party to effect
the
merger and consummate the transactions contemplated by the merger
agreement has become impossible;
|
· |
if
any of the conditions precedent to the obligations of that party
to effect
the merger and consummate the transactions contemplated by the merger
agreement has not been satisfied as of the agreed closing date; or
|
· |
the
merger has not been completed on or before September 30, 2007.
|
If
the
merger agreement is terminated, all further obligations of the parties under
the
merger agreement shall terminate and no party shall have any further liability
under the merger agreement, except that neither party shall be relieved of
any
obligation or liability arising from any prior breach by such party of any
covenant or obligation set forth in the merger agreement. A termination fee
will
be payable in the event that either party consummates an acquisition transaction
within 12 months after termination of the merger agreement. The termination
fee
is $400,000 in the case of an acquisition transaction by Neonode and $800,000
in
the case of an acquisition transaction by us. If a party fails to pay the
termination fee promptly, the other party will be entitled to reasonable fees
and expenses (including reasonable attorneys’ fees and expenses) incurred in
connection with any legal proceeding initiated to obtain payment of the
termination fee.
Waivers
No
failure on the part of any person to exercise any power, right, privilege or
remedy under the merger agreement, and no delay on the part of any person in
exercising any power, right, privilege or remedy under the merger agreement,
shall operate as a waiver of such power, right, privilege or remedy; and no
single or partial exercise of any such power, right, privilege or remedy shall
preclude any other or further exercise thereof or of any other power, right,
privilege or remedy.
No
person
shall be deemed to have waived any claim arising out of the merger agreement,
or
any power, right, privilege or remedy under the merger agreement, unless the
waiver of such claim, power, right, privilege or remedy is expressly set forth
in a written instrument duly executed and delivered on behalf of such person;
and any such waiver shall not be applicable or have any effect except in the
specific instance in which it is given.
Amendments
The
merger agreement may not be amended, modified, altered or supplemented other
than by means of a written instrument duly executed and delivered on behalf
of
all of the parties hereto; provided that the covenants related to the
registration rights and indemnification of our directors and officers from
and
after the effective time of the merger for a period of three years can not
be
amended, modified, altered or supplemented after approval of either our
stockholders or Neonode’s stockholders has been obtained.
Fees
and Expenses
Except
as
otherwise provided in the merger agreement, each party to the merger agreement
shall bear and pay all fees, costs and expenses (including legal fees and
accounting fees) that have been incurred or that are incurred by or on behalf
of
such party in connection with the merger.
Accounting
Treatment of the Merger
The
former Neonode stockholders will hold a majority of the outstanding voting
securities of SBE upon completion of the merger. This transaction will be
accounted for as a reverse merger, with Neonode being the acquirer for
accounting purposes. The pre-acquisition financial statements (December 31
year
end) of the accounting acquirer, Neonode, will become the historical financial
statements of the combined companies and the historical financial statements
of
SBE for the periods prior to the date of the transaction (October 31 fiscal
year
end) will not be presented. This transaction will be accounted for as the
issuance of common stock by Neonode for the net assets
of
SBE, accompanied by a recapitalization to reflect the legally issued and
outstanding shares of the combined companies. Pre-acquisition stockholders’
equity of Neonode will be retroactively restated for the equivalent number
of
shares of SBE received by Neonode stockholders in the acquisition, with
differences between the par value of SBE and Neonode’s stock recorded as
additional paid in capital.
Registration
Rights
After
completion of the merger, the combined company will be obligated to use its
best
efforts to register with the SEC the public resale the shares offered in the
merger, on the terms and subject to the conditions set forth in the merger
agreement.
Voting
Agreement; Neonode Stockholder Vote
In
connection with the execution of the merger agreement, the holders of
approximately 67% of Neonode’s outstanding capital stock entered into a voting
agreement with SBE and merger sub pursuant to which, among other things, such
holders agreed with SBE and Merger Sub to vote in favor of the merger and,
subject to certain exceptions, agreed not to dispose of any shares of Neonode
common stock held by such parties prior to the consummation of the merger.
Shortly following the execution of the original merger agreement and its
amendment, the stockholders of Neonode approved the merger and the merger
agreement by written consent.
Past
Contacts, Transactions or Negotiations
Other
than as described in the “Background of the Merger and the Private Placement,”
we and Neonode have not had any past material contacts, transactions or
negotiations.
Loan
to Neonode
As
described in “Background of the Merger” above, Neonode required additional
capital during the pre-closing period. In May 2007, we entered into a loan
agreement with Neonode providing that SBE would loan Neonode $1,000,000. The
loan bears interest at 6% and all principal and accrued but unpaid interest
is
due on September 30, 2007 or, if the merger agreement is terminated pursuant
to
its terms, on the date of such termination. Our loan and Neonode’s existing
loans in aggregate principal amount of $14.9 million are secured on a pari
passu
basis by a first-priority security interest in Neonode’s shares of its
wholly-owned subsidiary, Neonode AB. The loan agreement and associated
promissory note were filed with our Form 8-K filed with the Securities and
Exchange Commission on May 29, 2007. On
May
29, 2007, we advanced Neonode $500,000 under an interest bearing secured note
and advanced an additional $500,000 to Neonode on June 15, 2007.
Recommendation
of our Board of Directors
Our
board
of directors recommends that our stockholders vote FOR the merger, the merger
agreement, the issuance of shares of our common stock to the Neonode
stockholders and the assumption of options to purchase shares of our common
stock in the merger.
PROPOSAL
2
APPROVAL
OF OPTION PLAN INCREASE
In
January 2006, our board of directors adopted, and our stockholders subsequently
approved, the SBE, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) and
reserved 300,000 (adjusted for the April 2, 2007 1 for 5 reverse split) shares
for issuance thereunder. The 2006 Plan was adopted because our 1996 Equity
2006
Plan (the “1996 Plan”) expired in January 2006. During fiscal 2006, we granted
options to purchase 49,000 shares of common stock under the 2006 Plan to our
current executive officers and directors at an exercise price of $5.00 per
share, and we granted to all employees and consultants (excluding executive
officers) as a group options to purchase 45,000 shares of common stock at
exercise prices ranging from $1.80 to $5.50 per share. In addition, during
fiscal 2006 we granted 212,111 shares of stock to officers, directors and
employees.
As
of
April 18, 2007, awards and stock (net of canceled or expired awards) covering
an
aggregate of 260,702 shares of common stock had been granted under the 2006
Plan
and 39,298 shares of common stock (plus any shares that might in the future
be
returned to the 2006 Plan as a result of cancellation or expiration of awards)
remained available for future grants under the 2006 Plan.
On May
18,
2007,
our
board of directors approved an amendment to the 2006 Plan, subject to
stockholder approval, to increase the number of shares authorized for issuance
under the 2006 Plan by 1,000,000 shares of common stock from an aggregate of
300,000 shares to 1,300,000 shares.
Stockholders
are requested in this Proposal 2 to approve the 2006 Plan, as amended. The
adoption of Proposal 2 will require the affirmative vote of the holders of
a
majority of the shares present in person or represented by proxy and entitled
to
vote at the special meeting. Abstentions will be counted toward the tabulation
of votes cast on proposals presented to the stockholders and will have the
same
effect as negative votes. Broker non-votes are counted towards a quorum, but
are
not counted for any purpose in determining whether this matter has been
approved. A copy of the 2006 Plan, as amended, is appended to this proxy
statement as Appendix B.
THE
BOARD OF DIRECTORS RECOMMENDS
A
VOTE IN FAVOR OF PROPOSAL 2.
The
essential features of the 2006 Plan are outlined below:
The
2006
Plan provides for the grant of incentive stock options, nonstatutory stock
options and stock bonus awards (collectively “awards”). Incentive stock options
granted under the 2006 Plan are intended to qualify as “incentive
stock options” within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the “Code”). Nonstatutory stock options granted under the 2006
Plan are not intended to qualify as incentive stock options
under the Code. See “Material Federal Income Tax Information” for a discussion
of the tax treatment of awards.
Purpose
Our
board
of directors adopted the 2006 Plan to provide a means by which our employees,
directors and consultants may be given an opportunity to purchase our common
stock, to assist in retaining the services of such persons, to secure and retain
the services of persons capable of filling such positions and to provide
incentives for such persons to exert maximum efforts for the success of SBE
and
its affiliates. All of our employees, directors and consultants are eligible
to
participate in the 2006 Plan.
Administration
Our
board
of directors administers the 2006 Plan. Subject to the provisions of the 2006
Plan, the board of directors has the power to construe and interpret the 2006
Plan and to determine the persons to whom and the dates on which awards will
be
granted, the number of shares of common stock to be subject to each award,
the
time or times during the term of each award within which all or a portion of
such award may be exercised, the exercise price, the type of consideration
and
other terms of the award.
The
board
of directors has the power to delegate administration of the 2006 Plan to a
committee composed of not fewer than two members of the board of directors.
In
the discretion of the board of directors, a committee may consist solely of
two
or more outside directors in accordance with Section 162(m) of the Code or
solely of two or more non-employee directors in accordance with Rule 16b-3
of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The board
of directors has delegated administration of the 2006 Plan to the Compensation
Committee of the board of directors. As used herein with respect to the 2006
Plan, the “board of directors” refers to any committee the board of directors
appoints as well as to the board of directors itself. The board of directors
also may delegate to one or more of our officers the power to designate officers
and employees to receive awards and the number of shares subject to such
awards.
The
regulations under Section 162(m) of the Code require that the directors who
serve as members of the committee must be “outside directors.” The 2006 Plan
provides that, in the board of directors’ discretion, directors serving on the
committee may be “outside directors” within the meaning of Section 162(m). This
limitation would exclude from the committee directors who are (i) current
employees of SBE or an affiliate, (ii) former employees of SBE or an affiliate
receiving compensation for past services (other than benefits under a
tax-qualified pension incentive plan), (iii) current and former officers of
SBE
or an affiliate, (iv) directors currently receiving direct or indirect
remuneration from SBE or an affiliate in any capacity (other than as a
director), and (v) any other person who is otherwise not considered an “outside
director” for purposes of Section 162(m).
Stock
Subject to the 2006 Plan
If
this
proposal is approved, an aggregate of 1,300,000 shares of common stock will
be
reserved for issuance under the 2006 Plan. If awards granted under the 2006
Plan
expire or otherwise terminate without being exercised, the shares of common
stock not acquired pursuant to such awards again become available for issuance
under the 2006 Plan. If we reacquire unvested stock issued under the 2006 Plan,
the reacquired stock will again become available for reissuance under the 2006
Plan.
Eligibility
Incentive
stock options may be granted under the 2006 Plan only to employees (including
officers) of SBE and its affiliates. Employees (including officers), directors,
and consultants of both SBE and its affiliates are eligible to receive all
other
types of awards under the 2006 Plan.
No
incentive stock option may be granted under the 2006 Plan to any person who,
at
the time of the grant, owns (or is deemed to own) stock possessing more than
10%
of the total combined voting power of SBE or any affiliate of SBE, unless the
exercise price is at least 110% of the fair market value of the stock subject
to
the option on the date of grant and the term of the option does not exceed
five
years from the date of grant. In addition, the aggregate fair market value,
determined at the time of grant, of the shares of common stock with respect
to
which incentive stock options are exercisable for the first time by a
participant during any calendar year (under the 2006 Plan and all other such
plans of SBE and its affiliates) may not exceed $100,000.
No
employee may be granted options under the 2006 Plan exercisable for more than
150,000 shares of common stock during any calendar year (“Section 162(m)
Limitation”).
Terms
of Options
The
following is a description of the permissible terms of options under the 2006
Plan. Individual option grants may be more restrictive as to any or all of
the
permissible terms described below.
Exercise
Price; Payment.
The
exercise price of incentive stock options may not be less than 100% of the
fair
market value of the stock subject to the option on the date of the grant and,
in
some cases (see “Eligibility” above), may not be less than 110% of such fair
market value. The exercise price of nonstatutory options may not be less than
85% of the fair market value of the stock on the date of grant. If options
were
granted to covered executives with exercise prices below fair market value,
deductions for compensation attributable to the exercise of such options could
be limited by Section 162(m) of the Code. See “Material Federal Income Tax
Information.” As of April 30, 2007, the closing price of SBE’s common stock as
reported on the Nasdaq Capital Market was $2.40 per share.
The
exercise price of options granted under the 2006 Plan must be paid either in
cash at the time the option is exercised or (i) by delivery of other common
stock of SBE, (ii) pursuant to a deferred payment arrangement, or (iii) in
any
other form of legal consideration acceptable to the board of
directors.
Repricing.
In the
event of a decline in the value of SBE’s common stock, the board of directors
has the authority to offer participants the opportunity to replace outstanding
higher priced options with new lower priced options. To the extent required
by
Section 162(m) of the Code, a repriced option is deemed to be canceled and
a new
option granted. Both the option deemed to be canceled and the new option deemed
to be granted will be counted against the Section 162(m)
Limitation.
Option
Exercise.
Options
granted under the 2006 Plan may become exercisable in cumulative increments
(“vest”) as determined by the board of directors. The board of directors has the
power to accelerate the time during which an option may vest or be exercised.
In
addition, options granted under the 2006 Plan may permit exercise prior to
vesting, but in such event the participant may be required to enter into an
early exercise stock purchase agreement that allows us to repurchase unvested
shares, generally at their exercise price, should the participant’s service
terminate before vesting. To the extent provided by the terms of an option,
a
participant may satisfy any federal, state or local tax withholding obligation
relating to the exercise of such option by a cash payment upon exercise, by
authorizing us to withhold a portion of the stock otherwise issuable to the
participant, by delivering already-owned common stock of SBE or by a combination
of these means.
Term.
The
maximum term of options under the 2006 Plan is 10 years, except that in certain
cases (see “Eligibility”) the maximum term is five years. Options under the 2006
Plan will generally terminate three months after termination of the
participant’s service unless (i) such termination is due to the participant’s
permanent and total disability (as defined in the Code), in which case the
option may, but need not, provide that it may be exercised (to the extent the
option was exercisable at the time of the termination of service) at any time
within 12 months of such termination; (ii) the participant dies before the
participant’s service has terminated, or within a certain number of months after
termination of such service, in which case the option may, but need not, provide
that it may be exercised (to the extent the option was exercisable at the time
of the participant’s death) within 18 months of the participant’s death by the
person or persons to whom the rights to such option pass by will or by the
laws
of descent and distribution; or (iii) the option by its terms specifically
provides otherwise. A participant may designate a beneficiary who may exercise
the option following the participant’s death. Individual option grants by their
terms may provide for exercise within a longer period of time following
termination of service.
The
option term generally is extended in the event that exercise of the option
within these periods is prohibited. A participant’s option agreement may provide
that if the exercise of the option following the termination of the
participant’s service would be prohibited because the issuance of stock would
violate the registration requirements under the Securities Act of 1933, as
amended (the “Securities Act”), then the option will terminate on the earlier of
(i) the expiration of the term of the option or (ii) three months after the
termination of the participant’s service during which the exercise of the option
would not be in violation of such registration requirements.
Terms
of Stock Bonuses
Payment.
The
board of directors may award stock bonuses in consideration of past services
without a cash payment.
Vesting.
Shares
of stock sold or awarded under the 2006 Plan may, but need not be, subject
to a
repurchase option in favor of SBE in accordance with a vesting schedule as
determined by the board of directors.
Restrictions
on Transfer.
The
board of directors determines the restrictions on transfer of a stock bonus
award.
Restrictions
on Transfer
The
participant may not transfer an option otherwise than by will or by the laws
of
descent and distribution. During the lifetime of the participant, only the
participant may exercise an option. Shares subject to repurchase by SBE under
an
early exercise stock purchase agreement may be subject to restrictions on
transfer that the board of directors deems appropriate.
Adjustment
Provisions
Transactions
not involving receipt of consideration by SBE, such as a merger, consolidation,
reorganization, reincorporation, stock dividend, dividend in property other
than
cash, stock split, liquidating dividend, combination of shares, exchange of
shares or change in corporate structure may change the type(s), class(es) and
number of shares of common stock subject to the 2006 Plan and outstanding
awards. In that event, the 2006 Plan will be appropriately adjusted as to the
type(s), class(es) and the maximum number of shares of common stock subject
to
the 2006 Plan and the Section 162(m) Limitation, and outstanding awards will
be
adjusted as to the type(s), class(es), number of shares and price per share
of
common stock subject to such awards.
Effect
Of Certain Corporate Transactions
In
the
event of (i) the sale or other disposition of all or substantially all of the
consolidated assets of SBE, (ii) the sale or other disposition of at least
90%
of the outstanding securities of SBE, or (iii) certain specified types of
merger, consolidation or similar transactions (collectively, “corporate
transaction”), any surviving or acquiring corporation may continue or assume
awards outstanding under the 2006 Plan or may substitute similar awards. If
any
surviving or acquiring corporation does not assume such awards or to substitute
similar awards, then with respect to awards held by participants whose service
with SBE or an affiliate has not terminated as of the effective date of the
corporate transaction, the vesting of such awards (and, if applicable, the
time
during which such awards may be exercised) will be accelerated in full and
the
awards will terminate if not exercised (if applicable) at or prior to such
effective date.
The
2006
Plan also provides that, in the event of a dissolution or liquidation, all
outstanding awards shall terminate.
The
acceleration of an award in the event of a corporate transaction or a change
in
control event may be viewed as an anti-takeover provision, which may have the
effect of discouraging a proposal to acquire or otherwise obtain control of
SBE.
Duration,
Amendment and Termination
The
board
of directors may suspend or terminate the 2006 Plan without stockholder approval
or ratification at any time or from time to time. Unless sooner terminated,
the
2006 Plan will terminate on the tenth anniversary of the date the Incentive
Plan
was adopted by the board of directors.
The
board
of directors may also amend the 2006 Plan at any time or from time to time.
However, no amendment will be effective unless approved by the stockholders
of
SBE within 12 months before or after its adoption by the board of directors
to
the extent such approval is necessary to satisfy applicable law. The board
of
directors may submit any other amendment to the 2006 Plan for stockholder
approval, including, but not limited to, amendments intended to satisfy the
requirements of Section 162(m) of the Code regarding the exclusion of
performance-based compensation from the limitation on the deductibility of
compensation paid to certain employees.
Material
Federal Income Tax Information
This
following summary is based upon current law, which may change, possibly even
retroactively. It does not address tax considerations under state, local,
foreign, and other laws.
Incentive
Stock Options.
Incentive stock options under the 2006 Plan are intended to be eligible for
the
favorable federal income tax treatment accorded “incentive stock options” under
the Code. There generally are no federal income tax consequences to the
participant or SBE by reason of the grant or exercise of an incentive stock
option. However, the exercise of an incentive stock option may increase the
participant’s alternative minimum tax liability, if any.
If
a
participant holds stock acquired through exercise of an incentive stock option
for more than two years from the date on which the option is granted and more
than one year from the date on which the shares are transferred to the
participant upon exercise of the option, any gain or loss on a disposition
of
such stock will be a long-term capital gain or loss if the participant held
the
stock for more than one year.
Generally,
if the participant disposes of the stock before the expiration of either of
these holding periods (a “disqualifying disposition”), then at the time of
disposition the participant will realize taxable ordinary income equal to the
lesser of (i) the excess of the stock’s fair market value on the date of
exercise over the exercise price, or (ii) the participant’s actual gain, if any,
on the purchase and sale. The participant’s additional gain or any loss upon the
disqualifying disposition will be a capital gain or loss, which will be
long-term or short-term depending on whether the stock was held for more than
one year.
To
the
extent the participant recognizes ordinary income by reason of a disqualifying
disposition, SBE will generally be entitled (subject to the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the
satisfaction of a tax reporting obligation) to a corresponding business expense
deduction in the tax year in which the disqualifying disposition
occurs.
Nonstatutory
Stock Options, Restricted Stock Purchase Awards and Stock
Bonuses.
Nonstatutory stock options, restricted stock purchase awards and stock bonuses
granted under the 2006 Plan generally have the following federal income tax
consequences.
There
are
no tax consequences to the participant or SBE by reason of the grant of the
awards. However, if the strike price of a nonstatutory stock option can, at
any
time, be less than the fair market value of the stock on the grant date, Section
409A of the Code imposes ordinary income and employment tax liability for the
participant as the option vests in an amount equal to the difference between
the
fair market value of the stock on the vesting date and the strike price. In
addition, Section 409A imposes a penalty of 20% of such amount and an interest
charge. SBE would be responsible for withholding these tax amounts. Upon
acquisition of the stock under any of these awards, the participant normally
will recognize taxable ordinary income equal to the excess, if any, of the
stock’s fair market value on the acquisition date over the purchase price.
However, to the extent the stock is subject to certain types of vesting
restrictions, the taxable event will be delayed until the vesting restrictions
lapse unless the participant elects to be taxed on receipt of the stock. With
respect to employees, SBE is generally required to withhold from regular wages
or supplemental wage payments an amount based on the ordinary income recognized.
Subject to the requirement of reasonableness, the provisions of Section 162(m)
of the Code and the satisfaction of a tax reporting obligation, SBE will
generally be entitled to a business expense deduction equal to the taxable
ordinary income realized by the participant.
Upon
disposition of the stock, the participant will recognize a capital gain or
loss
equal to the difference between the selling price and the sum of the amount
paid
for such stock plus any amount recognized as ordinary income upon acquisition
(or vesting) of the stock. Such gain or loss will be long-term or short-term
depending on whether the stock was held for more than one year. Slightly
different rules may apply to participants who acquire stock subject to certain
repurchase options or who are subject to Section 16(b) of the Exchange
Act.
Potential
Limitation on Company Deductions.
Section
162(m) of the Code denies a deduction to any publicly held corporation for
compensation paid to certain “covered employees” in a taxable year to the extent
that compensation to such covered employee exceeds $1 million. It is possible
that compensation attributable to awards, when combined with all other types
of
compensation received by a covered employee from SBE, may cause this limitation
to be exceeded in any particular year.
Certain
kinds of compensation, including qualified “performance-based compensation,” are
disregarded for purposes of the deduction limitation. In accordance with
Treasury Regulations issued under Section 162(m), compensation attributable
to
stock options will qualify as performance-based compensation if the award is
granted by a compensation committee comprised solely of “outside directors” and
either (i) the plan contains a per-employee limitation on the number of shares
for which such awards may be granted during a specified period, the per-employee
limitation is approved by the stockholders, and the exercise price of the award
is no less than the fair market value of the stock on the date of grant, or
(ii)
the award is granted (or exercisable) only upon the achievement (as certified
in
writing by the compensation committee) of an objective performance goal
established in writing by the compensation committee while the outcome is
substantially uncertain, and the award is approved by stockholders.
Awards
to
purchase restricted stock and stock bonus awards will qualify as
performance-based compensation under the Treasury Regulations only if (i) the
award is granted by a compensation committee comprised solely of “outside
directors,” (ii) the award is granted (or exercisable) only upon the achievement
of an objective performance goal established in writing by the compensation
committee while the outcome is substantially uncertain, (iii) the compensation
committee certifies in writing prior to the granting (or exercisability) of
the
award that the performance goal has been satisfied and (iv) prior to the
granting (or exercisability) of the award, stockholders have approved the
material terms of the award (including the class of employees eligible for
such
award, the business criteria on which the performance goal is based, and the
maximum amount -- or formula used to calculate the amount -- payable upon
attainment of the performance goal).
PROPOSAL
3
APPROVAL
OF REVERSE STOCK SPLIT
Background
Our
common stock is quoted on The Nasdaq Capital Market under the symbol SBEI.
In
order for our common stock to continue to be quoted on the Nasdaq Capital
Market, we must satisfy various listing maintenance standards established by
Nasdaq. Among other things, as such requirements pertain to us, we are required
to have stockholders’ equity of at least $2.5 million and public float value of
at least $1.0 million and our common stock must have a minimum closing bid
price
of $1.00 per share. Our
stockholders’ equity as of January 31, 2007 was approximately $2.4 million and
our closing bid price on January 31, 2007 was $0.56, on a pre-split basis.
On
July
14, 2006, we received a notice from Nasdaq, indicating that for the preceding
30
consecutive business days, the bid price of our common stock closed below the
$1.00 minimum bid price required for continued listing by Nasdaq Marketplace
Rule 4310(c)(4), referred to as the Rule. We were provided 180 calendar days,
or
until January 10, 2007, to regain compliance with the Rule. We did not regain
compliance during the 180 calendar day period and on January 11, 2007; we
received a notice from Nasdaq that our stock is subject to delisting. We filed
an appeal of the staff’s determination to the Listings Qualifications Panel. The
appeals’ hearing was held on February 22, 2007.
On
April
11, 2007, we received a determination letter from the Nasdaq Listing
Qualifications Panel (Panel) granting our request for continued listing on
Nasdaq subject to certain conditions. Our continued listing is subject to
certain specified conditions, including:
|
1.
|
On
or before April 17, 2007, we must have evidenced a closing bid price
of
$1.00 or more for a minimum of ten prior consecutive trading days.
Our bid
price increase to over the minimum $1.00 per share as a result of
the
1-for-5 reverse stock split effected on April 2, 2007. We
maintained a closing bid price for more than the minimum 10 consecutive
days and exceeded the requirement.
|
|
2.
|
On
or before April 30, 2007, we shall file an initial listing application
with Nasdaq with respect to the pending merger with Neonode, unless
we
delay or decide not to go forward with the merger. The initial listing
application for Neonode was filed with Nasdaq on April 17,
2007.
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|
3.
|
On
or before May 31, 2007, we must file a Form 8-K with pro forma financial
information indicating that our plan to report stockholders’ equity of
$2.5 million or greater as of quarter end. On May 29, 2007, we filed
a
Form 8-K with the actual financial information reporting stockholders’
equity of greater than $2.5 million as of our latest fiscal quarter
end,
April 30, 2007.
|
|
4.
|
We
shall immediately notify the Panel if we enter into an agreement
to sell,
transfer or otherwise dispose of our software business before we
consummate a merger with Neonode, and the Panel may revisit its
determination.
|
This
action follows recent steps taken by us to come into compliance with Nasdaq
requirements for continued listing including a gain to stockholders’ equity
resulting from the $2.2 million sale of our embedded hardware business to One
Stop Systems on March 30, 2007 and an increase in bid price resulting from
the
1-for-5 reverse stock split effected on April 2, 2007.
On April
30, 2007, our closing bid price was $2.40 and our shareholders’ equity exceeded
the required $2.5 million.
On
June 21,
2007, we received notification from Nasdaq that we regained compliance with
Nasdaq Marketplace Rule 4210(c)(4) and with Marketplace Rule
4310(c)(2)(B)
Purpose
and Material Effects of Proposed Reverse Split
Our
merger with Neonode will require us to meet the initial, instead of the
continued, listing criteria of The Nasdaq Capital Market. One of the key
requirements for initial listing on The Nasdaq Capital Market is that our common
stock must maintain a minimum bid price above $4.00 per share. We believe that
the proposed new reverse split of either 1-for-2 or 1-for-3, with the specific
ratio to be determined by our board of directors, will improve the price level
of our common stock so that we are able to maintain compliance with the Nasdaq
minimum bid price listing standard. Furthermore, we believe that maintaining
our
Nasdaq Capital Market listing, if possible, may provide us with a broader market
for our common stock. Our board of directors will make the final determination
regarding the reverse stock split ratio based on the closing price of our common
stock as of the closing of the merger with Neonode.
However,
the effect of the reverse split upon the market price for our common stock
cannot be predicted, and the history of similar stock split combinations for
companies in like circumstances is varied. There can be no assurance that the
market price per share of our common stock after the reverse split will rise
in
proportion to the reduction in the number of shares of our common stock
outstanding resulting from the reverse split. The market price of our common
stock may also be based on our performance and other factors, some of which
may
be unrelated to the number of shares outstanding. Furthermore, the possibility
exists that liquidity in the market price of our common stock could be adversely
affected by the reduced number of shares that would be outstanding after the
reverse split. There can be no assurance that the market price per post-reverse
split share will either exceed or remain in excess of the $4.00 minimum bid
price as required by Nasdaq, or that we will otherwise meet the requirements
of
Nasdaq for continued listing on The Nasdaq Capital Market, including the minimum
public float or stockholders’ equity requirements.
The
reverse split will affect all of our stockholders uniformly and will not affect
any stockholder’s percentage ownership interests in us or proportionate voting
power, except to the extent that the reverse split results in any of our
stockholders owning a fractional share. In lieu of issuing fractional shares,
we
will pay cash to each stockholder owning fractional shares as described below.
Although the reverse split will not affect any stockholder’s percentage
ownership or proportionate voting power (subject to the treatment of fractional
shares), the number of authorized shares of common stock will not be reduced
and
will increase the ability of the board of directors to issue such authorized
and
unissued shares without further stockholder action. This issuance of such
additional shares, if such shares were issued, may have the effect of diluting
the earnings per share and book value per share, as well as the stock ownership
and voting rights, of outstanding common stock. The effective increase in the
number of authorized but unissued shares of common stock may be construed as
having an anti-takeover effect by permitting the issuance of shares to
purchasers who might oppose a hostile takeover bid or oppose any efforts to
amend or repeal certain provisions of our certificate of incorporation or
bylaws.
The
following table depicts, by way of example, the potential effects of a reverse
stock split of either 1-for-2 or 1-for-3 as of June 29, 2007, before considering
any issuance as a result of the merger with Neonode, on the number of (i) shares
of our common stock outstanding, (ii) shares of our common stock reserved for
future issuance pursuant to outstanding options, (iii) shares of our common
stock reserved for future issuance pursuant to outstanding warrants, (iv) shares
of our common stock reserved for future issuance under our equity incentive
plans; and (v) authorized but unissued shares of our common stock that would
be
available for future issuance.
Reverse
stock split ratio
|
Common
stock issued and outstanding
|
Common
stock reserved for issuance pursuant to outstanding
options(1)
|
Common
stock reserved for issuance pursuant to outstanding
warrants(1)
|
Common
stock reserved for future issuance under our equity incentive
plans
|
Common
stock available for future issuance
|
No
stock split
|
2,269,595
|
458,000
|
232,000
|
39,298
|
22,040,405
|
2-for-1
|
1,134,798
|
229,000
|
116,000
|
19,649
|
23,500,553
|
3-for-1
|
756,532
|
152,667
|
77,333
|
13,099
|
24,000,369
|
|
(1)
|
As
of the effective date of the reverse stock split, the exercise price
of
all outstanding options and warrants will be adjusted such that the
aggregate exercise price to be paid upon exercise of such option
or
warrant will be the same as the aggregate exercise price in effect
immediately prior to the reverse
split.
|
The
reverse split will not affect the par value of our common stock. As a result,
on
the effective date of the reverse split, the stated capital on our balance
sheet
attributable to our outstanding common stock will be reduced to one-half of
its
present amount, and the additional paid-in capital account will be credited
with
the amount by which the stated capital is reduced. The per share net income
or
loss and net book value of our common stock will be increased because there
will
be fewer shares of our common stock outstanding.
The
following table depicts, by way of example, the
potential effects of a reverse stock split of either 1-for-2 or 1-for-3 on
the
estimated
number of (i)
shares of our common stock outstanding, (ii) shares of our common stock reserved
for future issuance pursuant to outstanding options, (iii) shares of our common
stock reserved for future issuance pursuant to outstanding warrants, (iv) shares
of our common stock reserved for future issuance under our equity incentive
plans; and (v) authorized but unissued shares of our common stock that would
be
available for future issuance.
The
actual number of shares of common stock, options to purchase common stock and
warrants to purchase common stock issued and outstanding will be determined
based on the actual number of shares of common stock outstanding a the closing
date of the merger.
Reverse
stock split ratio
|
Common
stock issued and outstanding
|
Common
stock reserved for issuance pursuant to outstanding
options
|
Common
stock reserved for issuance pursuant to outstanding
warrants
|
Common
stock reserved for future issuance under our equity incentive
plans
|
Common
stock available for future issuance
|
No
stock split
|
22,665,000
|
2,447,000
|
6,234,000
|
1,039,298
|
7,614,702
|
2-for-1
|
7,555,000
|
2,077,000
|
815,000
|
519,649
|
29,033,351
|
3-for-1
|
11,333,000
|
1,223,000
|
3,117,000
|
346,432
|
23,980,568
|
The
reverse split is not intended as, and will not have the effect of, a “going
private transaction” covered by Rule 13e-3 under the Securities Exchange Act of
1934. We will continue to be subject to the periodic reporting requirements
of
the Securities Exchange Act of 1934.
Procedure
for Effecting Reverse Split and Exchange of Stock
Certificates
If
the
reverse split is approved by our stockholders and the board of directors has
determined to effect the reverse split, our board of directors will determine
the specific stock split ratio and we will promptly file our amended and
restated certificate of incorporation with the Secretary of State of the State
of Delaware. The reverse split will become effective on the date of filing
the
certificate of amendment, which we will refer to as the effective date.
Beginning on the effective date, each certificate representing pre-reverse
split
shares will be deemed for all corporate purposes to evidence ownership of
post-reverse split shares.
As
soon
as practicable after the effective date, stockholders will be notified that
the
reverse split has been effected. Our transfer agent will act as exchange agent
for purposes of implementing the exchange of stock certificates. We refer to
such person as the exchange agent. Holders of pre-reverse split shares may
be
asked to surrender to the exchange agent certificates representing pre-reverse
split shares in exchange for certificates representing post-reverse split shares
in accordance with the procedures to be set forth in a letter of transmittal
to
be sent by us. Stockholders
should not destroy any stock certificate and should not submit any certificates
until requested to do so.
Fractional
Shares
We
will
not issue fractional certificates for post-reverse split shares in connection
with the reverse split. In lieu of any such fractional share interest, each
holder of pre-reverse split shares who as a result of the reverse split would
otherwise receive a fractional share of post-reverse split common stock will
be
entitled to receive cash in an amount equal to the product obtained by
multiplying (i) the closing sales price of our common stock on the effective
date as reported on The Nasdaq Capital Market by (ii) the number of shares
of
pre-reverse split common stock held by such holder that would otherwise have
been exchanged for such fractional share interest. Such amount will be issued
to
such holder in the form of a check in accordance with the exchange procedures
outlined above.
No
Dissenter’s Rights
Under
the
Delaware General Corporation Law, our stockholders are not entitled to
dissenter’s rights with respect to our proposed amendment to our charter to
effect the reverse split and we will not independently provide our stockholders
with any such right.
Federal
Income Tax Consequences of the Reverse Split
The
following is a summary of important U.S. federal income tax considerations
of
the reverse split. It addresses only stockholders who hold the pre-reverse
split
shares and post-reverse split shares as capital assets. It does not purport
to
be complete and does not address stockholders subject to special rules, such
as
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities, mutual funds, foreign stockholders, stockholders who hold the
pre-reverse split shares as part of a straddle, hedge, or conversion
transaction, stockholders who hold the pre-reverse split shares as qualified
small business stock within the meaning of Section 1202 of the Code,
stockholders who are subject to the alternative minimum tax provisions of the
Code, and stockholders who acquired their pre-reverse split shares pursuant
to
the exercise of employee stock options or otherwise as compensation. This
summary is based upon current law, which may change, possibly even
retroactively. It does not address tax considerations under state, local,
foreign, and other laws. Furthermore, we have not obtained a ruling from the
Internal Revenue Service or an opinion of legal or tax counsel with respect
to
the consequences of the reverse stock split. Each stockholder is advised to
consult his or her tax advisor as to his or her own situation.
The
reverse stock split is intended to constitute a reorganization within the
meaning of Section 368 of the Code. Assuming the reverse split qualifies as
a
reorganization, a stockholder generally will not recognize gain or loss on
the
reverse stock split, except to the extent of cash, if any, received in lieu
of a
fractional share interest in the post-reverse split shares. The aggregate tax
basis of the post-reverse split shares received will be equal to the aggregate
tax basis of the pre-reverse split shares exchanged therefor (excluding any
portion of the holder’s basis allocated to fractional shares), and the holding
period of the post-reverse split shares received will include the holding period
of the pre-reverse split shares exchanged.
A
holder
of the pre-reverse split shares who receives cash will generally recognize
gain
or loss equal to the difference between the portion of the tax basis of the
pre-reverse split shares allocated to the fractional share interest and the
cash
received. Such gain or loss will be a capital gain or loss and will be short
term if the pre-reverse split shares were held for one year or less and long
term if held more than one year.
No
gain
or loss will be recognized by SBE as a result of the reverse stock
split.
The
adoption of Proposal 3 will require the affirmative vote of the holders of
a
majority of the outstanding shares of our common stock on the record date.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE
IN
FAVOR OF PROPOSAL 3.
PROPOSAL
4
APPROVAL
OF INCREASE IN AUTHORIZED SHARES
We
are
requesting stockholder approval to increase the authorized number of shares
of
common stock from 25,000,000 shares to 40,000,000 shares. The additional common
stock to be authorized by adoption of this proposal would have rights identical
to our currently outstanding common stock. Adoption of the proposed amendment
and issuance of the common stock would not affect the rights of the holders
of
our currently outstanding common stock, except for effects incidental to
increasing the number of shares of our common stock outstanding, such as
dilution of the earnings per share and voting rights of our current holders
of
common stock. If the amendment is adopted, it will become effective upon filing
of the amended and restated certificate of incorporation with the Secretary
of
State of the State of Delaware. If the merger proposal is not adopted, the
certificate amendment proposals, including this proposal, will not be presented
at the special meeting.
As
of
June 29, 2007, we had outstanding 2,269,595 shares, as well as options and
warrants, which if exercised, would result in the issuance of an additional
690,182 shares. We will have insufficient authorized shares of common stock
to
issue in connection with the merger and the proposed 2006 Plan share reserve
increase.
The
additional shares of common stock that would become available for issuance
if
the proposal is adopted could also be used by us to oppose a hostile takeover
attempt or to delay or prevent changes in control or management of SBE. For
example, without further stockholder approval, our board of directors could
strategically sell shares of common stock in a private transaction to purchasers
who would oppose a takeover or favor the incumbent board of directors. Although
this proposal to increase the authorized common stock has been prompted by
business and financial considerations and not by the threat of any hostile
takeover attempt (nor is our board of directors currently aware of any such
attempts directed at us), nevertheless, stockholders should be aware that
approval of proposal could facilitate our future efforts to deter or prevent
changes in control of SBE, including transactions in which the stockholders
might otherwise receive a premium for their shares over then current market
prices.
The
adoption of Proposal 4 will require the affirmative vote of the holders of
a
majority of the outstanding shares of our common stock on the record date.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE
IN
FAVOR OF PROPOSAL 4.
PROPOSAL
5
APPROVAL
OF NAME CHANGE
We
are
proposing to change our corporate name from “SBE, Inc.” to “Neonode Inc.” upon
completion of the merger. In the judgment of our board of directors, the change
of our corporate name is desirable to reflect our merger with Neonode.
Stockholders will not be required to exchange outstanding stock certificates
for
new stock certificates if the amended and restated certificate of incorporation
is adopted. If the merger proposal is not adopted, the certificate amendment
proposals, including this proposal, will not be presented at the special
meeting.
The
adoption of Proposal 5 will require the affirmative vote of the holders of
a
majority of the outstanding shares of our common stock on the record date.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE
IN
FAVOR OF PROPOSAL 5.
SBE’S
BUSINESS
The
following description of SBE’s business 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
SBE’s analysis only as of the date hereof, and SBE assumes no obligation to
update these statements. Actual events or results may differ materially from
the
results discussed in or implied by the forward-looking statements. The following
description should be read in conjunction with SBE’s unaudited consolidated
financial statements for the three and six months ended April 30, 2007 and
2006
and the related notes included in this proxy statement.
Overview
We
experienced a decline in our sales volume of our hardware products and a lack
of
market acceptance for our storage software that dramatically affected our
operating cash flow. Because of the continuing decline of our cash balance,
we
evaluated strategic alternatives to return the Company to cash flow positive
and
unlock value for our shareholders.
On
March
30, 2007, we sold all of the assets associated with our hardware business
(excluding cash, accounts receivable and other excluded assets specified in
the
asset purchase agreement) to One Stop Systems for $2.2 million in cash plus
One
Stop’s assumption of the lease of our corporate headquarters building and
certain equipment leases. We received $1.7 million in cash on the date of the
sale and received $500,000 in cash held in escrow on June 5, 2007.
On
January 19, 2007, amended May 18, 2007, we entered into a merger agreement
with
Neonode, a Delaware corporation. Neonode was founded in Sweden in 2001 to
develop, manufacture and sell multimedia mobile phones based on a unique user
interface with a focus on design, enhanced user experience and customization.
Over the past four years Neonode developed a multimedia mobile phone that
converts the functionality of a desktop computer to a mobile phone interface.
In
addition to connecting to any GSM supported cellular telephone network,
Neonode’s multimedia mobile phone allows the user to watch movies in full
screen, play music videos, play music, take pictures with its two mega pixel
camera and play games, all with internet pod casting capabilities. Neonode’s
patent pending user interface incorporates true one hand - on screen -
navigation with a user interface that recognizes gestures rather than defined
keys. Neonode’s user interface allowed for the design and manufacture of a
mobile phone with a large display without physical buttons using the smallest
form factor in the mobile phone industry. Neonode’s design is based on their
patent pending zForce ™ and Neno™ software and hardware technologies.
Neonode
released its new mobile phone, the N2, on February 10, 2007 and will begin
shipments of that product to customers in mid-2007.
Nasdaq
has deemed that our proposed merger with Neonode would qualify as a “reverse
merger” under Nasdaq Marketplace Rule 4340(a). Neonode has submitted an initial
listing application and will be required to meet all initial inclusion criteria
on the Nasdaq Capital Market including a $4.00 minimum bid price, in connection
with the Neonode transaction so, if required in order to meet the Nasdaq listing
requirements, we may effect an additional reverse split in connection with
that
transaction. It is anticipated that we will change our name to “Neonode Inc.”
upon consummation of the merger.
Historically,
we designed, manufactured and sold hardware products including wide area network
(WAN) and local area network (LAN) network interface cards (NICs) and central
processing units (CPUs) to original equipment manufacturers (OEMs) who
embed
our hardware products into their products for the communications
markets.
Our
hardware business generated the majority of our sales and net cash flow. As
of
March 30, 2007, with the sale of
our
hardware business to One Stop Systems we no longer participate in the hardware
markets. We transferred our entire inventory and the engineering and test
equipment used to support the hardware business to One Stop
Systems.
Since
July 2005, we have been designing and providing software-based storage
networking solutions for an extensive range of business critical applications,
including Disk-to-Disk Back-up and Disaster Recovery. Our products deliver
an
affordable, expandable, and easy-to-use portfolio of software solutions designed
to enable optimal performance and rapid deployment across a wide range of next
generation storage systems. We sell standards-based storage software solutions
to OEMs, system integrators and value added resellers (VARs) who embed our
software into their IP
storage area network (IP SAN) and network attached storage (NAS) systems
to provide data storage solutions for the small and medium business (SMB)
enterprise storage markets. Our storage software products have not gained wide
acceptance in the storage markets and have not generated significant sales,
to
date.
Distribution,
Sales and Marketing
We
license our software products using a direct sales force as well as independent
manufacturers’ representatives. We have a network of 8 manufacturers’
representatives covering the United States and Canada. We believe that our
direct sales force is well suited to communicate how our products differ from
those of our competitors. Since our products represent a complex and technical
sale, our sales force is supported by field application engineers who provide
customers with pre-sale technical assistance.
Our
internal sales and marketing organization supports our channel marketing
partners by providing sales collateral, such as product data sheets,
presentations, and other sales/marketing resource tools. Our sales staff
solicits prospective customers, provides technical advice with respect to our
products, and works closely with marketing partners to train and educate their
staffs on how to sell, install, and support our product lines.
We
have
focused our sales and marketing efforts in North America. All of our
international sales are negotiated and executed in U.S. dollars.
Our
direct sales force and our marketing activities are conducted from our corporate
headquarters in San Ramon, California.
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 storage software market. 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. Our product
development efforts are focused principally on our storage software products,
providing advanced storage software features.
Although
we are evaluating strategic alternatives for our storage software business
including selling the business, we continue development of our storage software
products to bring a broader spectrum of IP storage solutions to market. In
fiscal 2006, we completed the development of some key storage networking
solutions that enable an extensive range of business critical applications,
including Disk-to-Disk Back-up and Disaster Recovery to complement our iSCSI
based transport software.
During
the three and six months ended April 30, 2007 our continuing operation incurred
$252,000 and $611,000, respectively, in product research and development
expenses compared to $498,000 and $1.1 million for the same three and six month
periods in 2006.
Competition
The
market for both storage interface products is highly competitive. Many of our
competitors have greater financial resources and are well established in the
space. Our storage software product competes with products designed and/or
manufactured by Lefthand Networks, Wasabi Systems, OpenE Software, FalconStor
Software and UNH. To compete and differentiate ourselves in our markets, we
emphasize the functionality, engineering support, quality and price of our
products in relation to the products of our competitors, as well as our ability
to customize our products to meet the customers’ specific application needs.
Additionally,
we compete with the internal engineering resources of our customers. Typically,
as our customers become successful with their products, they seek to reduce
costs and integrate functions. To compete with the internal engineering
resources of our customers, we position ourselves as an extension of our
customers’ engineering teams, focusing on satisfying their price/performance and
time-to-market challenges through product innovation, technological expertise,
and comprehensive support. By doing so, we emphasize the advantages and
efficiencies of outsourcing embedded hardware and software, and keeping internal
engineering resources focused on their core competencies and value-added
services.
Intellectual
Property
We
believe that innovation in product engineering, sales, marketing, support,
and
customer relations, and protection of this proprietary technology and knowledge
impacts our future success. We rely on a combination of copyright, trademark,
trade secret laws and contractual provisions to establish and protect our
proprietary rights in our products. We typically enter into confidentiality
agreements with our employees, strategic partners, channel partners and
suppliers, and enforce strict limitations and access to our proprietary
information.
Employees
On
April
30, 2007, we had 10 employees. None of our employees is represented by a labor
union. We have experienced no work stoppages. We believe our employee relations
are positive.
Facilities
We
sublease office space to house our engineering and administrative headquarters
located in San Ramon, California on a month-to-month basis from One Stop
Systems. One Stop Systems assumed our lease on our 22,000 square foot
headquarter office on March 30, 2007. The lease terminates in 2010 and we are
a
guarantor on One Stop’s lease for the remaining term of the lease.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS OF SBE
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 SBE’s analysis only as of the date
hereof, and SBE assumes no obligation to update these statements. Actual events
or results may differ materially from the results discussed in or implied by
the
forward-looking statements. The following description should be read in
conjunction with SBE’s unaudited consolidated financial statements for the three
and six months ended April 30, 2007 and 2006 and the related notes included
in
this proxy statement.
Overview
We
experienced a decline in our sales volume of our embedded hardware products
and
a lack of market acceptance for our storage software that dramatically affected
our operating cash flow for fiscal 2006 and through the quarter ended April
30,
2007. Because of the continuing decline of our cash balance, we evaluated
numerous strategic alternatives to return SBE to cash flow positive and unlock
value for our stockholders. In September 2006, our board of directors and
management believed that the best course of action was to sell our hardware
business and consider selling our storage software business and to seek a viable
merger candidate.
Until
March 30, 2007, we designed and sold hardware products including WAN and LAN
NICs and CPUs to OEMs that embedded our hardware products into their products
for the communications markets. We sold our hardware business to One Stop
Systems on March 30, 2007 and
with the
sale of
our
hardware business we no longer participate in the hardware markets. We
transferred our entire inventory and the engineering and test equipment used
to
support the hardware business to One Stop Systems.
After
the
sale of our hardware business, our remaining business is the design and
licensing of software for an extensive range of business critical applications,
including Disk-to-Disk Back-up and Disaster Recovery. We deliver an affordable,
expandable and easy-to-use portfolio of software solutions designed to enable
optimal performance and rapid deployment across a wide range of next generation
storage systems. We sell standards-based storage software solutions to OEMs,
system integrators and value added resellers (VARs) who embed our software
into
their IP storage area network (IP SAN) and NAS systems to provide data storage
solutions for the small and medium business (SMB) enterprise storage markets.
We
license our software products in North America through a direct sales force
and
independent manufacturers’ representatives.
Substantially
all our revenue has been generated by the hardware business that we sold to
One
Stop Systems on March 30, 2007.
Critical
Accounting Policies and Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include levels of reserves for
doubtful accounts, warranty costs and deferred tax assets. Actual results could
differ from those estimates.
Our
critical accounting policies and estimates include the following:
Revenue
Recognition
Software
Products
We
derive
revenues from the following sources: (1) software, which includes new iSCSI
software licenses and (2) services, which include consulting. We account for
the
licensing of software in accordance with of American Institute of Certified
Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software
Revenue Recognition.
SOP
97-2 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. These documents include post delivery
support, upgrades and similar services. We typically charge software maintenance
equal to 20% of the software license fees.
For
software license arrangements that do not require significant modification
or
customization of the underlying software, we recognize new software license
revenues 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 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 is 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.
For
one
customer we began recognizing software license fee revenue and related
engineering support revenue by amortizing previously deferred revenue related
to
engineering services over 36 months beginning in March 2006, which was the
month
the first software license for this customer was activated. The 36-month
amortization period is the estimated life of the related software product for
this customer. We also amortize all fees related to the licensing of our
software to this customer over 36 months beginning with the month the software
license is activated. In the three and six months ended April 30, 2007, we
recognized $12,000 and $22,000 of software license fees for this customer and
$15,000 and $25,000 of deferred revenue related to engineering services to
this
and one other customer compared to $0 and $10,000 of software engineering
services for the same periods in fiscal 2006.
Certain
software arrangements include consulting implementation services sold separately
under consulting engagement contracts.
Allowance
for Doubtful Accounts
Our
policy is to maintain allowances for estimated losses resulting from the
inability of our customers to make required payments. Credit limits are
established through a process of reviewing the financial history and stability
of each customer. Where appropriate, we obtain credit rating reports and
financial statements of the customer when determining or modifying their credit
limits. We regularly evaluate the collectibility of our trade receivable
balances based on a combination of factors. When a customer’s account balance
becomes past due, we initiate dialogue with the customer to determine the cause.
If it is determined that the customer will be unable to meet its financial
obligation to us, such as in the case of a bankruptcy filing, deterioration
in
the customer’s operating results or financial position or other material events
impacting their business, we record a specific allowance to reduce the related
receivable to the amount we expect to recover. Should all efforts fail to
recover the related receivable, we will write-off the account.
We
also
record an allowance for all customers based on certain other factors including
the length of time the receivables are past due and historical collection
experience with customers. We believe our reported allowances are adequate.
If
the financial conditions of those customers were to deteriorate, however,
resulting in their inability to make payments, we may need to record additional
allowances which would result in additional general and administrative expenses
being recorded for the period in which such determination was made.
Warranty
Reserves
We
accrue
the estimated costs to be incurred in performing warranty services at the time
of revenue recognition and shipment of the products to the OEMs. Because there
is no contractual right of return other than for defective products, we can
reasonably estimate such returns and record a warranty reserve at the point
of
shipment. Our estimate of costs to service our warranty obligations is based
on
historical experience and expectation of future conditions. To the extent we
experience increased warranty claim activity or increased costs associated
with
servicing those claims, the warranty accrual will increase, resulting in
decreased gross margin.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes.
SFAS
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of items that have been included in the financial
statements or tax returns. Deferred income taxes represent the future net tax
effects resulting from temporary differences between the financial statement
and
tax bases of assets and liabilities, using enacted tax rates in effect for
the
year in which the differences are expected to reverse. Valuation allowances
are
recorded against net deferred tax assets where, in our opinion, realization
is
uncertain. Based on the uncertainty of future pre-tax income, we fully reserved
our deferred tax assets as of April 30, 2007 and October 31, 2006. 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 determination was made. The provision for income taxes represents
the net change in deferred tax amounts, plus income taxes payable for the
current period.
Long-lived
Assets
We
assess
any impairment by estimating the future cash flow from the associated asset
in
accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
If the
estimated undiscounted cash flow related to these assets decreases in the future
or the useful life is shorter than originally estimated, we may incur charges
for impairment of these assets. The impairment is based on the estimated
discounted cash flow associated with the asset. Capitalized software costs
consist of costs to purchase software and costs to internally develop software.
Capitalization of software costs begins upon the establishment of technological
feasibility. All capitalized software costs are amortized as related sales
are
recorded on a per-unit basis with a minimum amortization to cost of goods sold
based on a straight-line method over the estimated useful life, generally two
to
three years. We evaluate the estimated net realizable value of each software
product and record provisions to the asset value of each product for which
the
net book value is in excess of the net realizable value.
During
fiscal 2006, we evaluated the current expected cash flow from the sale of
storage software and determined that the net book value was in excess of the
net
realizable value. In the year ended October 31, 2006, we recorded asset
impairment charges of $6.5 million against our earnings for the period, reducing
our capitalized storage software asset to $1.3 million, which represents the
present value of the expected future sales of our storage software products
less
costs. Prior to the write-down, we amortized our storage software over 36 months
at the rate of $339,000 per month. As of April 30, 2007, we are amortizing
the
remaining $939,000 software asset over the remaining 15-month amortization
period at the rate of $63,000 per month.
Stock-Based
Compensation:
We
follow
Statement of Financial Accounting Standards (SFAS) 123(R), Share
Based Payments,
which
requires measurement of compensation cost for all stock-based awards at fair
value on the grant date and recognition of compensation expense over the
requisite service period for awards expected to vest. We estimate future
forfeitures and adjust our estimate on a period basis. The fair value of stock
option grants is determined using the Black-Scholes valuation model. The fair
value of restricted stock awards is determined based on the number of shares
granted and the quoted price of our common stock. Such fair values is recognized
as compensation expense over the requisite service period, net of estimated
forfeitures.
New
Accounting Pronouncements
In
September 2006, the SEC issued SAB 108, Considering
the Effects of Prior Year Misstatements in Current Year Financial
Statements.
SAB 108
expresses the SEC Staff’s views regarding the process of quantifying financial
statement misstatements. SAB 108 addresses the diversity in practice in
quantifying financial statement misstatements and the potential under current
practice for the build up of improper amounts on the balance sheet. SAB 108
will
be effective for the year beginning November 1, 2006. The cumulative effect
of
the initial application of SAB 108 will be reported in the carrying amounts
of
assets and liabilities as of the beginning of the fiscal year, with the
offsetting balance to retained earnings. We do not expect the adoption of SAB
108 to have a material impact on our financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
SFAS
157 defines fair value, establishes a framework for measuring fair value as
required by other accounting pronouncements and expands fair value measurement
disclosures. SFAS 157 is effective for fiscal years beginning after November
15,
2007. We are currently evaluating the impact of SFAS 157 on our financial
statements.
Results
of Operations
The
following table sets forth, as a percentage of net revenue, our consolidated
statements of operations data for the three and six months ended April 30,
2007
and 2006. Our
statements of operations for the three and six months ended April 30, 2007
and
2006 have been adjusted to reflect the effect of our discontinued operations
related to the sale of our hardware business. These
operating results are not necessarily indicative of our operating results for
any future period.
|
|
Three
Months
Ended
|
|
Six
Months
Ended
|
|
|
|
April
30,
|
|
April
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
revenue
|
|
|
100
|
%
|
|
---
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and impairment of acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
software
and intellectual property
|
|
|
696
|
|
|
---
|
|
|
765
|
|
|
20,460
|
|
Product
research and development
|
|
|
933
|
|
|
---
|
|
|
1,247
|
|
|
10,690
|
|
Sales
and marketing
|
|
|
337
|
|
|
---
|
|
|
557
|
|
|
6,180
|
|
General
and administrative
|
|
|
2,681
|
|
|
---
|
|
|
2,420
|
|
|
15,380
|
|
Total
operating expenses from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
4,647
|
|
|
---
|
|
|
4,989
|
|
|
52,710
|
|
Loss
from continuing operations
|
|
|
(4,533
|
)
|
|
---
|
|
|
(4,889
|
)
|
|
(52,370
|
)
|
Income
(loss) from discontinued operations
|
|
|
4,144
|
|
|
---
|
|
|
2,371
|
|
|
(5,200
|
)
|
Net
loss
|
|
|
(389)%
|
|
|
---
|
%
|
|
(2,518)%
|
|
|
(57,570)%
|
|
Percentages
of the three months ended April 30, 2006 are incalculable because there were
no
revenues.
We
sold
our hardware business to One Stop on March 30, 2007. Our
hardware business generated substantially all of our revenue and effective
with
the sale of this business we no longer participate in the embedded hardware
business. Our statements of operations for the three and six months ended April
30, 2007 and 2006 have been adjusted to reflect the effect of our discontinued
operations related to the sale of our hardware business. We do not expect to
sell any new products to, or generate additional revenue from, our former
hardware customers.
CONTINUING
OPERATIONS
Net
Revenue
Net
revenue for the second quarter of fiscal 2007 was $27,000, compared to no
revenue in the second quarter of fiscal 2006. For the first six months of fiscal
2007, net revenue was $49,000, which represented a 390% increase over net
revenue of $10,000 for the same period in fiscal 2006. All of our revenue from
continuing operations is generated from the sales and servicing of our storage
software.
After
the
proposed merger transaction with Neonode is completed, we will change our name
to “Neonode Inc.” and focus on the design and manufacture of mobile multi-media
telephones with
patented buttonless touch screen mobile phones and gesture-based user
interfaces.
Amortization
and Impairment of Purchased Software and Intellectual
Property
We
recorded a software asset totaling $12.4 million when we acquired PyX in 2005.
We continue to upgrade our software by enhancing the existing features of our
products and by adding new features and products. We evaluate whether to develop
these new offerings in-house or whether we can achieve a greater return on
investment by purchasing or licensing software from third parties. Based on
our
evaluations, we have purchased or licensed various software for resale since
1996.
Recurring
amortization of capitalized software and intellectual property costs totaled
$188,000 and $375,000 for the three and six months ended April 30, 2007 compared
to $1.0 million and $2.0 million for the three and six months ended April 30,
2006, respectively, and is included in amortization and impairment of acquired
software and intellectual property in our Condensed Statements of Operations.
The decrease in amortization of purchased software and intellectual property
in
2007 over 2006 was due to the write down to expected realizable value in fiscal
2006 of our software asset that we acquired in the PyX acquisition.
In
the
fiscal year ended October 31, 2006, we recorded an asset impairment charge
of
$6.5 million against our earnings for the year, reducing our storage software
asset to $1.3 million at November 1, 2006. Prior to the write-down, we amortized
our storage software asset over 36 months at the rate of $339,000 per month.
We
began to amortize the remaining $1.3 million software asset over the then
remaining 21 month amortization period at the rate of $63,000 per month,
effective November 1, 2006.
Product
Research and Development
Product
research and development (R&D) expenses for the three months ended April 30,
2007 were $252,000, a 49% decrease over $498,000 in the same quarter of fiscal
2006. R&D expenses for the six months ended April 30, 2007 were $611,000, a
44% decrease over $1.1 million in the same period of fiscal 2006. We decreased
our R&D in 2007 as compared to 2006 primarily as the result of a reduction
in cash spending for materials and consultants working on development
projects.
Included
in R&D expense for the three
and
six months ended April 30, 2007 is $75,000 and $197,000 of non-cash stock-based
compensation expense related to the stock-for-pay program, stock option expense
and the issuance of restricted stock to employees compared to $125,000 and
$164,000 for the same periods in fiscal 2006, respectively.
With
the
sale of our hardware business and lack of market acceptance for our storage
software products, we reduced our R&D budget significantly and have focused
our R&D efforts on key storage management features to enhance the value of
our storage software business.
We
did
not capitalize any internal software development costs in the three and six
months ended April 30, 2007 or 2006 and do not expect to capitalize internal
software development costs in the future.
Sales
and Marketing
Sales
and
marketing expenses for the three months ended April 30, 2007 were $91,000,
a 72%
decrease over $326,000 in the same quarter of fiscal 2006. Sales and marketing
expenses for the six months ended April 30, 2007 were $273,000, a 56% decrease
over $618,000 in the same period of fiscal 2006. We
experienced a reduction the number of employees in our sales and marketing
group
from eight in 2006 to three in 2007. In addition, our marketing expenditures
in
the six months ended April 30, 2007 decreased as compared to the same six-month
period in 2006 as a result of reduced cash expenditures across the company.
Included
in sales and marketing expense for the three
and
six months ended April 30, 2007 is a $23,000 reduction to expense due the
reversal of compensation expense related to the forfeiture of unvested
restricted stock issued to employees who terminated their employment prior
to
vesting and $24,000 of non-cash stock-based compensation expense related to
the
stock-for-pay program, stock option expense and the issuance of restricted
stock
to employees compared to expense of $122,000 and $166,000 for the same periods
in fiscal 2006, respectively.
We
are
not currently planning to attend trade shows or engage in product marketing
activities other than via our Web site and word of mouth.
General
and Administrative
General
and administrative expenses for the three months ended April 30, 2007 were
$724,000, a 4% decrease over $756,000 in the same quarter of fiscal 2006.
General and administrative expenses for the six months ended April 30, 2007
were
$1.2 million, a 20% decrease over $1.5 million in the same period of fiscal
2006. This decrease in the six month period is primarily due to a reduction
of
officers and directors salaries and fees in fiscal 2007 compared to 2006. We
reduced the salaries for all officers and eliminated the cash fees paid to
our
Board and, in our fourth quarter of fiscal 2006, the Board suspended the
stock-for-pay program for all of our directors and officers.
Included
in general and administrative expense for the three
months and six months ended April 30, 2007 is $104,000 and $211,000 of non-cash
stock-based compensation expense related to the stock-for-pay program, stock
option expense and the issuance of restricted stock to employees compared to
$387,000 and $758,000 for the same periods in fiscal 2006,
respectively.
Loss
from Continuing Operations
As
a
result of the factors discussed above, we recorded a loss from continuing
operations of $1.2 million and $2.4 million in the three and six month periods
ended April 30, 2007, as compared to a loss from continuing operations of $2.6
million and $5.2 million for the same periods in fiscal 2006.
DISCONTINUED
OPERATIONS
Included
in the loss from discontinued operation in the statements of operations are
the
net results of our hardware business that we sold to One Stop on March 30,
2007.
The
following is a discussion of activities of our hardware business for the three
and six months ended April 30, 2007 and 2006.
Net
Revenue
Net
revenue for the second quarter of fiscal 2007 was $342,000, an 81% decrease
from
$1.8 million in the second quarter of fiscal 2006. For the first six months
of
fiscal 2007, net revenue was $1.5 million, which represented a 53% decrease
over
net sales of $3.2 million for the same period in fiscal 2006.
Sales
to
two of our customers, DCL and True Position, represented 45% and 21%,
respectively, 66% collectively, of net sales during the second quarter of fiscal
2007. Sales to three of our customers, Raytheon, DCL and Nortel, represented
29%, 19% and 19%, respectively, and 67%, collectively, of net sales during
the
second quarter of fiscal 2006.
Sales
to
three of our customers, DCL, ACAL Technologies (ACAL) and Nortel, represented
35%, 16% and 13%, respectively, and 64% collectively, of net sales during the
first two quarters of fiscal 2007. Sales to three of our customers, DCL,
Raytheon and Nortel, represented 29%, 19% and 16%, respectively, and 64%
collectively, of net sales during the first two quarters of fiscal 2006.
Sales
by product (in thousands)
Product
|
|
Three
Months Ended April 30,
2007
|
|
|
|
Three
Months Ended April 30, 2006
|
|
|
|
Adapter
|
|
$
|
107
|
|
|
31
|
%
|
$
|
1,200
|
|
|
66
|
%
|
HighWire
|
|
|
132
|
|
|
39
|
%
|
|
379
|
|
|
21
|
%
|
Legacy
& other
|
|
|
103
|
|
|
30
|
%
|
|
236
|
|
|
13
|
%
|
Total
|
|
$
|
342
|
|
|
|
|
$
|
1,815
|
|
|
|
|
Product
|
|
Six
Months Ended April 30,
2007
|
|
|
|
Six
Months Ended April 30,
2006
|
|
|
|
Adapter
|
|
$
|
848
|
|
|
56
|
%
|
$
|
2,000
|
|
|
62
|
%
|
HighWire
|
|
|
556
|
|
|
36
|
%
|
|
970
|
|
|
30
|
%
|
Legacy
& other
|
|
|
123
|
|
|
8
|
%
|
|
246
|
|
|
8
|
%
|
Total
|
|
$
|
1,527
|
|
|
|
|
$
|
3,216
|
|
|
|
|
Our
adapter products are used primarily in edge-of-the-network applications such
as
Virtual Private Network (VPN) and other routers, VoIP gateways and security
devices. Our HighWire products are primarily targeted at core-of-the-network
applications used primarily by telecommunications central offices and VoIP
providers. All
of
these product lines were sold to One Stop on March 30, 2007.
We
recorded a $1.3 million gain on the sale of our hardware business to One Stop
on
March 30, 2007. The gain is based on the difference between the proceeds
received and liabilities assumed from/by One Stop and the carrying value of
the
assets transferred to One Stop.
|
|
Gain
on the sale of hardware business
(in
thousands)
|
|
Cash
and escrow receivable
|
|
$
|
2,200
|
|
Liabilities
assumed
|
|
|
209
|
|
Total
consideration
|
|
|
2,409
|
|
|
|
|
|
|
Inventory
|
|
|
741
|
|
Plant
property & equipment
|
|
|
277
|
|
Other
assets
|
|
|
48
|
|
Total
basis of assets sold
|
|
|
1,066
|
|
Gain
on Sale
|
|
$
|
1,343
|
|
International
sales constituted 52% and 61% of net sales for the three and six month periods
ended April 30, 2007 compared to 29% and 41% of net sales for the three and
six
month periods ended April 30, 2006, respectively. International sales are
primarily executed with customers in the United Kingdom, which represented
50%
and 51% of our sales for the three and six month periods ended April 30, 2007,
respectively, and 25% and 35% of our sales for the three and six month periods
ended April 30, 2006, respectively. All international sales are executed in
U.S.
dollars.
Cost
of Hardware Products and Other Revenue
Cost
of
hardware products and other revenues consisted of the direct and indirect costs
of our manufactured hardware products and the costs related to the personnel
in
our operations and production departments including share-based payment
compensation expense associated with the implementation of SFAS 123(R). Cost
of
hardware products and other revenues for the three months ended April 30, 2007
decreased by 76% to $304,000 compared with $1.3 million for the three months
ended April 30, 2006. Cost of hardware products and other revenues for the
six
months ended April 30, 2007 decreased by 50% to $1.0 compared with $2.1 million
for the six months ended April 30, 2006. We sold our hardware business on March
30, 2007 and transferred three employees in our production and operations group
and certain of the hardware product related supplier contracts to One Stop
upon
consummation of the sale. The decrease in cost of hardware products and other
revenue in absolute dollars was principally due to a lower volume of hardware
sales that decreased the total direct and indirect cost of our manufactured
products and a decrease in production and operations personnel.
Product
Research and Development
Product
research and development (R&D) expenses for the three months ended April 30,
2007 were $172,000, a 73% decrease over $649,000 in the same quarter of fiscal
2006. R&D expenses for the six months ended April 30, 2007 were $398,000, a
60% decrease over $1.0 million in the same period of fiscal 2006. We
sold
our hardware business on March 30, 2007 and transferred five employees in our
engineering group and all the hardware engineering contracts to One Stop upon
consummation of the sale. In addition, the prior year periods R&D expense
include a
$279,000 inventory write-down related to the cancellation of our VoIP product
development program
We also
decreased our R&D in 2007 as compared to 2006 primarily as the result of a
reduction in cash spending for materials and consultants working on development
projects.
We
did
not capitalize any internal software development costs in the three and six
months ended April 30, 2007 or 2006 and do not expect to capitalize internal
software development costs in the future.
Sales
and Marketing
Sales
and
marketing expenses for the three months ended April 30, 2007 were $90,000,
a 72%
decrease over $325,000 in the same quarter of fiscal 2006. Sales and marketing
expenses for the six months ended April 30, 2007 were $272,000, a 56% decrease
over $618,000 in the same period of fiscal 2006. We
sold
our hardware business on March 30, 2007 and transferred three employees in
our
sales and marketing group and all the customer contracts related to the hardware
business to One Stop upon consummation of the sale.
We also
experienced an overall reduction in the total number of employees in our sales
and marketing group due to voluntary terminations. Our marketing expenditures
in
the six months ended April 30, 2007 decreased as compared to the same six-month
period in 2006 as a result of reduced cash expenditures across the company.
Net
Income (Loss) from Discontinued Operations
As
a
result of the factors discussed above, we recorded net income from discontinued
operations of $1.1 million and $1.2 million in the three and six month periods
ended April 30, 2007, as compared to a net loss of $438,000 and $520,000 for
the
same periods in fiscal 2006. The net income from discontinued operations for
the
three months ended April 30, 2007 is comprised of a loss from our discontinued
hardware business totaling $224,000 and a $1.3 million gain from the sale of
the
hardware business. The net income from discontinued operations for the six
months ended April 30, 2007 is comprised of a loss from our discontinued
hardware business totaling $181,000 and a $1.3 million gain from the sale of
the
hardware business.
Net
Loss
As
a
result of the factors discussed above, we recorded a net loss of $105,000 and
$1.2 million in the three and six month periods ended April 30, 2007, as
compared to a net loss of $3.0 million and $5.6 million for the same periods
in
fiscal 2006.
Contractual
Obligations and Commercial Commitments
The
following table sets forth a pro forma summary of our material contractual
obligations and commercial commitments subsequent to the sale of our hardware
business to One Stop Systems on March 30, 2007:
|
|
Payments
due by period (in thousands)
|
|
|
|
|
|
Less
than
|
|
1-2
|
|
3-5
|
|
More
than
|
|
Contractual
Obligations
|
|
Total
|
|
1
year
|
|
Years
|
|
Years
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building
leases (1)
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
$
|
—
|
|
Capital
leases
|
|
|
133
|
|
|
44
|
|
|
44
|
|
|
45
|
|
|
---
|
|
Total
net lease payments
|
|
$
|
133
|
|
$
|
44
|
|
$
|
44
|
|
$
|
45
|
|
$
|
—
|
|
(1)
One
Stop Systems assumed our corporate headquarters office lease and a lease for
certain engineering equipment as part of the consideration related to the
purchase of our hardware business on March 30, 2007. One Stop Systems assumed
approximately $2.2 million of future lease payments.
In
addition to salary, each of our directors and executive officers is eligible
to
receive a bonus pursuant to our Director and Officer Bonus Plan adopted
September 21, 2006. The total paid to our directors and executive officers
in
April 2007 under our Director and Officer Bonus Plan was $58,000. Each of our
executive officers have severance agreements that provide for 6 months’ salary
and accelerated vesting of all unvested stock options upon certain events
triggered by a change in control. The total estimated amounts due under the
severance agreements is approximately $247,000. The amounts due will be paid
to
the executive officers upon completion of the merger and subsequent termination
of employment.
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. On
May
29, 2007, pursuant to an amendment to the merger agreement with Neonode, we
advanced Neonode $500,000 under an interest bearing secured note payable and
advanced an additional $500,000 on June 15, 2007. As of June 6, 2007, we had
$1.3 million in cash and we expect our cash balance, after advances to Neonode,
will be adequate to fund our operations until the merger is consummated. If
we
are unable to consummate our proposed merger with Neonode or Neonode is unable
to repay the notes on September 30, 2007, as required, we will be forced
to
seek
credit line facilities from financial institutions and/or additional equity
investment. No assurances can be given that we would be successful in obtaining
such additional financing on reasonable terms, or at all.
Our
future liquidity after the merger with Neonode is completed will be affected
by,
among other things:
- |
sales
of Neonode’s products;
|
- |
our
operating expenses;
|
- |
the
timing of Neonode’s product
shipments;
|
- |
Neonode’s
gross profit margin;
|
- |
our
ability to raise additional capital, if necessary;
and
|
- |
our
ability to secure credit facilities, if
necessary.
|
At
April
30, 2007, we had cash and cash equivalents of $1.2 million, as compared to
$1.1
million at October 31, 2006. In the first six months of fiscal 2007, $1.6
million of cash was used in operating activities, primarily as a result of
our
net loss.
Our
cash used was reduced by an amortization and depreciation expense of $468,000
related to property and equipment and capitalized software and $451,000 of
stock-based compensation expense that are included in the $1.2 million net
loss
but did not require cash. We received $1.7 million in cash proceeds from the
sale of our hardware business and received an additional $500,000 in cash
proceeds on June 5, 2007. Working
capital, consisting of our current assets less our current liabilities; at
April
30, 2007 was $1.5 million, as compared to $1.7 million at October 31,
2006.
In
the
six months ended April 30, 2007, we purchased $4,000 of fixed assets, consisting
primarily of computers and engineering equipment.
We
continue to pursue cost cutting measures to reduce our cash expenditures. We
reduced the salaries for all officers and employees and eliminated the cash
fees
paid to our Board. We sold our hardware business for cash and reduced our
ongoing lease liabilities and our headcount to reflect our current business.
We
continue to operate our storage software business and are actively developing
new product features and licensing our software to new customers.
In
January 2007, we entered into a merger agreement with Neonode. If the merger
is
not completed, our business may be adversely affected. We currently anticipate
that our available cash balances and cash generated from operations will be
sufficient to fund our standalone operations through fiscal 2007. If we are
unable to complete the transaction, we may be unable to find another way to
grow
our business. Costs related to the transaction, such as legal, accounting and
financial advisor fees, must be paid even if the transaction is not completed.
If we are unable to complete the merger transaction and are successful in
growing our software business we may be forced to seek credit line facilities
from financial institutions and/or additional equity investment. No assurances
can be given that we would be successful in obtaining such additional financing
on reasonable terms, or at all. If adequate funds are not available on
acceptable terms, or at all, we may be unable to adequately fund our business
plans and it could have a negative effect on our business, results of operations
and financial condition. In addition, if funds are available, the issuance
of
equity securities or securities convertible into equity could dilute the value
of shares of our common stock and cause the market price to fall and the
issuance of debt securities could impose restrictive covenants that could impair
our ability to engage in certain business transactions. Our ability to continue
as a going concern is dependent on our ability to complete the merger
transaction with Neonode. Our independent registered public accountants stated
in their opinion for the year ended October 31, 2006 that there is substantial
doubt about our ability to continue as a going concern.
Quantitative
and Qualitative Disclosures About Market Risk
Our
cash
and cash equivalents are subject to interest rate risk. We invest
primarily on a short-term basis. Our financial instrument holdings at April
30,
2007 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. We hold no assets or liabilities denominated in a foreign
currency and all sales are denominated in U.S. dollars.
NEONODE’S
BUSINESS
The
following description of Neonode’s business 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
Neonode’s analysis only as of the date hereof, and Neonode assumes no obligation
to update these statements. Actual events or results may differ materially
from
the results discussed in or implied by the forward-looking statements. The
following description should be read in conjunction with Neonode’s consolidated
financial statements for the three months ended March 31, 2007 and the years
ended December 31, 2006, 2005 and the ten months ended December 31, 2004
and the related notes included in this proxy statement.
Overview
Neonode
was founded in Sweden to develop, manufacture and sell multimedia mobile phones,
technologies and software based on a unique user interface with a focus on
design, enhanced user experience and customization. Neonode delivers
GSM
based
multimedia mobile phones that includes all the features from a desktop personal
computer (PC). The first models of Neonode’s multimedia mobile phone, the N1 and
N1m, were released in November 2004. Neonode first started selling the N1 and
N1m phones in the later part of 2004 and continued to sell limited numbers
of
the phones throughout 2005 and into the first quarter of 2006. Approximately
7,000 units of the N1 and N1m’s were sold during this period. During the final
three quarters of 2006, Neonode concentrated its efforts on the development
of
its next generation phone, N2. Neonode released the N2 model of its multimedia
mobile phone in mid-February 2007. Neonode expects to begin shipping the N2
to
its first customers in mid-2007,
and
to gradually expand product range and distribution worldwide.
Neonode
delivers
a
compact
multimedia mobile phone,
with a
focus on
interoperability, functionality
and ease of integration with desktop PC and other media devices.
Neonode
offers:
· |
A
mobile multimedia device that is also a
phone.
|
· |
Focus
on design (size, colors, look and
feel).
|
· |
Fast,
flexible and easy software upgrades (internet and SD
card)
|
· |
Large
mass storage for media content (up to 32
Gigabytes)
|
Strategy
Neonode’s
overall strategy is to develop innovative differentiated touchscreen products
based on its patent pending hardware and software technologies. Neonode is
targeting consumers in the middle to high middle segment of the mobile
multimedia phone market who value style combined with innovative technology.
Neonode incorporates its patent pending technologies in its multimedia mobile
products and also license its hardware and software technologies to other
companies. Neonode’s products are not locked into any individual mobile
telephone operator’s network and can be used on any GSM mobile network in the
world, thereby allowing the end users to select the network and calling plans.
Future mobile phone handsets may be developed that are tailored for specific
mobile network operator’s needs.
Neonode
expects to begin shipping its multimedia mobile phone, N2, to customers in
mid-2007. Together with a network of third party partners providing first line
product support and product delivery logistic, Neonode is focused on building
a
large-scale product development and customer support infrastructure.
Neonode
is building a sales channel with an initial focus on European and Latin American
distributors, and plans to expand its marketing and distribution on other
continents. Neonode also plans to sell the N2 directly to end users via its
Web
site in areas where they do not have a distributor presence. Neonode has an
agreement with a provider of call center, customer technical support and credit
card payment processing for its anticipated Web sales.
On
the
product development side, Neonode is currently developing its next generation
of
multimedia phone products, N2.5, which will feature additional functionality.
In
addition, Neonode began developing its 3G mobile phone in early 2007.
Products
Neonode
developed a series of multimedia mobile phones that convert the functionality
of
a desktop computer to a mobile phone interface. Neonode launched its latest
mobile phone, the N2, in February 2007 and expects first shipments to customers
in mid 2007. In addition to connecting to any GSM supported cellular telephone
network, Neonode’s N2 multimedia mobile phone is based on an open platform
Windows CE technology that provides simplicity in connecting to any personal
computer (PC) for updating contact information, calendars and downloading of
media files via Bluetooth or USB connections. It also allows users to watch
movies or music videos in full screen, play music, take pictures with a two
mega
pixel camera and play video games, all with internet pod casting capabilities.
The Windows CE environment allows third party software developers and individual
users to develop customized software applications and video games for use on
the
N2 phone.
Neonode’s
N2 mobile phone is based on a patent pending user interface that incorporates
true one hand on screen navigation with a simple user interface that recognizes
gestures rather than defined keys. As a result, Neonode’s interface features a
large display without physical buttons using the smallest handset in the mobile
phone industry. Neonode’s standard N2 phone incorporates a standard one Gigabyte
SD memory card (currently expandable to four Gigabytes) that allows storage
capacity for thousands of songs and pictures and several movies. Neonode’s
multimedia mobile phone has battery life for 30 hours of music and seven hours
of video playback time. In addition, standby time is estimated to be 200 hours
with a talk-time of four hours.
Neonode
may license its patent pending touchscreen hardware and software designs to
third party companies for incorporation into diverse products that incorporate
touchscreen technology such as digital cameras, Global Positioning Systems
(GPS)
and alarm system touch pads. In 2005, Neonode entered into a non-exclusive
licensing agreement, which expires in July 2007, with a major Asian mobile
telephone manufacturer whereby Neonode licensed its touch screen technology
for
use in a mobile phone to be included in their product assortment. Neonode also
provides consulting services related to the implementation of its software.
The
fees for these consultancy services vary from hourly rates to monthly rates
and
are based on reasonable market rates for such services.
Neonode’s
designs are based on its patent pending zForce ™ and Neno™ software and hardware
technology. zForce™ supports one-handed navigation allowing the user to operate
the functionality with finger gestures passing over the screen. Some of the
qualities include:
· |
Touchscreen
is based on infrared LED and photodiodes (works in
sunlight)
|
· |
Finger
based input (no need for stylus)
|
· |
Accurate
navigation on small displays
|
· |
No
degradation of display quality
|
· |
Limited
accuracy needed (navigation on the
move)
|
· |
High
speed capture (capture gestures)
|
· |
Near
surface detection (no false
detection)
|
· |
No
ambient light needed (works in the
dark)
|
· |
Single
and multiple area detection (games)
|
Neno™
is
based on Windows CE™ includes the following:
· |
Media
players for streaming video, movies and music that supports all the
standard applications (WMA, WMV, MP3, WAV, DivX and AVI
MPEG¼)
|
· |
Internet
explorer 6.0 browser
|
· |
Image
viewer with camera preview and
capture
|
· |
Organizer
with calendar and task with Microsoft Outlook
synchronization
|
· |
Calendar,
alarm, calculator and call list
|
· |
Telephony
manager for voice calls
|
· |
Messaging
manager for SMS, MMS, IM and T9
|
· |
Task
manager for switching between
applications
|
Intellectual
Property
Neonode
believes that innovation in product engineering, sales, marketing, support,
and
customer relations, and protection of this proprietary technology and knowledge
will impact its future success. In addition to certain patents that are pending,
Neonode relies on a combination of copyright, trademark, trade secret laws
and
contractual provisions to establish and protect its proprietary rights in its
products.
Neonode
has applied for patent protection of its invention named “On a substrate formed
or resting display arrangement” in six countries through a PCT application and
in 24 designated countries through an application to the European Patent Office
(EPO). Neonode applied for a patent in Sweden relating to a mobile phone and
has
also applied for a patent in the United States regarding software named “User
Interface.”
Neonode
has been granted design protection in Sweden for the design of a mobile phone,
and has applied for design protection in Sweden of a new a design of its mobile
phone.
Neonode
has been granted trademark protection for the word NEONODE in the European
Union
(EU), Sweden, Norway, and Australia. In addition, Neonode has 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.
Neonode’s
“User Interface” may also be protected by copyright laws in most countries,
especially 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.
Neonode
also licenses technologies from third parties for integration into its products.
Neonode believes that the licensing of complementary technologies from third
parties with specific expertise is an effective means of expanding the features
and functionality of its products, allowing Neonode to focus on its core
competencies.
Consistent
with Neonode’s efforts to maintain the confidentiality and ownership of its
trade secrets and other confidential information and to protect and build its
intellectual property rights, Neonode require its employees and consultants
and
certain customers, manufacturers, suppliers and other persons with whom it
does
business or may potentially do business to execute confidentiality and invention
assignment agreements upon commencement of a relationship with Neonode and
typically extending for a period of time beyond termination of the
relationship.
Distribution,
Sales and Marketing
Neonode
currently is seeking to build a network of distributors covering Europe and
Mexico and hopes to expand its network to the United States and Latin America
in
2008. Neonode’s
products are customizable for each country or region using the GSM standard.
In
addition to the distributor sales channel, Neonode is exploring the use of
its
Neonode.com web store as a direct sales channel to sell its products and
third-party products, focusing particularly on its existing customer base.
Neonode expects to accomplish this through e-marketing campaigns.
Neonode’s
internal sales and marketing organization supports its channel marketing
partners by providing sales collateral, such as product data sheets,
presentations, and other sales/marketing resource tools. Neonode’s sales staff
solicits prospective customers, provides technical advice with respect to its
products and works closely with marketing partners to train and educate their
staff on how to sell, install, and support its product lines.
Neonode’s
sales are normally negotiated and executed in U.S. Dollars or
Euros.
Neonode’s
direct sales force and marketing operations are based out of its corporate
headquarters in Stockholm, Sweden.
Research
and Development
Neonode
continues to invest in research and development of current and emerging
technologies that it deems critical to maintaining its competitive position
in
the mobile multimedia telecommunications markets. Many factors are involved
in
determining the strategic direction of Neonode’s product development focus,
including trends and developments in the marketplace, competitive analyses,
market demands, business conditions, and feedback from its customers and
strategic partners.
Neonode’s
product development efforts are focused principally on its strategic product
lines including its N2.5 model multimedia phone with additional functionality.
Neonode has also initiated a 3G mobile phone technology
investigation.
During
the three months ended March 31, 2007 and the fiscal years 2006, 2005 and 2004,
Neonode incurred $1.0 million, $2.2 million, $1.6 million and $661,000,
respectively, in product research and development expenses.
Manufacturing
Neonode
does not engage in any manufacturing operations. Instead, Neonode utilizes
third-party manufacturers to build its multimedia mobile phone products.
Competition
Competition
in the mobile computing device market is intense and characterized by rapid
change and complex technology. The principal competitive factors affecting
the
market for Neonode’s mobile computing devices are access to sales and
distribution channels, price, styling, usability, functionality, features,
operating system, brand, marketing, availability of third-party software
applications and customer and developer support. Neonode’s devices compete with
a variety of mobile devices, including pen-and keyboard-based devices, mobile
phones and converged voice/data devices.
Neonode’s
principal competitors include: mobile handset and smartphone manufacturers
such
as Apple, High Tech Computer (HTC), Palm, Motorola, Nokia, Research in Motion,
Samsung, Sony-Ericsson and Hewlett-Packard; hand held devices made by consumer
electronics companies such as Garmin, NEC, Sharp Electronics and Yakumo; and
a
variety of early-stage technology companies.
Some
of
these competitors, such as HTC, produce multimedia phones as carrier-branded
devices in addition to their own branded devices.
In
addition, Neonode’s devices compete for a share of disposable income and
enterprise spending on consumer electronic, telecommunications and computing
products such as MP3 players, Apple’s iPods, media/photo views, digital cameras,
personal media players, digital storage devices, handheld gaming devices, GPS
devices and other such devices.
Many
of
Neonode’s competitors have greater financial resources and are well established.
Competition within the communications market varies principally by application
segment.
Employees
In
June
15, 2007, Neonode had 29 employees and augmented its staffing needs with
consultants as needed; all are located in Stockholm, Sweden. None of Neonode’s
employees is represented by a labor union. Neonode has experienced no work
stoppages. Neonode believes its employee relations are positive.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS OF NEONODE
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 neither we nor Neonode 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 Neonode’s financial statements for
the years ended December 31, 2006, 2005 and the ten months ended December
31, 2004 and the three months ended March 31, 2007 and the related notes
included in this proxy statement.
Overview
Neonode
develops, manufactures and sells multimedia mobile phones, technologies and
software based on a unique user interface. The first model of the Neonode
multimedia mobile phone, the N1, was released in November 2004. Approximately
7,000 units of the N1and N1m’s have been sold between late 2004 and early 2006.
During the final three quarters of 2006, Neonode stopped production of the
N1
and N1m mobile phones and concentrated its efforts on the development of its
next generation phone, N2. Neonode released the N2 model of its multimedia
mobile phone in mid-February 2007 and expects to begin shipping the N2 to
customers in mid-2007. Neonode initially expects to sell the N2 and future
generations of mobile phones through sales channels that include distributors
and network operators Europe, Mexico, Latin America and the United States.
Neonode
was incorporated in the State of Delaware in 2006 to be the parent of Neonode
AB, a company founded in February 2004 and incorporated in Sweden. In a February
2006 corporate reorganization, Neonode issued its shares to the stockholders
of
Neonode AB in exchange for all of the outstanding stock of Neonode AB. Following
the reorganization, Neonode AB became a wholly-owned subsidiary of Neonode.
The
reorganization was accounted for with no change in accounting basis for Neonode
AB, since there was no change in control of the group,
where
the
assets and liabilities were accounted for at historical cost in the new group.
The consolidated accounts comprise the accounts of the combined companies as
if
they had been owned by Neonode throughout the entire reporting period.
Neonode
has incurred net operating losses and negative operating cash flows since
inception. As of March 31, 2007, Neonode had an accumulated deficit of $12.9
million. Neonode expects to incur additional losses and negative operating
cash
flows through the end of 2007.
Neonode’s
long-term success is dependent on obtaining sufficient capital to fund Neonode’s
operations and development of Neonode’s products, bringing such products to the
worldwide market, and obtaining sufficient sales volume to be profitable. To
achieve these objectives, Neonode will 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.
Neonode
is subject to certain risks common to technology-based companies in similar
stages of development. See “Risk Factors” above. Principal risks include
uncertainty of growth in market acceptance for Neonode’s products; history of
losses since inception, ability to remain competitive in response to new
technologies, costs to defend, as well as risks of losing patent and
intellectual property rights, reliance on limited number of suppliers, reliance
on outsourced manufacture of Neonode’s products for quality control and product
availability, ability to increase production capacity to meet demand for
Neonode’s products, concentration of Neonode’s operations in a limited number of
facilities, uncertainty of demand for Neonode’s products in certain markets,
ability to manage growth effectively, dependence on key members of Neonode’s
management and development team, limited experience in conducting operations
internationally, and ability to obtain adequate capital to fund future
operations.
Critical
Accounting Policies and Estimates
The
preparation of our financial statements are in conformity with generally
accepted accounting principles in the United States of America (GAAP) and
include the accounts of Neonode Inc. and its subsidiary based in Sweden, Neonode
AB. All inter-company accounts and transactions have been eliminated in
consolidation. 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
results of which form the basis for making judgments about the reported carrying
values of assets and liabilities and the reported amounts of revenue and
expenses that may not be readily apparent from other sources. Actual results
may
differ from these estimates under different assumptions or conditions. We
believe the following are some of the more critical accounting policies and
related judgments and estimates used in the preparation of consolidated
financial statements.
Revenue
Recognition
Neonode’s
policy is to recognize revenue for product sales when title transfers and risk
of loss has passed to the customer, which is generally upon shipment of
Neonode’s products to its customers. Neonode estimates expected sales returns
and records the amount as a reduction of revenues and cost of products and
other
revenue at the time of shipment. Neonode’s policy complies with the guidance
provided by the Securities and Exchange Commission’s Staff Accounting Bulletin
(SAB) No. 104, Revenue
Recognition in Financial Statements,
issued
by the Securities and Exchange Commission. Neonode recognizes revenue from
the
sale of its mobile phones when all of the following conditions have been met:
(1) evidence exists of an arrangement with the customer, typically consisting
of
a purchase order or contract; (2) Neonode’s products have been delivered and
risk of loss has passed to the customer; (3) Neonode has completed all of the
necessary terms of the contract; (4) the amount of revenue to which Neonode
is
entitled is fixed or determinable; and (5) Neonode believes it is probable
that
it will be able to collect the amount due from the customer. To the extent
that
one or more of these conditions has not been satisfied, Neonode defers
recognition of revenue. Judgments are required in evaluating the credit
worthiness of Neonode’s customers. Credit is not extended to customers and
revenue is not recognized until Neonode has determined that collectibility
is
reasonably assured.
Revenue
for the twelve months ended December 31, 2006 and 2005 includes revenue from
the
sales of the N1 multimedia mobile phone and revenue from a licensing agreement
with a major Asian manufacturer. In July 2005, Neonode entered into a licensing
agreement with a major Asian manufacturer whereby Neonode licensed its
touchscreen technology for use in a mobile phone to be included in their product
assortment. In this agreement, Neonode received approximately $2.0 million
in
return for granting an exclusive right to use its software over a two year
period. The exclusive rights do not limit Neonode’s right to use its licensed
technology for its own use, nor to grant to third parties rights to use its
licensed technology in other devices than mobile phones. The net revenue related
to this agreement has been allocated over the term of the agreement, amounting
to $851,000 in 2006 and $399,000 in 2005 and $225,000 and $200,000 for the
three
months ended March 31, 2007 and 2006, respectively. The contract also included
consulting services to be provided by Neonode on an “as needed basis”. The fees
for these consultancy services vary from hourly rates to monthly rates and
are
based on reasonable market rates for such services. Another component of the
agreement provides for a fee of approximately $2.65 per telephone if the Asian
manufacture sells mobile phones based on Neonode’s technology. As of May 12,
2007, the Asian manufacturer had not sold any mobile telephones using Neonode’s
technology.
Allowance
for Doubtful Accounts
Neonode’s
policy is to maintain allowances for estimated losses resulting from the
inability of Neonode’s customers to make required payments. Credit limits are
established through a process of reviewing the financial history and stability
of each customer. Where appropriate, Neonode obtains credit rating reports
and
financial statements of the customer when determining or modifying their credit
limits. Neonode regularly evaluates the collectibility of Neonode’s trade
receivable balances based on a combination of factors. When a customer’s account
balance becomes past due, Neonode initiates dialogue with the customer to
determine the cause. If it is determined that the customer will be unable to
meet its financial obligation to them, such as in the case of a bankruptcy
filing, deterioration in the customer’s operating results or financial position
or other material events impacting their business, Neonode records a specific
allowance to reduce the related receivable to the amount Neonode expects to
recover. Should all efforts fail to recover the related receivable, Neonode
will
write-off the account. Neonode also records an allowance for all customers
based
on certain other factors including the length of time the receivables are past
due and historical collection experience with customers.
Warranty
Reserves
Neonode’s
products are generally warranted against defects for 12 months following the
sale. Neonode has a 12 month warranty from the manufacturer of the mobile
phones. Reserves for potential warranty claims not covered by the manufacturer
are provided at the time of revenue recognition and are based on several
factors, including current sales levels and Neonode’s estimate of repair
costs.
Research
and Development
Research
and Development costs are expensed as incurred. Software development costs
are
accounted for in accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed.
Costs
incurred in the product development of new software products are expensed as
incurred until technological feasibility has been established. To date, the
establishment of technological feasibility of Neonode’s products and general
release substantially coincide. As a result, Neonode has not capitalized any
software development costs since such costs have been immaterial.
Research
and development costs consists mainly of personnel related costs in addition
to
some external consultancy costs such as testing, certifying, measurements,
etc.
Long-lived
Assets
Neonode
assesses any impairment by estimating the future cash flow from the associated
asset in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
If the
estimated undiscounted cash flow related to these assets decreases in the future
or the useful life is shorter than originally estimated, Neonode 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
Neonode
accounts for stock-based employee compensation arrangements in accordance with
SFAS No. 123R, Accounting
for Stock-Based Compensation.
Neonode
accounts for equity instruments issued to non-employees in accordance with
SFAS
No. 123R and Emerging Issues Task Force (EITF) 96-18, Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services,
which
require that such equity instruments be recorded at their fair value. When
determining stock based compensation expense involving options and warrants,
Neonode determines the estimated fair value of options and warrants using the
Black-Scholes option pricing model.
Accounting
for Debt Issued with Stock Purchase Warrants
Neonode
accounts for debt issued with stock purchase warrants in accordance with APB
opinion 14 Accounting
for Convertible Debts and Debts issued with stock purchase
warrants.
Neonode
allocates the proceeds of the debt between the debt and the detachable warrants
based on the relative fair values of the debt security without the warrants
and
the warrants themselves.
Derivatives
Neonode
does not enter into derivative contracts for purposes of risk management or
speculation. However, from time to time, Neonode enters into contracts
that are not considered derivative financial instruments in their entirety
but
that include embedded derivative features. Such embedded derivatives are
assessed at inception of the contract and, depending on their characteristics,
are accounted for as separate derivative financial instruments pursuant to
FAS
133. Neonode accounts for these derivatives under FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,
as
amended (together, FAS 133).
FAS
133
requires that Neonode analyzes all material contracts and determine whether
or
not they contain embedded derivatives. Any such derivatives are then bifurcated
from their host contract and recorded on the consolidated balance sheet at
fair
value and the changes in the fair value of these derivatives are recorded
each period in the consolidated statements of operations.
Income
taxes
Neonode
accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes
(SFAS
109). SFAS 109 requires recognition of deferred tax liabilities and assets
for
the expected future tax consequences of items that have been included in the
financial statements or tax returns. Neonode estimates income taxes based on
rates in effect in each of the jurisdictions in which it operates. Deferred
income tax assets and liabilities are determined based upon differences between
the financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The realization of deferred tax assets is based on historical tax
positions and expectations about future taxable income. Valuation allowances
are
recorded against net deferred tax assets where, in our opinion, realization
is
uncertain based on the “not more likely than not” criteria of SFAS No. 109.
Based
on
the uncertainty of future pre-tax income, Neonode fully reserved its net
deferred tax assets as of March 31, 2007, December 31, 2006 and 2005. In the
event Neonode were to determine that it would be able to realize its deferred
tax assets in the future, an adjustment to the deferred tax asset would increase
income in the period such determination was made. The provision for income
taxes
represents the net change in deferred tax amounts, plus income taxes payable
for
the current period.
New
Accounting Pronouncements
In
September 2006, FASB issued SFAS No. 157 Fair Value Measurements. This Statement
is effective for financial statements issued for fiscal years beginning after
November 15, 2007. We are currently evaluating this standard and its
effect on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities—Including an amendment of
FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair
value accounting but does not affect existing standards which require certain
assets or liabilities to be carried at fair value. The objective of SFAS 159
is
to improve financial reporting by providing companies with the opportunity
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS 159, a company may choose, at specified election dates,
to measure eligible items at fair value and report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each
subsequent reporting date. SFAS 159 is effective as of the beginning of the
fiscal year that begins after November 15, 2007. The Company is currently
assessing the impact that SFAS 159 will have on its results of operations and
financial position.
Results
of Operations
March
31, 2007 compared to March 31, 2006
The
following table sets forth, as a percentage of net sales, certain statements
of
operations data for the three months ended March 31, 2007 and 2006. These
operating results are not necessarily indicative of Neonode’s operating results
for any future period.
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Cost
of goods
|
|
|
1
|
|
|
77
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
99
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
420
|
|
|
37
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
195
|
|
|
16
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
448
|
|
|
90
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,063
|
|
|
143
|
|
|
|
|
|
|
|
|
|
Operating
loss before other expense
|
|
|
(964
|
)
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
Interest
and other expense, net
|
|
|
55
|
|
|
8
|
|
|
|
|
|
|
|
|
|
Non-cash
inducement expense
|
|
|
---
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
|
(1,019)%
|
|
|
(139)%
|
|
Net
Sales
Net
sales
for the three months ended March 31, 2007 were $249,000, a 73.6% decrease from
$945,000 for the three months ended March 31, 2006. Revenue for the three months
ended March 31, 2007 includes $21,000 from the sales of the N1m multimedia
mobile phone compared to $745,000 for the same period in 2006. In addition,
both
the comparable three month periods for 2007 and 2006 include revenue from a
licensing agreement with a major Asian manufacturer. In July 2005, Neonode
entered into a licensing agreement with a major Asian manufacturer whereby
Neonode licensed its touchscreen technology for use in a mobile phone to be
included in their product assortment. In this agreement, Neonode received
approximately $2.0 million in return for granting an exclusive right to use
its
software for a period which expires in July 2007. The exclusive rights do not
limit Neonode’s right to use its licensed technology for its own use, nor to
grant to third parties the right to use Neonode’s licensed technology in other
devices than mobile phones. The net revenue related to this agreement has been
allocated over the term of the agreement, amounting to $225,000 in the three
months ended March 31, 2007 and $200,000 in the comparable period in 2006.
Neonode
launched the N2 model of its multimedia mobile phone in mid-February 2007.
Neonode expects to begin shipping the N2 to its first customers in mid-2007.
Neonode currently has a purchase order from one customer for the N2 that totals
approximately $2.3 million with shipment dates beginning mid-2007.
Neonode
expects to sell and license its products, initially in Europe and Mexico, using
a direct sales force to support its distributors. Neonode’s plan is
concentrating its sales efforts on the European and Mexico markets. Neonode
anticipates an increase in the sales associated with its N2 mobile phone in
the
later part of 2007 as it begins customer shipment of its N2 phone.
Gross
Profit
Gross
profit as a percentage of net sales was 99% and 23% in the three months ended
March 31, 2007 and 2006, respectively. Neonode’s costs of goods include the
direct cost of production of the phone. Neonode has not begun production or
shipments of its commercially available N2 mobile phone handsets and the costs
of goods for the years presented reflect the cost to produce a limited number
of
N1 and N1m mobile phone handsets in very limited production runs. Limited
production runs of new products typically have higher costs of production due
to
the price of purchasing components in low volumes. Sales for the three months
ended March 31, 2007 were primarily the results of the amortization of deferred
revenue related to technology license agreement entered into in 2005. The
revenue was initially deferred and is amortized over 24 months, which is the
term of the license agreement. The costs to service this technology license
agreement are minimal and as a result the entire amount of the license revenue
is included in gross profit for the three month period.
Neonode
expects its gross profit to increase as Neonode begins to produce and sell
its
N2 mobile phone handsets in larger quantities. Neonode’s target range for gross
profit is between 30% and 35% once full production mode is
achieved.
Product
Research and Development
Product
research and development (R&D) expenses for the three months ended March 31,
2007 were $1.1 million, a 199% increase over $349,000 for the same quarter
in
2006.
The
increase in R&D in 2007 as compared to 2006 is primarily the result of two
factors:
· |
An
increase in the number of employees in the Neonode’s engineering
department;
and
|
· |
an
increase in engineering design projects related expenditures related
to
the development of the N2 and future products including production
tooling, N2 prototypes and the extensive use of outside engineering
design
services and consultants to develop the plastics/mechanics and antenna
used in the design of the phone.
|
Neonode
plans to continue to increase expenditures on critical R&D projects and has
planned increases in both the headcount of its engineering department and the
purchase of critical design and testing technology. Neonode has a product
roadmap of future mobile phone handsets and technologies and expects to increase
R&D budgets in order to develop these products and technologies to meet
market demands. Neonode is currently working on the N2.5 with additional
functionality and initiated a 3G mobile phone technology investigation.
Sales
and Marketing
Sales
and
marketing expenses for the three months ended March 31, 2007 were $486,000,
a
230% increase from $147,000 for the same period in 2006.
This
increase in 2007 over 2006 is primarily related to an increase in product
marketing activities as Neonode prepared to release its N2 model phone handset
including the introduction of the N2 at the Barcelona, Spain 3GSM Trade Show
and
the preparation of product marketing materials.
Sales
and
marketing programs are focused on design wins with new customers and, therefore,
as new customer sales increase, sales and marketing expenses are expected to
increase. Neonode
expects its sales and marketing expenses to continue to increase as Neonode
positions the Company to take advantage of new market opportunities for its
N2
and future mobile phone handsets and participate in more sales lead generation
and branding initiatives, such as, industry trade events, public relations
and
direct marketing.
General
and Administrative
General
and administrative expenses for the
three
months ended March 31, 2007 were $1.1 million, a 32% increase from $847,000
for
the same period in 2006.
The
increase is primarily due to an increase in legal and accounting fees combined
with an increase in headcount in preparation with product rollout and the
merger.
Neonode
expects general and administrative expense to increase after the merger with
SBE
due to legal, accounting, insurance and other costs associated with being a
public company.
Interest
Expense
Interest
and other expense, net for the
three
months ended March 31, 2007 was $245,000, a 163% increase from $93,000 for
the
same period in 2006. The increase is directly related to a $5.0 million increase
in corporate borrowings under bridge notes issued in January 2007
and as a
result almost $10.0 million of debt was outstanding during the quarter ended
March 31, 2007 but only one month of $4.0 million of debt was outstanding in
the
same quarter of 2006.
On
April
29, 2004, Neonode AB entered into a loan agreement with ALMI Företagspartner
Stockholm AB (Almi). The credit period for the loan is 44 months starting April
29, 2004 with an annualized interest rate of 9.75%.
On
April
6, 2005, Neonode AB entered into a second loan agreement with Almi. The loan
has
a credit period of 48 months with an annualized interest rate of 2%. On February
26, 2006, in conjunction with Neonode’s reorganization, Almi received shares and
warrants to purchase Neonode’s common stock.
On
December 22, 2004 Neonode AB entered into a Loan agreement with Petrus Holding
SA. The funds under this loan agreement were received in January 2005. This
loan
arrangement has an interest rate of 5% per annum. The loan is due December
22,
2009.
In
February 2006, Neonode raised $5.0 million in a private offering of secured
notes (bridge notes) convertible into its stock.
In
January 2007, an additional $5.0 million was raised through the private sales
of
additional bridge notes. These notes are convertible into shares of its common
stock under the same terms and conditions as the bridge notes dated February
26,
2006. Neonode
expects all of the bridge notes to be converted to shares of its common stock
prior to the merger with SBE. After the conversion to common stock, Neonode
will
no longer be obligated to pay interest on these bridge notes.
Income
Taxes
Neonode’s
effective tax rate was 0% in the three months ended March 31, 2007 and 2006,
respectively. Neonode recorded valuation allowances in 2007 and 2006 for
deferred tax assets related to net operating losses due to the uncertainty
of
realization. In the event of future taxable income, Neonode’s effective income
tax rate in future periods could be lower than the statutory rate as such tax
assets are realized.
Net
Loss Available to Common Shareholders
As
a
result of the factors discussed above, Neonode recorded a net loss available
to
common shareholders of $2.5 million in the three months ended March 31, 2007,
compared to a net loss available to common shareholders of $1.3 million in
the
comparable period in 2006.
Contractual
Obligations and Commercial Commitments
Neonode
entered into borrowing agreements with lenders that provide that under certain
circumstances the borrowings under the notes and accrued interest are
convertible into shares of Neonode’s common stock. (see Note 10 to the Neonode
financial statements included as Annex F to this proxy statement
Neonode
leases office facilities and certain office equipment under various
non-cancelable operating lease agreements. Aggregate future minimum lease
payments under contractual commitments are as follows as of March 31, 2007
(in
thousands):
|
|
Payments
due by period (in thousands)
|
|
|
|
|
|
Less
than
|
|
1-2
|
|
3-5
|
|
More
than
|
|
Contractual
Obligations
|
|
Total
|
|
1
year
|
|
Years
|
|
Years
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
11,038
|
|
$
|
10,218
|
|
$
|
90
|
|
$
|
730
|
|
$
|
—
|
|
Building
and furniture leases
|
|
|
226
|
|
|
224
|
|
|
2
|
|
|
—
|
|
|
—
|
|
Total
net payments
|
|
$
|
11,264
|
|
$
|
10,442
|
|
$
|
92
|
|
$
|
730
|
|
$
|
—
|
|
Total
rent expense under the leases was $84,000 and $65,000 for the three months
ended
March 31, 2007 and 2006, respectively.
Neonode
has issued $10.9 million of bridge notes and other debt that is convertible
into
shares of Neonode common stock. These notes will be converted into Neonode
common stock simultaneously with the consummation of the merger with SBE. See
Liquidity and Capital Resources.
Year
ended December 31, 2006 compared to year ended December 31, 2005 and Year ended
December 31, 2005 compared to ten months ended December 31, 2004
The
following table sets forth, as a percentage of net sales, certain statements
of
operations data for the twelve months ended December 31, 2006 and 2005 and
ten
months ended December 31, 2004. These operating results are not necessarily
indicative of Neonode’s operating results for any future period.
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods
|
|
|
79
|
|
|
96
|
|
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss)
|
|
|
21
|
|
|
4
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
research and development
|
|
|
135
|
|
|
110
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
45
|
|
|
47
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
112
|
|
|
71
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
292
|
|
|
228
|
|
|
439
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss before other expense
|
|
|
(271
|
)
|
|
(224
|
)
|
|
(571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other expense, net
|
|
|
40
|
|
|
21
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash inducement expense
|
|
|
6
|
|
|
---
|
|
|
---
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
|
(317 |
)% |
|
(245
|
)%
|
|
(575
|
)%
|
Net
Sales
Net
sales
for the year ended December 31, 2006 were $1.6 million, a 9.6% increase from
$1.5 million for the year in 2005. Neonode’s net sales for the year ended
December 31, 2005 represents a
504%
increase from $248,000 for the ten months ended December 31, 2004. Revenue
for the year ended December 31, 2006 and 2005 includes $793,000 and $1.1 million
revenue from the sales of the N1m multimedia mobile phone, respectively. In
addition, both 2006 and 2005 include revenue from a licensing agreement with
a
major Asian manufacturer. In July 2005, Neonode entered into a licensing
agreement with a major Asian manufacturer whereby Neonode licensed its
touchscreen technology for use in a mobile phone to be included in their product
assortment. In this agreement, Neonode received approximately $2.0 million
in
return for granting an exclusive right to use its software for a period that
expires in July 2007. The exclusive rights do not limit Neonode’s right to use
its licensed technology for its own use, nor to grant to third parties to use
Neonode’s licensed technology in other devices than mobile phones. The net
revenue related to this agreement has been allocated over the term of the
agreement, amounting to $851,000 in 2006 and $399,000 in 2005. The
revenue in 2004 was generated from the sales of Neonode’s initial phone, N1 that
was sold on a limited release.
Neonode
launched the N2 model of its multimedia mobile phone in mid-February 2007.
The
N2 phone represents Neonode’s first mobile phone handset that will be released
on a wide-spread basis to customers. Neonode expects to begin shipping the
N2 to
its first customers in mid-2007. Neonode currently has a purchase order from
one
customer for the N2 that total approximately $2.3 million with shipment dates
beginning mid-2007.
Neonode
expects to sell and license its products, initially in Europe and Mexico, using
a direct sales force to support its distributors. Neonode’s plan is
concentrating its sales efforts on the European and Mexico markets. Neonode
anticipates an increase in the sales associated with its N2 mobile phone in
the
later part of 2007 as it begins customer shipment of its N2 phone.
Gross
Profit
Gross
profit as a percentage of net sales was 21% and 4% in the years ended December
31, 2006 and 2005, respectively compared to a gross loss of 131% for the ten
months ended December 31, 2004. Neonode’s costs of goods include the direct cost
of production of the phone. Neonode has not begun production or shipments of
its
commercially available N2 mobile phone handsets and the costs of goods for
the
years presented reflect the cost to produce a limited number of N1 and N1m
mobile phone handsets in very limited production runs. Limited production runs
of new products typically have higher costs of production due to the price
of
purchasing components in low volumes. Neonode’s cost of goods for the years
ended December 31, 2006 and 2005 includes write-downs of obsolete inventory
of
$133,000 and $195,000, respectively.
Neonode
expects its gross profit to increase as Neonode begins to produce and sell
its
N2 mobile phone handsets in larger quantities. Neonode’s target range for gross
profit is between 30% and 35% once full production mode is
achieved.
Product
Research and Development
Product
research and development (R&D) expenses for the year ended December 31, 2006
were $2.2 million, a 34% increase over $1.7 million for the same year in 2005.
R&D expense for the year ended December 31, 2005 increased by 150% over
$661,000 for the ten months ended December 31, 2004.
The
increase in R&D in 2006 as compared to 2005 is primarily the result of two
factors:
· |
a
minor increase in the headcount of Neonode’s engineering department from
10 to 11. Beginning in 2005, in order to recruit, retain and motivate
employees, Neonode began to increase employee’s salaries
to market levels over a two year period. Prior to 2005, Neonode’s
employee’s salaries were below market level; and
|
· |
an
increase in engineering design projects related expenditures related
to
the development of the N2 and future products including the extensive
use
of outside engineering design services and consultants to develop
the
plastics/mechanics and antenna used in the design of the
phone.
|
The
increase in R&D in 2005 as compared to 2004 is primarily the result of two
factors:
· |
an
increase in the headcount of Neonode’s engineering department from 8 to
10. Beginning in 2005, in order to recruit, retain and motivate employees,
Neonode began a two year program to increase employee’s salaries
to market levels. Prior to 2005, Neonode’s employee’s salaries were below
market level; and
|
· |
an
increase in engineering design projects related expenditures related
to
the development of the N2. In 2004 and early 2005, R&D expense was
related to the development and release of Neonode’s N1 and N1m mobile
phone handsets.
|
Neonode
plans to continue to increase expenditures on critical R&D projects and has
planned increases in both the headcount of its engineering department and the
purchase of critical design and testing technology. Neonode has a product
roadmap of future mobile phone handsets and technologies and expects to increase
R&D budgets in order to develop these products and technologies to meet
market demands. Neonode is currently working on the N2.5 with additional
functionality and initiated a 3G mobile phone technology investigation.
Sales
and Marketing
Sales
and
marketing expenses for the year ended December 31, 2006 were $746,000, a 5%
increase from $711,000 for the same period in 2005. Sales and marketing expense
for the year ended December 31, 2005 increased by 390%
over
$145,000 for the ten months ended December 31, 2004.
This
increase in 2006 over 2005 is primarily related to an increase in product
marketing activities as Neonode prepared to release its N2 model phone handset
and increasing salaries to market levels.
This
increase in 2005 over 2004 is primarily related to an increase in headcount
from
1.5 to 6.
Sales
and
marketing programs are focused on design wins with new customers and, therefore,
as new customer sales increase, sales and marketing expenses are expected to
increase. Neonode
expects its sales and marketing expenses to continue to increase as Neonode
positions the Company to take advantage of new market opportunities for its
N2
and future mobile phone handsets and participate in more sales lead generation
and branding initiatives, such as, industry trade events, public relations
and
direct marketing.
General
and Administrative
General
and administrative expenses for the
year
ended December 31, 2006 were $1.8 million, a 74% increase from $1.1 million
for
the same period in 2005. General
and administrative expense for
the
year ended December 31, 2005 increased by 271%
over
$286,000 for the ten months ended December 31, 2004.
This
increase in 2006 over 2005 is primarily related to $616,000 of non-cash stock
based compensation charges related to warrants to purchase Neonode’s common
stock issued to Iwo Jima SARL in a February 26, 2006 reorganization of Neonode,
Included in 2006, is $410,000 to settle a legal dispute related to the
production of its N1 phone in 2005. In addition, beginning
in 2005, in order to recruit, retain and motivate employees, Neonode began
to
increase employee’s salaries
to market levels over a two year period. Prior to 2005, Neonode’s employee’s
salaries were below market level. Prior to 2005, Neonode’s employee’s salaries
were below market level.
This
increase in 2005 over 2004 is primarily related to an increase in headcount
from
5 to 9. In 2005, rent and lease related expenses increased because Neonode
moved
to larger facilities and leased additional equipment to support the increase
in
the number of employees. Beginning
in 2005, in order to recruit, retain and motivate employees, Neonode began
a two
year program to increase employee’s salaries
to market levels. Prior to 2005, Neonode’s employee’s salaries were below market
level.
Neonode
expects general and administrative expense to increase in after the merger
with
SBE due to legal, accounting, insurance and other costs associated with being
a
public company.
Interest
Expense
Interest
and other expense, net for the
year
ended December 31, 2006 was $764,000, a 127% increase from $336,000 for the
same
period in 2005. Interest
expense for
the
twelve months ended December 31, 2005 increased by 2700%
over
$12,000 for the ten months ended December 31, 2004.
On
April
29, 2004, Neonode AB entered into a loan agreement with ALMI Företagspartner
Stockholm AB (Almi). The credit period for the loan is 44 months starting April
29, 2004 with an annualized interest rate of 9.75%.
On
April
6, 2005, Neonode AB entered into a second loan agreement with Almi. The loan
has
a credit period of 48 months with an annualized interest rate of 2%. On February
26, 2006, in conjunction with Neonode’s reorganization, Almi received shares and
warrants to purchase Neonode’s common stock.
On
December 22, 2004 Neonode AB entered into a Loan agreement with Petrus Holding
SA. The funds under this loan agreement were received in January 2005. This
loan
arrangement has an interest rate of 5% per annum. The loan is due December
22,
2009.
In
February 2006, Neonode raised $5.0 million in a private offering of secured
notes (bridge notes) convertible into its stock.
In
January 2007, an additional $5.0 million was raised through the private sales
of
additional bridge notes. These notes are convertible into shares of our common
stock under the same terms and conditions as the bridge notes dated February
26,
2006. Neonode
expects all of the bridge notes to be converted to shares of its common stock
prior to the merger with SBE. After the conversion to common stock, Neonode
will
no longer be obligated to pay interest on these bridge notes.
In
addition to the interest expense related to additional borrowings during the
year, interest and other expense net for the year ended December 31, 2006
includes approximately $200,000 of foreign exchange loss as well as $222,000
of
non-cash amortization of deferred financing fees and debt discounts and changes
in the fair value related to the February 26, 2006 line of credit debt
conversion feature.
Income
Taxes
Neonode’s
effective tax rate was 0% in the year ended December 31, 2006 and 2005 and
for
the ten months ended December 31, 2004, respectively. Neonode recorded valuation
allowances in 2006, 2005 and 2004 for deferred tax assets related to net
operating losses due to the uncertainty of realization. In the event of future
taxable income, Neonode’s effective income tax rate in future periods could be
lower than the statutory rate as such tax assets are realized.
Net
Loss Available to Common Shareholders
As
a
result of the factors discussed above, Neonode recorded a net loss available
to
common shareholders of $5.2 million in the year ended December 31, 2006,
compared to a net loss available to common shareholders of $3.7 million in
the
same period in 2005 and $1.4 million in the ten months ended December 31,
2004.
Off-Balance
Sheet Arrangements
Neonode
does not have any transactions, arrangements, or other relationships with
unconsolidated entities that are reasonably likely to affect its liquidity
or
capital resources other than the operating leases noted above. Neonode has
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
Neonode’s
liquidity is dependent on many factors, including sales volume, operating profit
and the efficiency of asset use and turnover. Neonode’s future liquidity will be
affected by, among other things:
- |
sales
of Neonode’s products;
|
- |
Neonode’s
operating expenses;
|
- |
the
timing of product shipments;
|
- |
Neonode’s
gross profit margin;
|
- |
Neonode’s
ability to raise additional capital, if necessary;
and
|
- |
Neonode’s
ability to secure credit facilities, if
necessary.
|
Neonode
had cash and cash equivalents of $2.9 million and $369,000 on December 31,
2006
and 2005, respectively. In the three months ended March 31, 2007, $2.2 million
of cash was used by operating activities,
primarily as a result of net losses. Neonode’s cash used was reduced by $27,000
of amortization and depreciation expense related to property and equipment,
$229,000 of deferred interest and amortization of debt discount and financing
fees and $163,000 of stock based compensation expense that are included in
the
$2.7 million net loss but did not require cash. Cash used was increased by
$5.0
million proceeds from the issuance of convertible debt. Neonode had a working
capital (current assets less current liabilities) at March 31, 2007 of $1.5
million (assuming conversion of outstanding convertible debt), as compared
to a
working capital deficit of $884,000 (assuming conversion of outstanding
convertible debt) at December 31, 2006.
In
the
three months ended March 31, 2007, Neonode purchased $101,000 of fixed assets,
consisting primarily of computers, software and engineering equipment.
In
the
three months ended March 31, 2007, Neonode received proceeds of $122,000 from
the sale of employee stock options.
On
May
18, 2007 the Merger agreement between SBE and Neonode was amended to set the
exchange ratio of SBE shares to Neonode shares at 3.5319 SBE shares per one
Neonode share. Also in this amendment, it was agreed that SBE may lend $1.0
million to Neonode. The
maturity date of the SBE loan is September 30, 2007 with an annualized interest
rate of 6%. On
May
29, 2007, pursuant the amendment, SBE advanced Neonode $500,000 under the note
and advanced an additional $500,000 on June 15, 2007.
In
June
2007, bridge notes were issued for an additional $3.0 million and the maturity
date for all outstanding bridge notes was extended to December 31, 2007.
The
majority of Neonode’s cash for the three months ended March 31, 2007 was
provided by borrowings from bridge notes that are convertible into shares of
its
common stock. Unless Neonode is able to increase its sales to get to cash
breakeven or increase its secured lines or credit or enter into new lines of
credit, Neonode may have to raise additional funds through the issuance of
additional debt or equity securities. If Neonode raises additional funds through
the issuance of preferred stock or debt, these securities could have rights,
privileges or preferences senior to those of common stock, and debt covenants
could impose restrictions on Neonode’s operations. The sale of equity or debt
could result in additional dilution to current stockholders, and such financing
may not be available to Neonode on acceptable terms, if at all.
Neonode’s
interest bearing debt consists of the following (in thousands):
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Senior
secured notes (bridge notes) (1)
|
|
$
|
10,000
|
|
|
5,000
|
|
Petrus
Holding SA
|
|
|
766
|
|
|
780
|
|
Loan
- Almi Företagspartner 2
|
|
|
176
|
|
|
201
|
|
Loan
- Almi Företagspartner 1
|
|
|
92
|
|
|
94
|
|
Capital
lease
|
|
|
4
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Total
notes outstanding
|
|
|
11,038
|
|
|
6,080
|
|
|
|
|
|
|
|
|
|
Unamortized
debt discounts
|
|
|
(201
|
)
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
Total
debt, net of debt discounts
|
|
$
|
10,837
|
|
|
5,966
|
|
(1)
An
additional $3.0 million of bridge notes were issued on June 15,
2007.
Petrus
Holdings SA ( Petrus)
On
December 22, 2004 Neonode AB entered into a Loan agreement with Petrus Holding
SA. The funds under this loan agreement were received in January 2005. This
loan
arrangement has an interest rate of 5% per annum. The loan shall be repaid
no
later than December 22, 2009. The Petrus loan is subordinated in right of
payment to all indebtedness of Neonode to Almi.
ALMI
Företagspartner Stockholm AB (Almi)
Almi
1
On
April
29, 2004, Neonode AB entered into a loan agreement with Almi. The loan has
a
term of 44 months with annual interest rate of 9.75%. Neonode has the right
to
redeem the loan at any time prior to expiration subject to a prepayment penalty
of $14,000.
Almi
2
On
April
6, 2005, Neonode AB entered into a second loan agreement with Almi. This loan
agreement has a warrant to purchase 72,000 shares of Neonode common stock.
The
loan has a term of 48 months with annualized interest rate of 2%. Neonode has
the right to redeem the loan at any time prior to expiration subject to a
prepayment penalty of 1%, on an annualized basis, of the outstanding principle
amount over the remaining term of the loan. On February 26, 2006, in conjunction
with Neonode’s reorganization, Almi received 43,993 shares of Neonode common
stock and warrants to purchase 22,490 shares Neonode’s common
stock.
Bridge
Notes
In
February 2006, Neonode raised $5.0 million in a private offering of bridge
notes
convertible into its stock. Neonode
expects all of the bridge notes to be converted to shares of its common stock
prior to the merger with SBE. After the conversion to common stock, Neonode
will
no longer be obligated to pay interest on these bridge notes.
On
January 19, 2007, all outstanding bridge notes were modified to include a
reverse merger with SBE as an event for conversion on the same terms as an
initial public offering. In addition, the conversion terms relating to the
senior secured notes were modified to extend the maturity date from August
28,
2007 to September 30, 2007.
At
March
31, 2007, the bridge notes, which bear interest at 4%, had a maturity date
of
September 30, 2007. In May 2007, the maturity date for all outstanding bridge
notes was further extended from September 30, 2007 to December 31, 2007. The
bridge notes are collateralized by the common stock shares of Neonode’s wholly
owned subsidiary, Neonode AB and are subordinated in right of payment to all
indebtedness of Neonode AB to Almi. In addition, Per Bystedt, Thomas Ericsson
and Magnus Goertz have pledged their beneficial holdings in Neonode as
collateral for the bridge notes. The bridge notes are convertible under the
following scenarios:
|
1.
|
In
the event the Merger Agreement is terminated, the bridge notes may
be
prepaid without premium or penalty, in whole or in part, on 20 days
notice; provided that the Lender shall have the opportunity, prior
to such
prepayment, to convert the senior secured note into common stock
of
Neonode at a price based on the price set forth in Scenario 3 or
4
below.
|
|
2.
|
In
the event that the Merger is consummated pursuant to the terms of
the
Merger Agreement, the bridge notes, including without limitation
all
accrued interest (unless paid in cash by the undersigned) and other
obligations under the senior secured note, shall automatically convert,
immediately prior to the Closing of the merger and without any action
of
the holder, into a number of units of the undersigned (the “Units”), each
Unit consisting of one share of Neonode Common Stock and one half
of a
Warrant of the undersigned determined by dividing the outstanding
principal amount and accrued interest due on the senior secured notes
by
$5.00 (the “Conversion Price”).
|
|
3.
|
In
the event the Merger Agreement is terminated and the Neonode completes
a
registered public offering in the United States, United Kingdom or
Sweden
(the “QIPO”) with gross proceeds in an amount at least equal to the cost
of operating Neonode for a period of three months (commencing after
the
QIPO) on or before December 31, 2007 (as amended in May 2007), this
senior
secured notes, including without limitation all accrued interest
(unless
paid in cash by Neonode) and other obligations under the senior secured
notes, shall automatically convert without any action of the holder
into
the securities offered in such financing at a price per security
equal to
the price paid by public investors based on the pre-money valuation
of the
fully-diluted equity of Neonode, including for this purpose as equity
all
debt (other than (i) SEK 2,000,000 of debt held by Almi and (ii)
all
principal and interest under the bridge notes) held by stockholders
or
their affiliates, of $15.3 million; and provided further that Neonode
has
not suffered any material adverse change since the date
hereof.
|
|
4.
|
In
the event the Merger Agreement is terminated and Neonode fails to
complete
the QIPO or Merger by December 31, 2007 (as amended in May 2007)
due to
circumstances beyond Neonode’s control, the bridge notes, including
without limitation all accrued interest and other obligations under
the
bridge notes, shall be converted into common stock of the Neonode
at a
price per share equal to the fair market value of such shares as
determined by negotiations between the Neonode and the holders of
at least
50.1% of the aggregate outstanding principal amount of the bridge
notes
(the “Required Holders”),
subject to compliance with applicable securities law;
provided that (i) the pre-money valuation of the fully-diluted equity
of
Neonode in the event and at the time of such conversion, including
for
this purpose as equity all debt (other than (a) SEK 2,000 of debt
held by
Almi and (b) all principal and interest under the senior secured
notes)
held by stockholders or their affiliates, does not exceed $15.3 million,
(ii) Neonode has not suffered any Material Adverse Change since the
date
hereof and (iii) the Lender and Neonode enter into an investor rights
agreement which includes certain demand and piggyback registration
rights,
preemptive rights, tagalong rights with principal stockholders of
Neonode,
rights to Neonode information and a bar on issuance of toxic preferreds
or
other death spiral convertible securities, all as negotiated between
the
undersigned and the Required Holders. During the term of the bridge
notes,
Neonode shall not issue any equity securities or securities convertible
into, exercisable to purchase or exchangeable for equity securities
without offering to holders of the bridge notes rights to purchase
up to a
percentage (the “Percentage”) of such issue equal to the ratio of (A) the
aggregate principal amounts of the senior secured notes then outstanding
divided by (B) the sum of $15.3 million and such aggregate principal
amounts, and shall not permit Neonode AB to issue any such securities
or
incur any indebtedness other than reasonable accounts
payable.
|
In
February 2007, we completed an additional $5.0 million convertible bridge note
financing package that was offered proportionally to our Shareholders. Prior
holders of bridge notes had first right to any subscription amounts not taken
by
other existing shareholders. The terms and conditions of these notes are
substantially the same as for the existing bridge notes as amended on January
19,
As
of
March 31, 2007, Neonode had $2.9 million in cash and is not operating at cash
breakeven. Unless Neonode is able to increase its sales to get to cash
breakeven, Neonode will not have sufficient cash generated from its business
activities to support its operations for the next twelve months.
Quantitative
and Qualitative Disclosures About Market Risk
Our
cash
is subject to interest rate risk. We invest primarily on a short-term basis.
Our
financial instrument holdings at March 31, 2007 were analyzed to determine
their
sensitivity to interest rate changes. The fair values of these instruments
were
determined by net present values. In our sensitivity analysis, the same change
in interest rate was used for all maturities and all other factors were held
constant. If interest rates increased by 10%, the expected effect on net loss
related to our financial instruments would be immaterial. The functional
currency of our foreign subsidiary is the applicable local currency, the Swedish
krona and is subject to foreign currency exchange rate risk. Any increase or
decrease in the exchange rate of the U.S. Dollar compared to the Swedish krona
will impact Neonode’s future operating results. Certain of Neonode loans are in
U.S. Dollars and fluctuations in the exchange rate of the U.S. Dollar compared
to the Swedish krona will impact both the interest and future principal payments
associated with these loans.
FINANCIAL
STATEMENTS - SBE, INC.
The
unaudited balance sheet for SBE as of April 30, 2007 and the related unaudited
statements of operations and cash flows for each of the three and six months
ended April 30, 2007 and 2006 are attached to this proxy statement as Annex
E.
You are encouraged to review such financial statements in their
entirety.
FINANCIAL
STATEMENTS - NEONODE INC.
The
audited balance sheets for Neonode Inc. as of December 31, 2006 and 2005
and the related audited statements of operations, stockholders’ equity and cash
flows for each of the years ended December 31, 2006 and 2005 and the ten
months ended December 31, 2004, together with the report of their independent
registered public accounting firm, Öhrlings PricewaterhouseCoopers AB, are
attached to this proxy statement as Annex F. The unaudited balance sheet
for Neonode as of March 31, 2007 and the related unaudited statements of
operations and cash flows for each of the three months ended March 31, 2007
and
2006 are attached to this proxy statement as Annex E. You are encouraged to
review such financial statements in their entirety.
UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
The
unaudited pro forma condensed combined balance sheet as of March 31, 2007 is
presented as if the proposed transaction with Neonode had occurred on the date
of the balance sheet presented. The unaudited pro forma condensed combined
statements of operations for the year ended December 31, 2006 and three months
ended March 31, 2007 are presented as if the proposed transaction with Neonode
had occurred at the beginning of their fiscal years. After the merger
transaction with Neonode is completed, Neonode will be the acquirer for
accounting purposes.
COMPARATIVE
PER SHARE DILUTION AND DIVIDEND INFORMATION
The
following table sets forth the historical per share information of us and
Neonode and the combined per share data on an unaudited pro forma basis after
giving effect to the merger. Also presented is Neonode’s equivalent pro forma
per share data for one share of Neonode common stock. The pro forma information
is presented for illustrative purposes only. You should not rely on the pro
forma financial information as an indication of the combined financial position
or results of operations of future periods or the results that actually would
have been realized had the entities been a single entity during the periods
presented.
The
unaudited pro forma per share information combines our financial information
for
our fiscal year ended October 31, 2006 with the financial information of Neonode
for the Neonode fiscal year ended December 31, 2006, assuming the merger had
occurred on the first day of the respective periods.
Historical
book value per common share for us is computed by dividing stockholders’ equity
(deficit) attributable to common stockholders by the number of shares of common
stock outstanding at October 31, 2006 and for Neonode by dividing stockholders’
equity (deficit) attributable to common stockholders by the number of shares
of
common stock outstanding at December 31, 2006. Our unaudited pro forma combined
per share data is derived from the unaudited pro forma combined financial
statements that are included elsewhere in this proxy statement. The Neonode
equivalent pro forma per share data is calculated by applying the exchange
ratio
of Neonode common shares to our common shares received.
|
|
Year
Ended October 31, 2006 (SBE) or
December
31, 2006 (Neonode)
|
|
|
|
(unaudited)
|
|
SBE
Historical Per Share Data: (adjusted for a one for five reverse stock
split effective April 2, 2007)
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(7.85
|
)
|
Book
value per common share
|
|
$
|
1.51
|
|
Neonode
Historical Per Share Data:
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(1.82
|
)
|
Book
value (deficiency) per common share
|
|
$
|
(2.31
|
)
|
SBE
Pro Forma Combined:
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(9.68
|
)
|
Book
value (deficiency) per share
|
|
$
|
(1.59
|
)
|
Neonode
Equivalent Pro Forma Combined:
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
$
|
(7.47
|
)
|
Book
value (deficiency) per share
|
|
$
|
(1.15
|
)
|
COMPARATIVE
PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Our
common stock is quoted on the Nasdaq Capital Market under the symbol SBEI.
The
following table presents quarterly information on the price range of our common
stock, indicating the high and low bid prices reported by the Nasdaq Capital
Market. These prices do not include retail markups, markdowns or commissions.
As
of December 31, 2006, there were approximately 1,039 holders of record of our
common stock.
Historical
per share amounts
Fiscal
quarter ended
|
|
Fiscal
2007
|
|
January
31
|
|
April
30
|
|
High
|
|
$
|
0.58
|
|
$
|
4.00
|
(after
1 for 5 reverse stock split effective April 2, 2007)
|
Low
|
|
|
0.33
|
|
|
0.48
|
|
Fiscal
2006
|
|
January
31
|
|
April
30
|
|
July
31
|
|
October
31
|
|
High
|
|
$
|
1.44
|
|
$
|
1.08
|
|
$
|
0.40
|
|
$
|
0.38
|
|
Low
|
|
|
1.33
|
|
|
1.05
|
|
|
0.36
|
|
|
0.35
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
4.59
|
|
$
|
3.55
|
|
$
|
3.65
|
|
$
|
3.50
|
|
Low
|
|
|
3.03
|
|
|
2.30
|
|
|
2.09
|
|
|
2.17
|
|
Historical
per share amounts adjusted for one for five reverse stock split effective April
2, 2007
Fiscal
quarter ended
|
|
Fiscal
2007
|
|
January
31
|
|
April
30
|
|
High
|
|
$
|
2.90
|
|
$
|
4.00
|
|
Low
|
|
|
1.65
|
|
|
2.40
|
|
Fiscal
2006
|
|
January
31
|
|
April
30
|
|
July
31
|
|
October
31
|
|
High
|
|
$
|
7.20
|
|
$
|
5.40
|
|
$
|
2.0
|
|
$
|
1.90
|
|
Low
|
|
|
6.65
|
|
|
5.25
|
|
|
1.80
|
|
|
1.75
|
|
Fiscal
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
22.95
|
|
$
|
17.75
|
|
$
|
18.25
|
|
$
|
17.50
|
|
Low
|
|
|
15.15
|
|
|
11.50
|
|
|
10.45
|
|
|
10.85
|
|
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.
No
active
trading or public market exists for Neonode common stock. The shares of Neonode
common stock are not listed on any exchange and are not traded in the
over-the-counter market. As of July 3, 2007, the record date, there were
[_____] stockholders of record who held shares of Neonode common stock.
Neonode has never paid any cash dividends on its common stock.
DIRECTORS
AND EXECUTIVE OFFICERS OF SBE
FOLLOWING
THE MERGER
Board
of Directors
Upon
the
completion of the merger, we expect our board of directors to be as
follows:
NAME
|
|
AGE
|
|
POSITION
|
Per
Bystedt
|
|
42
|
|
Chairman,
Board of Directors
|
Susan
Major
|
|
55
|
|
Director
|
John
Reardon
|
|
44
|
|
Director
|
Johan
Ihrfelt
|
|
39
|
|
Director
|
Magnus
Goertz
|
|
37
|
|
Director
|
Per
Bystedt -
Mr.
Bystedt served as the interim CEO of Neonode from October 2005 through July
2006. Since 1997, Mr. Bystedt has been the CEO of Spray AB, an internet
investment company. From 1991 through 1997, Mr. Bystedt was the CEO of various
television production and network companies including Trash Television, ZTV
AB,
TV3 Broadcasting Group Ltd and MTG AB. Since 1998 through the present, Mr.
Bystedt has served as a member of the board of directors of Axel Johnson AB,
since 2000 he has been a member of the board of directors of Eniro AB and since
2005 has been a member of the board of directors of Servera AB. Since 2004,
Mr.
Bystedt has been the chairman of the board of directors of AIK Fotboll AB.
From
1997 through 2005 he served as a member of the board of directors of Ahlens
AB,
and from 1998 through 2000 he was the chairman of the board of directors of
Razorfish, Inc.
Susan
Major - Ms.
Major
is the co-founder and Managing Partner of DavenportMajor Executive Search.
Her
expertise working in the Technology industry spans more than 18 years with
global high growth companies coupled with 10 additional years of search
experience, including C-level executive placements for public and emerging,
pre-IPO corporations. Ms. Major specializes in the wireless, telecom, software
and semiconductor sectors and serves Fortune 500 companies like Motorola and
Qualcomm. While at Motorola, Ms. Major introduced numerous technology products,
including two-way radios, cellular handsets and a first generation PDA. At
Ameritech, she led the marketing efforts that expanded their paging and wireless
data services. Additionally, she has been awarded two patents in wireless
messaging.
John
Reardon -- Mr.
Reardon has served as a director of SBE, Inc. (Nasdaq - SBEI) since February
2004. Mr. Reardon is the chairman of the compensation committee and member
of
the audit and nominating and governance committees of SBE, Inc. Mr. Reardon
has
served as President and member of the board of directors of The RTC Group,
a
technical publishing company since 1990. In 1994, Mr. Reardon founded a Dutch
corporation, AEE, to expand the activities of The RTC Group into Europe. Mr.
Reardon also serves on the board of directors of One Stop Systems, Inc., a
computing systems and manufacturing company.
Johan
Ihrfelt - Mr.
Ihrfelt is currently the President and co-founder of O2 Energi, a renewable
energy group in Sweden, designing, building and operating wind power plants
as
well as a reseller of environmentally friendly electricity. O2 also offers
energy efficient solutions to businesses. Mr. Ihrfelt was one of the founders
of
Spray, a pioneer in internet service and portals. He served first as President
of the parent company of Spray, and then as the CEO of the Spray portal group
of
companies with operations in eight countries. After the acquisition of Spray’s
portal business by the German and American owned Lycos Europe, Mr. Ihrfelt
and
three other partners continued with Spray developing the company’s other
operations. Other positions held by Mr. Ihrfelt include Vice President of
Razorfish Inc., earlier listed on Nasdaq Stock Market, and Vice President of
Lycos Europe NV, listed on the Frankfurt Stock Exchange. Mr. Ihrfelt also serves
as a board member in a number of companies including Agent 25 Group AB, Yogayama
AB and Fjord Network AB.
Magnus
Goertz - Mr.
Goertz co-founded Neonode in 2001 and served as CEO from 2001 through 2003.
Since 2004 through the present, Mr. Goertz also served as a Vice President
and
business development manager. From 1999 through 2001, Mr. Goertz was a member
of
the board of directors of Repeatit AB, a company that specialized in radio
design.
Executive
Officers
Upon
the
completion of the merger, we expect our executive officers who are not also
directors to be as follows:
NAME
|
|
AGE
|
|
POSITION
|
Mikael
Hagman
|
|
39
|
|
President
and Chief Executive Officer
|
David
Brunton
|
|
57
|
|
Vice
President, Finance, Chief Financial Officer, Secretary and
Treasurer
|
Tommy
Hallberg
|
|
38
|
|
Vice
President of Operations
|
Thomas
Eriksson
|
|
37
|
|
Vice
President and Chief Technology
Officer
|
Mikael
Hagman - Mr.
Hagman joined Neonode as Chief Executive Officer in March 2007 from Sony where
he served as Chief Executive Officer for Sony Corp. in Sweden and Finland.
During his eight years with Sony, Mr. Hagman held a number of positions and
served on the board of Sony Nordic AS. While
at
Sony Mr. Hagman was nominated for several Pan European committees and
participated in forums that developed Sony’s commercial strategies. Prior
to
Sony Mr.
Hagman worked for United Biscuits Ltd in various leading sales and marketing
roles across Nordic. He currently serves on the board of directors of AIK
Fotboll AB, a publicly traded company listed on NGM (Nordic Growth Markets).
AIK
Fotboll AB is one of Sweden’s leading soccer clubs. He
has
served on the board of various industry associations (Consumer Electronics
Association, Elektronik branchen, SRL).
David
W Brunton
-- Mr.
Brunton joined SBE in November 2001 as Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer. From 2000 to 2001 he was the Chief Financial
Officer for NetStream, Inc., a telephony broadband network service provider.
Mr.
Brunton is a certified public accountant.
Tommy
Hallberg - Mr.
Hallberg joined Neonode in 2005 as an Executive Vice President and is currently
the Vice President of Operations of Neonode Inc. and the President of Neonode
AB, the Company’s Swedish subsidiary operating unit. Prior to Neonode, from 2000
through 2005, he was the CEO of Cybernetics Solutions Nordic AB, a provider
of
solutions to reduce the cost of information technology operations.
Thomas
Eriksson - Mr.
Eriksson co-founded Neonode in 2001 as Vice President and Chief Technology
Officer. Prior to founding Neonode AB, he founded several companies with
products ranging from car electronics test systems and tools to GSM/GPRS/GPS
based fleet management systems including M2M applications and wireless modems.
Mr. Eriksson has over 15 years of experience in product design and electronics
engineering.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Prior
to Merger with Neonode
The
following table sets forth certain information regarding the ownership of our
common stock as of April 30, 2007 by: (i) each director and nominee for
director; (ii) each of our “named executive officers,” as defined in Item 402
under Regulation S-K promulgated by the Securities and Exchange Commission;
(iii) all executive officers and directors of SBE as a group; and (iv) all
those
known by us to be beneficial owners of more than five percent of our common
stock. Unless otherwise indicated, the address for each of the persons and
entities set forth below is c/o SBE, Inc., 4000 Executive Parkway, Suite 200,
San Ramon, California 94583.
|
|
Beneficial
Ownership (1)
|
|
Beneficial
Owner
|
|
Number
of Shares
|
|
Percent
of Total(2)
|
|
|
|
|
|
|
|
Andre
Hedrick
4419
Sugarland Court
Concord,
CA 94521
|
|
|
279,680
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
Kenneth
G. Yamamoto (3)(4)
|
|
|
172,146
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
John
Reardon (3)
|
|
|
22,153
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Ronald
J. Ritchie (3)
|
|
|
27,229
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
Marion
M. (Mel) Stuckey (3)
|
|
|
22,153
|
|
|
*
|
|
|
|
|
|
|
|
|
|
John
D’Errico (3)
|
|
|
21,216
|
|
|
*
|
|
|
|
|
|
|
|
|
|
David
Brunton (3)
|
|
|
96,448
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
Nelson
Abal (3)
|
|
|
26,708
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
Leo
Fang (3)
|
|
|
71,938
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group (8 persons) (3)
|
|
|
459,991
|
|
|
20.4
|
%
|
*
Less
than 1%
(1) |
|
This table is based upon information
supplied
by officers, directors and principal stockholders and Schedules 13D
and
13G, if any, filed with the SEC. Unless otherwise indicated in the
footnotes to this table and subject to community property laws where
applicable, we believe that each of the stockholders named in this
table
has sole voting and investment power with respect to the shares indicated
as beneficially owned. |
(2) |
|
Applicable percentages are based on
2,250,779
shares outstanding on April 30, 2007, adjusted as required by rules
promulgated by the SEC. |
(3) |
|
Includes, 89,000, 15,500, 14,250,
15,500,
16,500, 69,000, 22,000 and 51,000 shares that Messrs. Yamamoto,
Reardon,
Ritchie, Stuckey, D’Errico, Brunton, Abal and Fang, respectively, have the
right to acquire within 60 days after the date of this table under
outstanding stock options. |
(4) |
|
Includes 12,000 shares held by
UTMA as
Custodian for Melanie Yamamoto and 12,000 shares held by UTMA
as Custodian
for Nicholas Yamamoto, the children of Mr.
Yamamoto |
After
Merger with Neonode
The
following table sets forth certain information regarding the estimated ownership
of our common stock as of June 13, 2007 on a pro forma basis giving effect
to
the merger with Neonode by: (i) each director and nominee for director; (ii)
each of our “named executive officers,” as defined in Item 402 under Regulation
S-K promulgated by the Securities and Exchange Commission; (iii) all executive
officers and directors of SBE/Neonode as a group; and (iv) all those known
by us
to be beneficial owners of more than five percent of our common stock. The
table
reflects the conversion of Bridge Notes and certain other indebtedness into
SBE
common stock and warrants on effectiveness of the merger. Unless otherwise
indicated, the address for each of the persons and entities set forth below
is
c/o SBE, Inc., 4000 Executive Parkway, Suite 200, San Ramon, California 94583.
|
|
Beneficial
Ownership (1)
|
|
Beneficial
Owner
|
|
Number
of Shares
|
|
Percent
of Total(2)
|
|
|
|
|
|
|
|
AIGH
Investment Partners LLC
6006
Berkeley Avenue
Baltimore,
MD 21209 (5)
|
|
|
4,869,024
|
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
Per
Bystedt (3)(4)
|
|
|
4,043,941
|
|
|
17.8
|
%
|
|
|
|
|
|
|
|
|
Magnus
Goertz (3)(6)
|
|
|
2,301,754
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
Serwello
AB (7)
|
|
|
1,467,975
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
Thomas
Eriksson (3)(8)
|
|
|
1,455,351
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
Mikael
Hagman (3)
|
|
|
269,029
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
Tommy
Hallberg (3)
|
|
|
122,175
|
|
|
*
|
|
|
|
|
|
|
|
|
|
David
Brunton (3)
|
|
|
96,448
|
|
|
*
|
|
|
|
|
|
|
|
|
|
All
executive officers and directors as a group (6 persons) (3)
|
|
|
8,641,866
|
|
|
38.1
|
%
|
*
less
than 1%
(1) |
|
This table is based upon information
supplied
by officers, directors and principal stockholders. Unless otherwise
indicated in the footnotes to this table and subject to community
property
laws where applicable, we believe that each of the stockholders named
in
this table has sole voting and investment power with respect to the
shares
indicated as beneficially owned. |
(2) |
|
Applicable percentages are based
on
22,655,695 shares, the estimated number of shares outstanding after
the
Merger, not adjusted for any reverse stock split contemplated by
this
proxy statement. |
(3) |
|
Includes, 116,553, 296,680, 215,446,
211,914,
105,957 and 69,000
shares
that Messrs. Bystedt, Goertz, Eriksson, Hagman, Hallberg and
Brunton,
respectively, have the right to acquire within 60 days after
the date of
this table under outstanding stock
options. |
(4) |
|
Includes 2,987,384 shares and
options or
warrants to purchase an aggregate of 715,705 shares held by
Iwo Jima Sarl
and 211,861 shares and 12,438 warrants issuable to Spray AB.
Iwo Jima Sarl
and Spray AB may be deemed affiliates of Mr. Bystedt.
|
(5) |
|
Includes, 1,623,008 shares
that AIGH
Investment Partners LLC has the right to acquire under
common stock
warrant agreements. |
(6) |
|
Includes 2,005,074 shares
held by Athemis
Limited, which may be deemed an affiliate of Mr. Goertz.
|
(7) |
|
Includes, 35,558
shares that Serwello AB has
the right to acquire under common stock warrant
agreements. |
(8) |
|
Includes 1,239,905
shares held by
Wirelesstoys Sweden AB, which may be deemed
an affiliate of Mr.
Ericksson. |
OTHER
MATTERS
Accountants
Representatives
of BDO Seidman, LLP and Öhrlings PricewaterhouseCoopers AB are not expected to
be present at the meeting.
|
By
Order of the Board of Directors,
|
|
|
|
|
|
/s/
David W. Brunton
|
|
|
|
David
W. Brunton
|
|
Secretary
|
San
Ramon, California
,
2007
ANNEX
A
AMENDMENT
NO. 1 TO AGREEMENT AND PLAN
OF
MERGER AND REORGANIZATION
THIS
AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this
“Amendment”), dated as of the 18th day of May, 2007 by and among SBE, INC., a
Delaware corporation (“Parent”); COLD WINTER ACQUISITION CORPORATION, a Delaware
corporation and wholly-owned subsidiary of Parent (“Merger Sub”) and NEONODE
INC., a Delaware corporation (referred to herein as the “Company”).
WITNESSETH:
WHEREAS,
the parties wish to amend the AGREEMENT AND PLAN OF MERGER AND REORGANIZATION,
dated as of January 19, 2007, by and among the parties hereto (the “Original
Merger Agreement,” and as amended hereby, the “Merger Agreement”),
WHEREAS,
capitalized terms not otherwise defined in this Amendment shall have the
meaning
set forth in the Original Merger Agreement,
WHEREAS,
the Original Merger Agreement provides that the parties may amend such agreement
at any time by written agreement of each party;
WHEREAS,
as contemplated in the Original Merger Agreement, Griffin Securities, Inc.
(“Griffin”) is entitled to receive the Griffin Warrants in its capacity as
financial advisor to the Company; and
WHEREAS,
the parties now mutually desire to amend the Original Merger Agreement to,
among
other things, (1) extend the time for Closing to September 30, 2007, (2)
provide
for a loan of an aggregate of $1,000,000 by Parent to the Company pursuant
to a
Note(s) in substantially the form set forth on Exhibit A hereto (the “SBE
Note”), (3) authorize the Company to raise additional capital, (4) finalize
computation of the Applicable Number, (5) accelerate delivery of the Griffin
Warrant, and (6) clarify and correct certain other provisions.
NOW,
THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to
be
legally bound, the parties consent to the amendment of the Original Merger
Agreement pursuant to this Amendment and agree as follows:
1. Sections
8.1(e) and (f) of the Original Merger Agreement are hereby amended to change
May
31, 2007 to September 30, 2007.
2. Section
1.5(b) of the Original Merger Agreement is hereby deleted in its entirety
and
replaced with the following:
“The
Applicable Number shall be 3.5319, subject to adjustment from time to time
as
equitable in the event of stock splits, combinations, reclassifications,
reorganizations or similar corporate transactions by either Parent or the
Company.”
3. (a) The
Company represents and warrants to Parent and Merger Sub that the
representations and warranties made in Section 2.3 of the Original Merger
Agreement are true and correct on the date hereof, other than as set forth
in
this Amendment. The representation and warranty made in the previous sentence
shall be deemed a representation and warranty contained in Section 2 of the
Merger Agreement.
(b) Parent
represents and warrants to the Company that as of the date hereof, it has
2,250,779 shares of Parent Common Stock outstanding and warrants outstanding
to
purchase an additional 232,000 shares of Parent Common Stock. The representation
and warranty made in the previous sentence shall be deemed a representation
and
warranty contained in Section 3 of the Merger Agreement.
4. Section
4.2(f) of the Original Merger Agreement is hereby amended so as to be and
read
in its entirety as follows:
“(f) the
Company may sell, issue or authorize the issuance of (i) its capital stock
or
other security, (ii) options or rights to acquire any capital stock or other
security, or (iii) instruments convertible into or exchangeable for any capital
stock or other security, provided that (x) such securities are issued at
or
above the fair value thereof (except that such fair value requirement shall
not
apply to the issuance of Company Common Stock to employees upon the exercise
of
outstanding Company Options or to holders of warrants upon the exercise of
Company Warrants) and (y) Parent specifically consents to the issuance of
up to
$3,000,000 of additional senior secured convertible notes having substantially
the same terms as the Bridge Notes; and any such securities shall be converted
at the Effective Time in accordance with the terms of this
Agreement;”
5. Each
of
the Company Disclosure Schedule and the Parent Disclosure Schedule are hereby
amended and restated so as to be and read in its entirety as set forth on
Annex
1 and Annex 2 hereto, respectively.
6. Section
2.4 of the Original Merger Agreement is hereby amended so as to be and read
in
its entirety as follows:
“2.4
Financial
Statements.
(a) The
Company has delivered to Parent the following financial statements and notes
(collectively, the “Company Financial Statements”):
(i) The
audited consolidated balance sheets of the Company as of December 31, 2005
and
2006 and the related audited income statements, statements of stockholders’
equity and statements of cash flows of the Company for the years then ended;
and
(ii) the
unaudited balance sheet of the Company (the “Unaudited Interim Balance Sheet”)
as of March 31, 2007 (the “Interim Statement Date”), and the related unaudited
statements of income, cash flows and stockholders’ equity of the Company for the
three months then ended.
(b) The
Company Financial Statements are accurate and complete in all material respects
and present fairly the financial position of the Company as of the respective
dates thereof and the results of operations and cash flows of the Company
for
the periods covered thereby. The Company Financial Statements have been prepared
in accordance with United States generally accepted accounting principles
(“GAAP”) applied on a consistent basis throughout the periods covered (except as
permitted by GAAP and except that the financial statements referred to in
Section 2.4(a)(ii) do not contain all footnotes required by GAAP and are
subject
to normal and recurring year-end audit adjustments, which are not expected,
individually or in the aggregate, to be material in magnitude).”
7. Section
2.22 of the Original Merger Agreement is hereby amended so as to be and read
in
its entirety as follows:
“2.22 Vote
Required.
The
affirmative vote of the holders of a majority of the shares of Company Common
Stock outstanding as of May 18, 2007 is the only vote of the holders of any
class or series of the Company’s capital stock necessary to adopt this Agreement
and approve the Merger and the other transactions contemplated by this
Agreement.”
8. The
parties hereby agree that the Griffin Warrants may be issued by the Company
on
the date hereof.
9. The
parties hereby agree that, notwithstanding Sections 4.2(m) and 5.2(k) or
any
other provisions of the Original Merger Agreement, Parent may issue the SBE
Note
to the Company.
10. Corporate
Approvals.
(a) Subject
to approval of the Merger by its stockholders, the Company has obtained all
corporate approvals required in connection with this Amendment. The Company
will
obtain approval of the Merger by its stockholders within four business days
after the execution of this Amendment.
(b) Subject
to approval of the Merger by its stockholders, Parent has obtained all necessary
corporate approvals required in connection with this Amendment.
11. Parent
shall seek approval from the Company, which approval shall not be unreasonably
withheld, for all expenditures in excess of $5,000, other than routine payments
of leases or as set forth in Exhibit A hereto.
12. Miscellaneous.
(a) Except
as
specifically provided for in this Amendment, the terms of the Merger Agreement
shall be unmodified and shall remain in full force and effect. For purposes
of
determining the accuracy of, or the occurrence of a breach of, a party’s
representations and warranties in the Merger Agreement as of the date of
the
Original Merger Agreement, only those representations and warranties set
forth
in the Original Merger Agreement in its form as of such date shall apply
and the
modifications or supplements set forth in the Amendment shall have no effect.
For purposes of determining the accuracy of a party’s representations and
warranties in the Merger Agreement as of the Closing Date, only those
representations and warranties set forth in the Merger Agreement as amended
by
this Amendment shall apply. For purposes of determining the compliance with,
or
the occurrence of a breach of, a party’s covenants in the Merger Agreement prior
to the date of this Amendment, only those covenants set forth in the Original
Merger Agreement in its form as of the date of the Original Merger Agreement
shall apply and the modifications or supplements set forth in this Amendment
shall have no effect. For purposes of determining the compliance with, or
the
occurrence of a breach of, a Party’s covenants in the Merger Agreement after the
date of this Amendment, only those covenants set forth in the Merger Agreement
as amended by this Amendment shall apply.
(b) This
Amendment shall be binding upon and shall inure to the benefit of the parties
and their respective successors and permitted assigns, except that neither
this
Amendment nor any rights or obligations hereunder shall be assigned or delegated
by party except in connection with an assignment of the Merger Agreement
in
accordance with the terms thereof. Any purported assignment in violation
of this
provision is void.
(c) This
Amendment is not intended to confer upon any person or entity other than
the
parties and their permitted assigns any rights or remedies.
(d) This
Amendment may be amended only by a written instrument signed by each of the
parties.
(e) This
Amendment may be executed in counterparts, each of which when so executed
shall
be deemed to be an original, and such counterparts shall together constitute
one
and the same instrument.
(f) THIS
AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE
INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF
THE
STATE OF DELAWARE.
[Remainder
of page intentionally left blank; signature page follows.]
Signature
Page
to
Amendment
No. 1 to Agreement and Plan of Merger and Reorganization
IN
WITNESS WHEREOF, the undersigned have hereunto set their hands and seals
on the
day and year first above written.
|
|
|
|
SBE,
INC., a Delaware Corporation
|
|
|
|
|
By: |
/s/
Greg
Yamamoto |
|
Name:
Greg Yamamoto
Title:
President & CEO
|
|
|
|
|
COLD
WINTER ACQUISITION CORPORATION,
a
Delaware Corporation
|
|
|
|
|
By: |
/s/
Greg Yamamoto
|
|
Name:
Greg Yamamoto
Title:
President & CEO
|
|
|
|
|
NEONODE
INC., a Delaware Corporation
|
|
|
|
|
By: |
/s/
Mikael Hagman |
|
Name:
Mikael Hagman
Title:
President & CEO
|
ANNEX
A
NEONODE
INC.
SBE
NOTE PURCHASE AGREEMENT
NOTE
PURCHASE AGREEMENT (the “Agreement”)
dated
as of May 18, 2007 among NEONODE INC., a Delaware corporation (“Company”),
and
SBE, Inc., a Delaware limited liability company ( “SBE”
or
the
“New
Investor”).
Background: The
Company desires to sell to the New Investor, and the New Investor desires
to
purchase, in two closings, senior secured notes, in substantially the form
attached hereto as Exhibit
1
(the
“Notes”)
in
aggregate principal amount of $1,000,000.
On
February 28, 2006, November 20, 2006 and January 22, 2007, the Company
sold
senior secured notes in aggregate principal amount of $10,000,000 (the
“Bridge
Notes”)
to
accredited and non-US investors (collectively in this capacity, the
“Bridge
Investors”),
and
in connection therewith (i) the Company entered into the Security Agreement
with
AIGH (as agent for the Bridge Investors), (ii) the Intercreditor Agreement
was
amended and restated to reflect the issuance of additional Bridge Notes,
and
(iii) the Pledgors entered into the Stockholder Pledge Agreements with
the
Bridge Investors.
The
Company intends to sell additional Senior Secured Notes, substantially
similar
to the Bridge Notes, in the principal amount of up to $3,000,000 (the
“May
2007 Notes”).
The
proceeds from the Notes and the May 2007 Notes are necessary for the development
and continuance of the business of the Company and each of its
Subsidiaries.
The
Company has entered into an Agreement and Plan of Merger and Reorganization,
dated January 19, 2007 (the “Merger
Agreement”),
by
and among the Company, SBE and Cold Winter Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of SBE (“Merger
Sub”),
which
provides for a merger (the “Merger”)
of the
Company with and into Merger Sub.
Certain
Definitions:
“AIGH”
means
AIGH Investment Partners, LLC, a Delaware limited liability
company.
“Capitalization
Table”
means
the Capitalization Table attached as Exhibit
7
to this
Agreement.
“Certificate
of Incorporation”
has
the
meaning set forth in Section 2.2.
“Closing”
or
“Closings”
have
the meanings set forth in Section 1.2.
“Collateral”
has
the
meaning set forth in the Security Agreement, as amended, a copy of which
is
included with Exhibit
2
hereto.
“Common
Stock”
shall
mean stock of the Company of any class (however designated) whether now
or
hereafter authorized, which generally has the right to participate in the
voting
and in the distribution of earnings and assets of the Company without limit
as
to amount or percentage, including the Company’s Common Stock, $.01 par value
per share.
“Company”
includes the Company and any Person which shall succeed to or assume, directly
or indirectly, the obligations of the Company hereunder.
“Company
Disclosure”
means
the disclosure materials in the form attached as Exhibit
6
to this
Agreement.
“First
Closing”
has
the
meaning set forth in Section 1.2.
“First
Closing Date”
has
the
meaning set forth in Section 1.2.
“Governmental
Body”
shall
mean any: (a) nation, state, commonwealth, province, municipality or district;
(b) federal, state, local, municipal, foreign or other government; or (c)
governmental or quasi-governmental authority of any nature (including any
governmental division, department, agency, commission, instrumentality,
official, organization, unit, body or entity and any court or other
tribunal).
“Guaranties”
means
the respective guaranties, dated February 28, 2006, as amended, delivered
to the
investors identified on Exhibit
A
of the
Stockholder Pledge Agreements, respectively, copies of which are included
with
Exhibit
4
hereto.
“Guarantors”
means
each of Thomas Erickson, Magnus Goertz and Per Bystedt, each as a party
to his
respective Guaranty.
“Intercreditor
Agreement”
means
the Intercreditor Agreement, dated February 28, 2006, as amended, between
AIGH
and Petrus.
“Material
Adverse Change”
shall
mean any change in the facts represented by the Company in the Agreement
or the
business, financial condition, results of operation, prospects, properties
or
operations of the Company and its Subsidiaries taken as a whole which may
have a
material adverse effect on the value of the Common Stock of the
Company.
“Material
Adverse Effect”
shall
mean a material adverse effect on the operations, assets, liabilities,
financial
condition, prospects or business of the Company.
“May
2007 Notes”
has
the
meaning set forth in the recitals.
“Merger”
has
the
meaning set forth in the recitals.
“Merger
Agreement”
has
the
meaning set forth in the recitals.
“Neonode
AB”
means
Neonode AB, a Swedish corporation.
“Notes”
has
the
meaning set forth in the recitals.
“Own”
shall
mean own beneficially, as that term is defined in the rules and regulations
of
the SEC.
“Petrus”
means
Petrus Holdings, SA, a corporation organized under the laws of
Luxembourg.
“Person”
means
any individual, sole proprietorship, partnership, corporation, limited
liability
company, business trust, unincorporated association, joint stock corporation,
trust, joint venture or other entity, any university or similar institution,
or
any government or any agency or instrumentality or political subdivision
thereof.
“Pledged
Collateral”
has
the
meaning set forth in the Stockholder Pledge Agreements, as amended, copies
of
which are included with Exhibit
3
hereto.
“Pledgors”
means
Rector AB (or its successor in interest, Athemis Limited), Iwo Jima Sarl
and
Wirelesstoys Sweden AB, each as a party to its respective Stockholder Pledge
Agreement.
“Proprietary
Assets”
shall
mean any: (i) patent, patent application, trademark (whether registered
or
unregistered), trademark application, trade name, fictitious business name,
service mark (whether registered or unregistered), service mark application,
copyright (whether registered or unregistered), copyright application,
maskwork,
maskwork application, trade secret, know-how, customer list, franchise,
system,
computer software, computer program, invention, design, blueprint, engineering
drawing, proprietary product, technology, proprietary right or other
intellectual property right or intangible asset relating to the foregoing;
or
(ii) right to use or exploit any of the foregoing.
“SEC”
means
the Securities and Exchange Commission.
“Second
Closing”
has
the
meaning set forth in Section 1.2.
“Second
Closing Date”
has
the
meaning set forth in Section 1.2.
“Securities
Act”
means
the Securities Act of 1933, as amended.
“Security
Agreement”
means
the Security Agreement, dated February 28, 2006, as amended, between the
Company
and AIGH, as agent for the Bridge Investors, a copy of which is included
with
Exhibit
2
hereto.
“Stockholder
Pledge Agreements”
means
the Stockholder Pledge and Security Agreements, dated February 28, 2006,
as
amended, between the Bridge Investors and each of the Pledgors, respectively,
copies of which are included with Exhibit
3
hereto.
“Subsidiary”
shall
mean, immediately prior to each Closing, any corporation of which stock
or other
interest having ordinary power to elect a majority of the board of directors
(or
other governing body) of such entity (regardless of whether or not at the
time
stock or interests of any other class or classes of such corporation shall
have
or may have voting power by reason of the happening of any contingency)
is,
immediately prior to the applicable Closing, directly or indirectly Owned
by the
Company or by one or more of its Subsidiaries.
“U.S.
person”
shall
have the meaning set forth in Regulation S of the SEC.
In
consideration of the mutual covenants contained herein, the parties agree
as
follows:
1. Purchase
and Sale of Notes.
1.1. Sale
and Issuance of Notes.
The
Company shall sell to the New Investor and the New Investor shall purchase
from
the Company, Notes in an aggregate principal amount of $1,000,000 at par,
subject to acceptance, in whole or in part, by the Company.
1.2. Closings.
The
purchase and sale of the Notes hereunder shall take place in two closings
(each
a “Closing”
and
collectively, the “Closings”).
The
first closing (the “First
Closing”)
hereunder shall be for $500,000 in principal amount of Notes and shall
take
place within three business days after the date hereof (the “First
Closing Date”).
A
second closing (the “Second
Closing”)
for
the purchase and sale of an additional $500,000 in principal amount of
Notes
shall take place on a date requested by Investor, but no later than June
15,
2007 (the “Second
Closing Date”).
Each
Closing shall take place at the offices of Hahn & Hessen LLP, the Company’s
counsel, in New York, New York, or at such other location as is mutually
acceptable to the New Investor and the Company.
1.3. Conditions
of the First Closing.
The
obligation of the New Investor to complete the purchase of the Notes at
the
First Closing is subject to fulfillment of the following
conditions:
(a) the
Company and AIGH shall execute and deliver Amendment 3 to the Security
Agreement, dated the First Closing Date, in the form attached as Exhibit 2
(“Security
Agreement Amendment No. 3”);
(c) each
Pledgor and AIGH shall execute and deliver the appropriate Amendment 3
to such
Pledgor’s respective Stockholder Pledge Agreement, dated the First Closing Date,
each in substantially the form attached as Exhibit 3
(“Stockholder
Pledge Amendment No. 3”);
(d) each
Guarantor and AIGH shall execute and deliver the appropriate Amendment
3 to such
Guarantor’s respective Guaranty, dated the First Closing Date, each in
substantially the form attached as Exhibit
4
(“Guaranty
Amendment No. 3”,
and
with the Agreement, the Notes, Security Agreement Amendment No. 3, Stockholder
Pledge Amendment No. 3
and the
other documents required in connection with the transactions contemplated
in the
Agreement, the “Transaction
Documents”);
(e) the
Company shall have executed and delivered all documents, such as financing
statements and assignments, reasonably requested by counsel for the New
Investor; and
(f) the
absence of any Material Adverse Change since the date hereof.
1.4. Conditions
of the Second Closing.
The
obligation of the New Investor to complete the purchase of the Notes at
the
Second Closing is subject to fulfillment of the following
condition:
(a) the
Merger Agreement shall have not have been terminated as of the Second Closing
Date.
2. Representations
and Warranties of the Company.
The
Company hereby represents and warrants to the New Investor as
follows:
2.1. Corporate
Organization; Authority; Due Authorization.
(a) The
Company (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (ii)
has the
corporate power and authority to own or lease its properties as and in
the
places where such business is now conducted and to carry on its business
as now
conducted and (iii) is duly qualified and in good standing as a foreign
corporation authorized to do business in every jurisdiction where the failure
to
so qualify, individually or in the aggregate, would have a Material Adverse
Effect. Set forth in the Company Disclosure is a complete and correct list
of
all Subsidiaries. Each Subsidiary is duly incorporated, and validly existing
under the laws of its jurisdiction of incorporation and is qualified to
do
business as a foreign corporation in each jurisdiction in which qualification
is
required, except where failure to so qualify would not have a Material
Adverse
Effect.
(b) The
Company (i) has the requisite corporate power and authority to execute,
deliver
and perform this
Agreement and the other Transaction Documents to
which
it is a party and
to
incur the obligations herein and therein and (ii) has been authorized by
all
necessary corporate action to execute, deliver and perform this Agreement
and
the other Transaction Documents to which it is a party and to consummate
the
transactions contemplated hereby and thereby (the “Contemplated
Transactions”).
Each
of this Agreement and the other Transaction Documents is a valid and binding
obligation of the Company enforceable in accordance with its terms except
as
limited by applicable bankruptcy, reorganization, insolvency, moratorium
or
similar laws affecting the enforcement of creditors’ rights and the availability
of equitable remedies (regardless of whether such enforceability is considered
in a proceeding at law or equity).
2.2. Capitalization.
The
authorized capital stock of the Company is 10,000,000 shares of Common
Stock,
$.01 par value per share. Except as contemplated by this Agreement, and
as set
forth in the Capitalization Table, there are (i) no outstanding
subscriptions, warrants, options, conversion privileges or other rights
or
agreements obligating the Company or Neonode AB to purchase or otherwise
acquire
or issue any shares of capital stock of the Company or Neonode AB (or shares
reserved for such purpose), (ii) no preemptive rights contained in the
Company’s Certificate of Incorporation, as amended (the “Certificate
of Incorporation”),
By-Laws of the Company or contracts to which the Company is a party or
rights of
first refusal with respect to the issuance of additional shares of capital
stock
of the Company, and (iii) no commitments or understandings (oral or
written) of the Company or Neonode AB to issue any shares, warrants, options
or
other rights. Except as disclosed in the Company Disclosure with respect
to each
Subsidiary, (x) all the issued and outstanding shares of the Subsidiary’s
capital stock have been duly authorized and validly issued, are fully paid
and
nonassessable, have been issued in compliance with applicable federal and
state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, (y) except
as disclosed in the Company Disclosure, there are no outstanding options
to
purchase, or any preemptive rights or other rights to subscribe for or
to
purchase, any securities or obligations convertible into, or any contracts
or
commitments to issue or sell, shares of the Subsidiary’s capital stock or any
such options, rights, convertible securities or obligations, and (z) the
Company
owns 100% of the outstanding equity of each Subsidiary. The Capitalization
Table
sets forth accurately and completely the capitalization of the Company
as of the
date hereof and the anticipated capitalization of SBE after giving effect
to the
Merger.
2.3. Validity
of Notes.
The
issuance of the Notes has been duly authorized and upon each Closing the
Notes
are valid and binding and will be in full force and effect and enforceable
in
accordance with their terms.
2.4. Private
Offering.
Neither
the Company nor anyone acting on its behalf has within the last 12 months
issued, sold or offered any security of the Company (including, without
limitation, any Notes) to any Person under circumstances that would cause
the
issuance and sale of the Notes, as contemplated by this Agreement, to be
subject
to the registration requirements of the Securities Act.
2.5. Brokers
and Finders.
The
Company has not retained any investment banker, broker or finder in connection
with the Contemplated Transactions. The Company has, however, retained
Griffin
Securities, Inc., as an advisor in connection with the Merger.
2.6. Financial
Statements; Absence of Certain Changes.
Each of
(a) the audited balance sheet of the Company as of December 31, 2006, (b)
the
audited statements of income, and that the unaudited statements may not
contain
all footnotes required by generally accepted accounting principles, retained
earnings and cash flows of the Company for the period ended on December
31,
2006, and (c) the audited statements of income, retained earnings and cash
flows
of the Company for the period ended on December 31, 2006, included in the
Company Disclosure (including any related notes and schedules, if any),
(the
“Financial
Statements”)
fairly
presents, in all material respects, the financial position of the Company,
or
the results of operations, retained earnings or cash flows, as the case
may be,
of the Company as of the referenced date or for the periods set forth therein
(subject to normal year-end audit adjustments which would not be material
in
amount or effect), in each case in accordance with generally accepted accounting
principles consistently applied during the periods involved, except as
may be
noted therein. Neither the Company nor any Subsidiary has any liabilities
or
obligations of any nature (whether accrued, absolute, contingent or otherwise),
including for taxes, that would be required to be reflected on, or reserved
against in, Financial Statements, except for (i) liabilities or obligations
that
were so reserved on, or reflected in (including the notes to), the Financial
Statements; and (ii) liabilities or obligations which would not, individually
or
in the aggregate, have a Material Adverse Effect. Other than the indebtedness
as
set forth in the Financial Statements or the Company Disclosure, neither
the
Company nor any Subsidiary has any indebtedness other than reasonable accounts
payable. Except as specifically contemplated by this Agreement or as set
forth
in the Company Disclosure and the Financial Statements, there has not been
any
Material Adverse Change since December 31, 2006.
2.7. Litigation.
Except
as set forth in the Company Disclosure, there are no claims, actions, suits,
investigations, inquiries or proceedings (“Actions”)
pending against the Company or its Subsidiaries or, to the knowledge of
the
Company, threatened against the Company or its Subsidiaries, or any officer,
director, employee or agent thereof in his or her capacity as such, at
law or in
equity, or before or by any court, tribunal, arbitrator, mediator or any
federal
or state commission, board, bureau, agency or instrumentality that would
reasonably be expected to have, either individually or in the aggregate,
a
Material Adverse Effect. To the Company’s knowledge, there is no factual or
legal basis for any such Action. The Company and each Subsidiary is not
a party
to or subject to the provisions of any order, writ, injunction, judgment
or
decree of any court or government agency or instrumentality and there is
no
Action by the Company or any Subsidiary currently pending or which the
Company
or any Subsidiary intends to initiate.
2.8. Proprietary
Assets.
(a) The
Company Disclosure sets forth, with respect to each Proprietary Asset of
the
Company and any Subsidiary registered with or issued by any Governmental
Body or
for which an application has been filed with any Governmental Body, (i)
a brief
description of such Proprietary Asset and (ii) the names of the jurisdictions
covered by the applicable registration or application. The Company Disclosure
identifies and provides a brief description of all other Proprietary Assets
owned by the Company and any Subsidiary, and identifies and provides a
brief
description of each Proprietary Asset licensed to the Company and any Subsidiary
by any person (except for any Proprietary Asset that is licensed to the
Company
or any Subsidiary under any third party license generally available to
the
public at a cost of less than $10,000), and identifies the license agreement
under which such Proprietary Asset is being licensed to the Company or
Subsidiary, as appropriate. Except as set forth in the Company Disclosure,
the
Company and its Subsidiaries, as a whole, have good, valid and marketable
title
to, or have a valid right to use, all of the Proprietary Assets used in
the
Company’s business (including without limitation all Proprietary Assets
identified in the Company Disclosure), free and clear of all liens and
other
encumbrances to the knowledge of the Company; and are not obligated to
make any
payment to any person for the use of any Proprietary Asset. The Company
and each
Subsidiary has not developed jointly with any other person any Proprietary
Asset
with respect to which such other person has any rights. Except as set forth
in
the Company Disclosure, none of which shall have a Material Adverse Effect,
the
Company has no knowledge that any other person has any right, title or
interest
in any of the Proprietary Assets of the Company or its
Subsidiaries.
(b) The
Company and its Subsidiaries, as appropriate, have taken reasonable and
customary measures and precautions to protect and maintain the confidentiality
and secrecy of all Proprietary Assets of the Company and its Subsidiaries
(except Proprietary Assets whose value would be unimpaired by public disclosure)
and otherwise to maintain and protect the value of all Proprietary Assets
of the
Company and its Subsidiaries. Each employee, officer, director, consultant
and
contractor (not including contractors without access to confidential information
of the Company) of the Company and its Subsidiaries (each, an “Employee”)
has
entered into and executed an agreement providing for (i) the assignment
to the
Company (or to any of its Subsidiaries) of personal rights or claims to
Proprietary Assets for which such Employee’s personal rights or claims arose out
of the scope of his/her employment or retainer by the Company or its
Subsidiaries and (ii) the nondisclosure of confidential information acquired
by
the Employee with respect to the Proprietary Assets of the Company and
its
Subsidiaries or an employment or consulting agreement containing substantially
similar terms. Except as set forth in the Company Disclosure, the Company
and
each Subsidiary has not (other than pursuant to license agreements identified
in
the Company Disclosure) disclosed or delivered to any person, or permitted
the
disclosure or delivery to any person of, (i) the source code, or any portion
or
aspect of the source code, of any Proprietary Asset of the Company or its
Subsidiaries, (ii) the object code, or any portion or aspect of the object
code,
of any Proprietary Asset of the Company or its Subsidiaries or (iii) any
patent
applications (except as required by law).
(c) (i)
To
the knowledge of the Company, none of the Proprietary Assets of the Company
or
its Subsidiaries necessary for the conduct of their businesses infringes
or
conflicts with any Proprietary Asset owned or used by any other Person,
(ii) to
the knowledge of the Company, the Company and each Subsidiary is not infringing,
misappropriating or making any unlawful use of, and the Company and each
Subsidiary has not at any time infringed, misappropriated or made any unlawful
use of, or received any notice or other communication (in writing or otherwise)
of any actual, alleged, possible or potential infringement, misappropriation
or
unlawful use of, any Proprietary Asset owned or used by any other person,
and
(iii) to the knowledge of the Company, no other person is infringing,
misappropriating or making any unlawful use of, and no Proprietary Asset
owned
or used by any other person infringes or conflicts with, any Proprietary
Asset
of the Company or its Subsidiaries.
(d) There
has
not been any claim by any customer or other person alleging that any Proprietary
Asset of the Company or its Subsidiaries (including each version thereof
that
has ever been licensed or otherwise made available by the Company or its
Subsidiaries to any person) does not conform in all material respects with
any
specification, documentation, performance standard, representation or statement
made or provided by or on behalf of the Company or its Subsidiaries, and,
to the
knowledge of the Company, there is no basis for any such claim.
(e) The
Company is not knowledgeable of any Proprietary Asset owned or used by
any other
person (except for any Proprietary Asset that is licensed to the Company
or any
Subsidiary under any third party license set forth in the Company Disclosure
or
would otherwise be commercially available) necessary to enable the Company
and
each Subsidiary to conduct its businesses in the manner in which such businesses
have been and are being conducted or are expected to be conducted pursuant
to
the Company Disclosure. Neither the Company nor any Subsidiary has licensed,
or
agreed to license, any of its Proprietary Assets to any person on an exclusive,
semi-exclusive or royalty-free basis. Neither the Company nor any Subsidiary
has
entered into any covenant not to compete or contract limiting its ability
to
exploit fully any of its Proprietary Assets or to transact business in
any
market or geographical area or with any person. Without limitation on the
foregoing, except as set forth in the Company Disclosure, no officer, director
or Stakeholder, either as an individual or through an affiliate, has any
claim
to own or any other rights to use any of the Proprietary Assets.
(f) Except
as
set forth in the Company Disclosure, the Company is not knowledgeable that
any
Employee is obligated under any agreement (including licenses, covenants
or
commitments of any nature) or subject to any judgment, decree or order
of any
court or administrative agency, or any other restriction that would interfere
with the use of his or her best efforts to carry out his or her duties
for the
Company and its Subsidiaries, as appropriate, or to promote the interests
of the
Company and its Subsidiaries, as appropriate, or that would conflict with
the
Company’s or its Subsidiaries’ business as proposed to be conducted. The Company
does not believe it is or will be necessary to utilize any inventions of
any
Employees (or persons the Company or its Subsidiaries currently intend
to hire)
made prior to their employment or retainer by the Company or its Subsidiaries,
as appropriate, which have not been assigned to the Company. To the Company’s
knowledge, after due inquiry, at no time during the conception of, or reduction
to practice, or development of, any of the Company’s or its Subsidiaries’
Proprietary Assets was any developer, inventor or other contributor to
such
Proprietary Assets operating under any grants from any governmental entity
or
agency or private source, performing research sponsored by any governmental
entity or agency or private source or subject to any employment agreement
or
invention assignment or nondisclosure agreement or other obligation with
any
third party that could adversely affect the Company’s or its Subsidiaries’
rights in such Proprietary Assets.
(g) The
Company believes that the exceptions, qualifications and other disclosures
relating to the Proprietary Assets set forth in the Company Disclosure
shall not
have a Material Adverse Effect in the aggregate.
2.9. Company
Disclosure.
No
representation or warranty of the Company herein, no exhibit or schedule
hereto,
and no information contained or referenced in the Company Disclosure, when
read
together, contains or will contain any untrue statement of a material fact
or
omits or will omit to state a material fact necessary in order to make
the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
3. Representations
and Warranties of the New Investor.
The New
Investor represents and warrants to the Company as follows:
3.1. The
New
Investor (i) has full power and authority to execute, deliver and perform
this
Agreement and the other Transaction Documents to which it is a party and
to
incur the obligations herein and therein and (ii) if applicable has been
authorized by all necessary corporate or equivalent action to execute,
deliver
and perform this Agreement and the other Transaction Documents and to consummate
the Contemplated Transactions. Each of this Agreement and the other Transaction
Documents to which the New Investor is a party is a valid and binding obligation
of the New Investor enforceable in accordance with its terms, except as
limited
by applicable bankruptcy, reorganization, insolvency, moratorium or similar
laws
affecting the enforcement of creditors’ rights and the availability of equitable
remedies (regardless of whether such enforceability is considered in a
proceeding at law or equity).
3.2. The
New
Investor has not retained any investment banker, broker or finder in connection
with the Contemplated Transactions.
3.3. The
Notes
will be acquired for investment for the New Investor’s own account, not as a
nominee or agent, and not with a view to the resale or distribution of
any part
thereof such that the New Investor would constitute an “underwriter” under the
Securities Act.
3.4. The
New
Investor understands and acknowledges that the offering of the Notes pursuant
to
this Agreement will not be registered under the Securities Act or qualified
under any state securities laws on the grounds that the offering and sale
of the
Notes are exempt from registration and qualification, respectively, under
the
Securities Act and the Blue Sky Laws.
3.5. The
New
Investor represents that (i) the New Investor is able to fend for itself in
the Contemplated Transactions; (ii) the New Investor has such knowledge
and
experience in financial and business matters as to be capable of evaluating
the
merits and risks of the New Investor’s prospective investment in the Notes;
(iii) the New Investor recognizes that its investment in the Notes involves
a high degree of risk which may result in the loss of the total amount
of its
investment and can afford the complete loss of such investment (iv) the
New
Investor recognizes that the Company has a very limited operating history
upon
which an evaluation of its business and prospects can be based; (v) the
New
Investor recognizes that the Company's prospects must be considered in
light of
its limited operating history, together with the expenses, difficulties,
uncertainties and delays frequently encountered in connection with the
early
phases of a new business; and (vi) the New Investor recognizes that there
can be
no assurance that the Company will ever achieve any time soon or sustain
profitability.
3.6. The
New
Investor has read and had the opportunity to discuss with management of
the
Company: (i) this Agreement, (ii) the Merger Agreement, (iii) the Company
Disclosure and (iv) the Risk Factors in the form attached as Exhibit
5
hereto.
3.7 The
New
Investor (i) qualifies as an “accredited investor” as such term is defined under
Rule 501 promulgated under the Securities Act, and (ii) the New Investor
has not
been organized for the purpose of purchasing the Notes.
4. Securities
Laws; Certain Covenants of New Investor.
4.1. The
New
Investor agrees that the Notes may not be sold by the New Investor without
registration under the Securities Act or an exemption therefrom, and therefore
the New Investor may be required to hold the Notes for an indeterminate
period.
4.2. The
New
Investor agrees that the obligations under the Notes shall be subject to
the
Security Agreement, Stockholder Pledge Agreement and the Intercreditor
Agreement, each as amended as contemplated herein. AIGH shall have no duty
to
the New Investor arising out of its actions or failure to act under the
Security
Agreement, Stockholder Pledge Agreement, the Intercreditor Agreement or
Guaranties, each as amended as contemplated herein, provided that AIGH
shall
apply the same standard of care as it would use in determining whether
to act
under such agreements in its capacity as a New Investor.
4.4. The
New
Investor agrees to indemnify AIGH from and against any and all reasonable
claims, losses, and liabilities (including, without limitation, reasonable
attorney fees) arising out of or resulting from the Notes, Security Agreement,
Stockholder Pledge Agreement, the Intercreditor Agreement or Guaranties,
each as
amended as contemplated herein, except claims, losses, or liabilities resulting
from the gross negligence or willful misconduct of AIGH.
4.5. The
New
Investor will upon demand pay the amount of any and all reasonable expenses,
including, without limitation, the reasonable fees and expenses of counsel
and
of any experts and agents, which AIGH may incur in connection with (i)
the
preparation and administration of the Security Agreement, Stockholder Pledge
Agreement, the Intercreditor or Guaranties, each as amended as contemplated
herein; (ii) the exercise or enforcement of any of the rights of AIGH or
the New
Investor thereunder; or (iii) the failure by the New Investor to perform
or
observe any of the provisions hereof or thereof.
4.6. The
New
Investor hereby appoints AIGH as its agent under the Security Agreement
with
respect to the Collateral and the creation, perfection, priority, preservation,
protection and enforcement of a security interest therein in accordance
with the
terms of the Security Agreement. The New Investor hereby authorizes AIGH
to take
such actions with respect to the Collateral, for the pro-rata benefit of
the New
Investor, and the Bridge Investors in accordance with Section 9 of the
Security
Agreement, as AIGH determines to take in its sole discretion, and the New
Investor agrees to indemnify and hold harmless AIGH for all costs, claims
or
expenses (including without limitation attorneys’ fees and expenses) in
connection with such actions taken or omitted to be taken, except to the
extent
resulting from the gross negligence or willful misconduct of AIGH. AIGH
shall
provide prompt notice of any material action under the Security Agreement
to the
New Investor.
4.7. The
New
Investor hereby appoints AIGH as its agent under the Stockholder Pledge
Agreements with respect to the Pledged Collateral and the creation, perfection,
priority, preservation, protection and enforcement of a security interest
therein in accordance with the terms of the Stockholder Pledge Agreements.
The
New Investor hereby authorizes AIGH to take such actions with respect to
the
Pledged Collateral, for the pro-rata benefit of the New Investor and the
Bridge
Investors in accordance with Section 9 of the Stockholder Pledge Agreements,
as
AIGH determines to take in its sole discretion, and the New Investor agrees
to
indemnify and hold harmless AIGH for all costs, claims or expenses (including
without limitation attorneys’ fees and expenses) in connection with such actions
taken or omitted to be taken, except to the extent resulting from the gross
negligence or willful misconduct of AIGH. AIGH shall provide prompt notice
of
any material action under the Stockholder Pledge Agreements to the New
Investor.
5. Additional
Covenants of the Company.
5.1. Form
D.
As soon
as is practicable following each Closing, the Company shall prepare and
file
with the SEC a Form D concerning the sale of the Notes.
5.2. Financial
Reports and Tax Returns.
Until
the Company is a public company required to file financial reports with
the U.S.
Securities and Exchange Commission, the Company will furnish or will cause
to be
furnished to the New Investor:
(a) within
90
days after the end of each fiscal quarter and fiscal year of the Company,
respectively, financial statements (including income statement and balance
sheet) in accordance with generally accepted accounting standards (except
that
interim financial statements need not contain footnotes or normal year-end
adjustments); and
(b) within
90
days after the end of each fiscal year of the Company, an independent certified
audit of financial statements for such fiscal year.
6. Miscellaneous.
6.1. Entire
Agreement; Successors and Assigns.
This
Agreement and the other Transaction Documents constitute the entire contract
between the parties relative to the subject matter hereof and thereof,
and no
party shall be liable or bound to the other in any manner by any warranties,
representations or covenants except as specifically set forth herein or
therein.
This Agreement and the other Transaction Documents supersede any previous
agreement among the parties with respect to the Notes. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the
respective executors, administrators, heirs, successors and assigns of
the
parties. Except as expressly provided herein, nothing in this Agreement,
expressed or implied, is intended to confer upon any party, other than
the
parties hereto, any rights, remedies, obligations or liabilities under
or by
reason of this Agreement.
6.2. Survival
of Representations and Warranties.
All
representations and warranties of the Company shall survive the execution
and
delivery of this Agreement and the Closings hereunder and shall continue
in full
force and effect for one year after the Second Closing. The covenants of
the
Company set forth in Section 5 shall remain in effect as set forth
therein.
6.3. Governing
Law; Jurisdiction.
This
Agreement shall be governed by and construed in accordance with the laws
of the
State of New York without regard to principles of conflicts of law. Each
party
hereby irrevocably consents and submits to the jurisdiction of any New
York
State or United States Federal Court sitting in the State of New York,
County of
New York, over any action or proceeding arising out of or relating to this
Agreement and irrevocably consents to the service of any and all process
in any
such action or proceeding by registered mail addressed to such party at
its
address specified in Section 6.6 (or as otherwise noticed to the other
party).
Each party further waives any objection to venue in New York and any objection
to an action or proceeding in such state and county on the basis of forum
non conveniens.
Each
party also waives any right to trial by jury.
6.4. Counterparts.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and
the same
instrument.
6.5. Headings.
The
headings of the sections of this Agreement are for convenience and shall
not by
themselves determine the interpretation of this Agreement.
6.6. Notices.
Any
notice required or permitted hereunder shall be given in writing and shall
be
deemed effectively given upon (i) personal delivery, (ii) delivery by fax
(with
answer back confirmed) or (iii) delivery by electronic mail (with reception
confirmed), addressed to a party at its address or sent to the fax number
or
e-mail address shown below or at such other address, fax number or e-mail
address as such party may designate by three days advance notice to the
other
party.
Any
notice to the New Investor shall be sent to:
if
to New
Investor:
SBE,
Inc.
Attn:
David Brunton
4000
Executive Parkway
Suite
200
San
Ramon, CA 94583
Facsimile:
(925) 355-2041
with
a
copy to:
Cooley
Godward Kronish LLP
101
California Street, 5th Floor
San
Francisco, CA 94111-5800
Attention:
Jodie Bourdet, Esq.
Fax:
415-693-2222
Any
notice to the Company shall be sent to:
Neonode
Inc.
Biblioteksgatan
11
S111
46
Stockholm, Sweden
Attention:
President
Fax
Number: +46-8-678 18 51
with
a
copy to:
Hahn
& Hessen LLP
488
Madison Avenue
New
York,
New York 10022
Attention:
James Kardon, Esq.
Fax
Number: (212) 478-7400
6.7. Rights
of Transferees.
Any and
all rights and obligations of the New Investor herein incident to the ownership
of Notes shall pass successively to all subsequent transferees of such
securities until extinguished pursuant to the terms hereof.
6.8. Severability.
Whenever possible, each provision of this Agreement shall be interpreted
in such
a manner as to be effective and valid under applicable law, but if any
provision
of this Agreement shall be deemed prohibited or invalid under such applicable
law, such provision shall be ineffective to the extent of such prohibition
or
invalidity, and such prohibition or invalidity shall not invalidate the
remainder of such provision or any other provision of this
Agreement.
6.9. Expenses.
Irrespective of whether the Closings are effected, the Company shall pay
all
costs and expenses that it incurs with respect to the negotiation, execution,
delivery and performance of this Agreement. The New Investor shall be
responsible for all costs incurred by the New Investor in connection with
the
negotiation, execution, delivery and performance of this Agreement including,
but not limited to, legal fees and expenses.
6.10. Amendments
and Waivers.
Unless
a particular provision or section of this Agreement requires otherwise
explicitly in a particular instance, any provision of this Agreement may
be
amended and the observance of any provision of this Agreement may be waived
(either generally or in a particular instance and either retroactively
or
prospectively), only with the written consent of the Company and the holders
of
a majority of the principal amount of the Notes. Any amendment or waiver
effected in accordance with this Section 6.10 shall be binding upon each
holder
of any Notes at the time outstanding (including securities into which such
Notes
are convertible), each future holder of all such Notes, and the
Company.
6.11. Conflicts.
The
Company and the New Investor (i) acknowledge that Hahn & Hessen LLP, counsel
to the Company in the Contemplated Transactions and the Merger, has acted,
and
from time to time continues to act, as counsel to (A) the Bridge Investors
or
affiliates thereof, in connection with the Bridge Notes, and (B) AIGH in
connection with the Bridge Notes, the Security Agreement, investments in
SBE,
and in unrelated matters, (ii) consent to the representation of the Company
and
such other representation of the Bridge Investors, or affiliates thereof,
by
Hahn & Hessen LLP, (iii) acknowledge that partners of Hahn & Hessen LLP
own securities of SBE constituting less than 0.2% of outstanding stock
of SBE,
and (iv) waive any conflicts of interest claim which may arise from any
or all
of the foregoing.
[signature
page follows]
SIGNATURE
PAGE
TO
NEONODE
INC.
SBE
NOTE
PURCHASE AGREEMENT
Dated
May
18, 2007
IN
WITNESS WHEREOF, the undersigned has executed this Agreement as of the
18th
day
of
May, 2007, and execution of this Agreement shall constitute execution of
the
consent to the applicable Stockholder Pledge Agreement, Guaranties and
the
Security Agreement, each as amended.
|
|
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SBE,
INC.
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|
|
|
By:
/s/
David W. Brunton
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Name:
David
W. Brunton
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Title:
CFO
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ACCEPTED
AND AGREED:
NEONODE
INC.
By:
/s/
Mikael Hagman
Name:
Mikael
Hagman
Title:
President & CEO
Dated:
May
18,
2007
EXHIBITS
TO
THE
SBE NOTE PURCHASE AGREEMENT
Exhibit
1:
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Form
of Note
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Exhibit
2:
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Form
of Security Agreement Amendment No. 3, Security Agreement Amendment
No. 2,
Security Agreement Amendments No. 1 and Security
Agreement
|
|
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|
Exhibit
3:
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Form
of Stockholder Pledge Amendment No. 3, Stockholder Pledge Amendment
No. 2,
Stockholder Pledge Amendment No. 1 and Stockholder Pledge Agreements,
for
each of
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Rector
AB
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|
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Iwo
Jima Sarl
|
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Wirelesstoys
|
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Exhibit
4:
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Form
of Guaranty Amendment No. 3, Guaranty Amendment No. 2, Guaranty
Amendment
No. 1 and Guaranties, for each of:
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Per
Bystedt
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Thomas
Eriksson
|
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Magnus
Goertz
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Exhibit
5:
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|
Risk
Factors
|
|
|
|
Exhibit
6:
|
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Company
Disclosure
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Exhibit
7:
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Capitalization
Table
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ANNEX
C
SBE,
INC.
2006
EQUITY INCENTIVE PLAN
ADOPTED
BY THE BOARD OF DIRECTORS: JANUARY 17, 2006
APPROVED
BY THE STOCKHOLDERS: MARCH 21, 2006
TERMINATION
DATE: JANUARY 16, 2016
1. GENERAL.
(a) Eligible
Stock Award Recipients.
The
persons eligible to receive Stock Awards are Employees, Directors, and
Consultants.
(b) Available
Stock Awards. The
Plan
provides for the grant of the following Stock Awards: (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, and (iii) Stock Bonus
Awards.
(c) Purpose.
The
Company, by means of the Plan, seeks to secure and retain the services
of the
group of persons eligible to receive Stock Awards as set forth in Section
1(a),
to
provide incentives for such persons to exert maximum efforts for the success
of
the Company and any Affiliate and to provide a means by which such eligible
recipients may be given an opportunity to benefit from increases in value
of the
Common Stock through the granting of Stock Awards.
As
used
in the Plan, the following definitions shall apply to the capitalized terms
indicated below:
(a) “Affiliate”
means
(i) any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, provided each corporation in the
unbroken
chain (other than the Company) owns, at the time of the determination,
stock
possessing fifty percent (50%) or more of the total combined voting power
of all
classes of stock in one of the other corporations in such chain, and (ii)
any
corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company, provided each corporation (other than the last
corporation) in the unbroken chain owns, at the time of the determination,
stock
possessing fifty percent (50%) or more of the total combined voting power
of all
classes of stock in one of the other corporations in such chain. The Board
shall
have the authority to determine (i) the time or times at which the ownership
tests are applied, and (ii) whether “Affiliate” includes entities other than
corporations within the foregoing definition.
(b) “Board”
means
the Board of Directors of the Company.
(c) “Capitalization
Adjustment”
has the
meaning ascribed to that term in Section 10(a).
(d) “Change
in Control”
means
the occurrence, in a single transaction or in a series of related transactions,
of any one or more of the following events:
(i) any
Exchange Act Person becomes the Owner, directly or indirectly, of securities
of
the Company representing more than fifty percent (50%) of the combined
voting
power of the Company’s then outstanding securities other than by virtue of a
merger, consolidation or similar transaction. Notwithstanding the foregoing,
a
Change in Control shall not be deemed to occur (A) on account of the acquisition
of securities of the Company by an investor, any affiliate thereof or any
other
Exchange Act Person that acquires the Company’s securities in a transaction or
series of related transactions the primary purpose of which is to obtain
financing for the Company through the issuance of equity securities, or
(B)
solely because the level of Ownership held by any Exchange Act Person (the
“Subject
Person”)
exceeds the designated percentage threshold of the outstanding voting securities
as a result of a repurchase or other acquisition of voting securities by
the
Company reducing the number of shares outstanding, provided that if a Change
in
Control would occur (but for the operation of this sentence) as a result
of the
acquisition of voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any additional voting
securities that, assuming the repurchase or other acquisition had not occurred,
increases the percentage of the then outstanding voting securities Owned
by the
Subject Person over the designated percentage threshold, then a Change
in
Control shall be deemed to occur;
(ii) there
is
consummated a merger, consolidation or similar transaction involving (directly
or indirectly) the Company and, immediately after the consummation of such
merger, consolidation or similar transaction, the stockholders of the Company
immediately prior thereto do not Own, directly or indirectly, either (A)
outstanding voting securities representing more than fifty percent (50%)
of the
combined outstanding voting power of the surviving Entity in such merger,
consolidation or similar transaction or (B) more than fifty percent (50%)
of the
combined outstanding voting power of the parent of the surviving Entity
in such
merger, consolidation or similar transaction, in
each
case in substantially the same proportions as their Ownership of the outstanding
voting securities of the Company immediately prior to such
transaction;
(iii) the
stockholders of the Company approve or the Board approves a plan of complete
dissolution or liquidation of the Company, or a complete dissolution or
liquidation of the Company shall otherwise occur; or
(iv) there
is
consummated a sale, lease, exclusive license or other disposition of all
or
substantially all of the consolidated assets of the Company and its
Subsidiaries, other than a sale, lease, license or other disposition of
all or
substantially all of the consolidated assets of the Company and its Subsidiaries
to an Entity, more than fifty percent (50%) of the combined voting power
of the
voting securities of which are Owned by stockholders of the Company in
substantially the same proportions as their Ownership of the outstanding
voting
securities of the Company immediately prior to such sale, lease, license
or
other disposition.
The
term
Change in Control shall not include a sale of assets, merger or other
transaction effected exclusively for the purpose of changing the domicile
of the
Company.
Notwithstanding
the foregoing or any other provision of this Plan, the definition of Change
in
Control (or any analogous term) in an individual written agreement between
the
Company or any Affiliate and the Participant shall supersede the foregoing
definition with respect to Stock Awards subject to such agreement; provided,
however,
that if
no definition of Change in Control or any analogous term is set forth in
such an
individual written agreement, the foregoing definition shall apply.
(e) “Code”
means
the Internal Revenue Code of 1986, as amended.
(f) “Committee”
means a
committee of two (2) or more members of the Board to whom authority has
been
delegated by the Board in accordance with Section 3(c).
(g) “Common
Stock”
means
the common stock of the Company.
(h) “Company”
means
SBE, Inc., a Delaware corporation.
(i) “Consultant”
means
any person, including an advisor, who is (i) engaged by the Company or
an
Affiliate to render consulting or advisory services and is compensated
for such
services, or
(ii)
serving as a member of the Board of Directors of an Affiliate and is compensated
for such services.
However, service solely as a Director, or payment of a fee for such service,
shall not cause a Director to be considered a “Consultant” for purposes of the
Plan.
(j) “Continuous
Service”
means
that the Participant’s service with the Company or an Affiliate, whether as an
Employee, Director or Consultant, is not interrupted or terminated. A change
in
the capacity in which the Participant renders service to the Company or
an
Affiliate as an Employee, Consultant or Director or a change in the entity
for
which the Participant renders such service, provided that there is no
interruption or termination of the Participant’s service with the Company or an
Affiliate, shall not terminate a Participant’s Continuous Service; provided,
however,
if the
corporation for which a Participant is rendering service ceases to qualify
as an
Affiliate, as determined by the Board in its sole discretion, such Participant’s
Continuous Service shall be considered to have terminated on the date such
corporation ceases to qualify as an Affiliate. For example, a change in
status
from an employee of the Company to a consultant of an Affiliate or to a
Director
shall not constitute an interruption of Continuous Service. To the extent
permitted by law, the Board or the chief executive officer of the Company,
in
that party’s sole discretion, may determine whether Continuous Service shall be
considered interrupted in the case of any leave of absence approved by
that
party, including sick leave, military leave or any other personal leave.
Notwithstanding the foregoing, a leave of absence shall be treated as Continuous
Service for purposes of vesting in a Stock Award only to such extent as
may be
provided in the Company’s leave of absence policy or in the written terms of the
Participant’s leave of absence.
(k) “Corporate
Transaction”
means
the occurrence, in a single transaction or in a series of related transactions,
of any one or more of the following events:
(i) a
sale or
other
disposition of all or substantially all, as determined by the Board in
its sole
discretion, of the consolidated assets of the Company and its
Subsidiaries;
(ii) a
sale or
other disposition of at least ninety percent (90%) of the outstanding securities
of the Company;
(iii) the
consummation of a merger, consolidation or similar transaction following
which
the Company is not the surviving corporation; or
(iv) the
consummation of a merger, consolidation or similar transaction following
which
the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger, consolidation or similar
transaction are converted or exchanged by virtue of the merger, consolidation
or
similar transaction into other property, whether in the form of securities,
cash
or otherwise.
(l) “Covered
Employee”
means
the chief executive officer and the four (4) other highest compensated
officers
of the Company for whom total compensation is required to be reported to
stockholders under the Exchange Act, as determined for purposes of Section
162(m) of the Code.
(m) “Director”
means a
member of the Board.
(n) “Disability”
means
the permanent and total disability of a person within the meaning of Section
22(e)(3) of the Code.
(o) “Employee”
means
any person employed by the Company or an Affiliate. However, service solely
as a
Director, or payment of a fee for such services, shall not cause a Director
to
be considered an “Employee” for purposes of the Plan.
(p) “Entity”
means a
corporation, partnership or other entity.
(q) “Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
(r) “Exchange
Act Person” means
any
natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d)
of the Exchange Act), except that “Exchange Act Person” shall not include (i)
the Company or any Subsidiary of the Company; (ii) any employee benefit
plan of
the Company or any Subsidiary of the Company or any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
Subsidiary of the Company; (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities; (iv) an Entity Owned, directly
or
indirectly, by the stockholders of the Company in substantially the same
proportions as their Ownership of stock of the Company; or
(v)
any natural person, Entity or “group” (within the meaning of Section 13(d) or
14(d) of the Exchange Act) that, as of the effective date of the Plan as
set
forth in Section 13,
is the
Owner, directly or indirectly, of securities of the Company representing
more
than fifty percent (50%) of the combined voting power of the Company’s then
outstanding securities.
(s) “Fair
Market Value”
means,
as of any date, the value of the Common Stock determined as
follows:
(i) If
the
Common Stock is listed on any established stock exchange or traded on the
Nasdaq
National Market or the Nasdaq SmallCap Market, the Fair Market Value of
a share
of Common Stock shall be the closing sales price for such stock (or the
closing
bid, if no sales were reported) as quoted on such exchange or market (or
the
exchange or market with the greatest volume of trading in the Common Stock)
on
the last market trading day prior to the day of determination, as reported
in
The
Wall Street Journal or
such
other source as the Board deems reliable. Unless otherwise provided by
the
Board, if there is no closing sales price (or closing bid if no sales were
reported) for the Common Stock on the last market trading day prior to
the day
of determination, then the Fair Market Value shall be the closing sales
price
(or closing bid if no sales were reported) on the last preceding date for
which
such quotation exists.
(ii) In
the
absence of such markets for the Common Stock, the Fair Market Value shall
be
determined in good faith by the Board and in a manner consistent with Section
260.140.50 and Section 409A of the Code.
(t) “Incentive
Stock Option”
means an
Option intended to qualify as an incentive stock option within the meaning
of
Section 422 of the Code and the regulations promulgated thereunder.
(u) “Non-Employee
Director” means
a
Director who either (i) is not a current employee or officer of the Company
or
an Affiliate, does not receive compensation, either directly or indirectly,
from
the Company or an Affiliate for services rendered as a consultant or in
any
capacity other than as a Director (except for an amount as to which disclosure
would not be required under Item 404(a) of Regulation S-K promulgated pursuant
to the Securities Act (“Regulation
S-K”)),
does
not possess an interest in any other transaction for which disclosure would
be
required under Item 404(a) of Regulation S-K, and is not engaged in a business
relationship for which disclosure would be required pursuant to Item 404(b)
of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for
purposes of Rule 16b-3.
(v) “Nonstatutory
Stock Option”
means an
Option not intended to qualify as an Incentive Stock Option.
(w) “Officer”
means a
person who is an officer of the Company within the meaning of Section 16 of
the Exchange Act and the rules and regulations promulgated
thereunder.
(x) “Option”
means an
Incentive Stock Option or a Nonstatutory Stock Option to purchase shares
of
Common Stock granted pursuant to the Plan.
(y) “Option
Agreement”
means a
written agreement between the Company and an Optionholder evidencing the
terms
and conditions of an Option grant. Each Option Agreement shall be subject
to the
terms and conditions of the Plan.
(z) “Optionholder”
means a
person to whom an Option is granted pursuant to the Plan or, if applicable,
such
other person who holds an outstanding Option.
(aa) “Outside
Director”
means a
Director who either (i) is not a current employee of the Company or an
“affiliated corporation” (within the meaning of Treasury Regulations promulgated
under Section 162(m) of the Code), is not a former employee of the Company
or an
“affiliated corporation” who receives compensation for prior services (other
than benefits under a tax-qualified retirement plan) during the taxable
year,
has not been an officer of the Company or an “affiliated corporation,” and does
not receive remuneration from the Company or an “affiliated corporation,” either
directly or indirectly, in any capacity other than as a Director, or (ii)
is
otherwise considered an “outside director” for purposes of Section 162(m) of the
Code.
(bb) “Own,”
“Owned,” “Owner,” “Ownership” A
person
or Entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to
have acquired “Ownership” of securities if such person or Entity, directly or
indirectly, through any contract, arrangement, understanding, relationship
or
otherwise, has or shares voting power, which includes the power to vote
or to
direct the voting, with respect to such securities.
(cc) “Participant”
means a
person to whom a Stock Award is granted pursuant to the Plan or, if applicable,
such other person who holds an outstanding Stock Award.
(dd) “Plan”
means
this SBE, Inc. 2006 Equity Incentive Plan.
(ee) “Rule
16b-3”
means
Rule 16b-3 promulgated under the Exchange Act or any successor to Rule
16b-3, as
in effect from time to time.
(ff) “Section
260.140.41”
means
Section 260.140.41 of Title 10 of the California Code of Regulations.
(gg) “Section
260.140.42”
means
Section 260.140.42 of Title 10 of the California Code of Regulations.
(hh) “Section
260.140.45”
means
Section 260.140.45 of Title 10 of the California Code of Regulations.
(ii) “Section
260.140.46”
means
Section 260.140.46 of Title 10 of the California Code of Regulations.
(jj) “Section
260.140.50”
means
Section 260.140.50 of Title 10 of the California Code of Regulations.
(kk) “Securities
Act”
means
the Securities Act of 1933, as amended.
(ll) “Stock
Award”
means
any right granted under the Plan, including an Option and a Stock Bonus
Award.
(mm) “Stock
Award Agreement”
means a
written agreement between the Company and a Participant evidencing the
terms and
conditions of a Stock Award grant. Each Stock Award Agreement shall be
subject
to the terms and conditions of the Plan.
(nn) “Stock
Bonus Award”
means an
award of shares of Common Stock which is granted pursuant to the terms
and
conditions of Section 7.
(oo) “Stock
Bonus Award Agreement”
means a
written agreement between the Company and a holder of a Stock Bonus Award
evidencing the terms and conditions of a Stock Bonus Award grant. Each
Stock
Bonus Award Agreement shall be subject to the terms and conditions of the
Plan.
(pp) “Subsidiary”
means,
with respect to the Company, (i) any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power
to
elect a majority of the board of directors of such corporation (irrespective
of
whether, at the time, stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency) is at the time, directly or indirectly, Owned by the Company,
and
(ii) any partnership in which the Company has a direct or indirect interest
(whether in the form of voting or participation in profits or capital
contribution) of more than fifty percent (50%).
(qq) “Ten
Percent Stockholder”
means a
person who Owns (or is deemed to Own pursuant to Section 424(d) of the
Code)
stock possessing more than ten percent (10%) of the total combined voting
power
of all classes of stock of the Company or any Affiliate.
(a) Administration
by Board.
The
Board shall administer the Plan unless and until the Board delegates
administration of the Plan to a Committee, as provided in Section 3(c).
(b) Powers
of Board.
The
Board shall have the power, subject to, and within the limitations of,
the
express provisions of the Plan:
(i) To
determine from time to time (1) which of the persons eligible under the
Plan
shall be granted Stock Awards; (2) when and how each Stock Award shall
be
granted; (3) what type or combination of types of Stock Award shall be
granted;
(4) the provisions of each Stock Award granted (which need not be identical),
including the time or times when a person shall be permitted to receive
Common
Stock pursuant to a Stock Award; and (5) the number of shares of Common
Stock
with respect to which a Stock Award shall be granted to each such
person.
(ii) To
construe and interpret the Plan and Stock Awards granted under it, and
to
establish, amend and revoke rules and regulations for its administration.
The
Board, in the exercise of this power, may correct any defect, omission
or
inconsistency in the Plan or in any Stock Award Agreement, in a manner
and to
the extent it shall deem necessary or expedient to make the Plan fully
effective.
(iii) To
accelerate the time at which a Stock Award may first be exercised or the
time
during which a Stock Award or any part thereof will vest in accordance
with the
Plan, notwithstanding the provisions in the Stock Award stating the time
at
which it may first be exercised or the time during which it will
vest.
(iv) To
effect, at any time and from time to time, with the consent of any adversely
affected Optionholder, (1) the reduction of the exercise price of any
outstanding Option under the Plan; (2) the cancellation of any outstanding
Option under the Plan and the grant in substitution therefor of (A) a new
Option
under the Plan or another equity plan of the Company covering the same
or a
different number of shares of Common Stock, (B) a Stock Bonus Award, (C)
cash,
and/or (D) other valuable consideration (as determined by the Board, in
its sole
discretion); or
(3)
any other action that is treated as a repricing under generally accepted
accounting principles. Shares subject to an Option canceled under this
Section
3(b)(iv)
shall
continue to be counted against the maximum award of Options permitted to
be
granted pursuant to Section 5(c)
of the
Plan. The repricing of an Option under this Section 3(b)(iv),
resulting in a reduction of the exercise price, shall be deemed to be a
cancellation of the original Option and the grant of a substitute Option;
in the
event of such repricing, both the original and the substituted Options
shall be
counted against the maximum awards of Options permitted to be granted pursuant
to Section 5(c)
of the
Plan. The
exercise price per share of Common Stock shall not be less than that specified
under the Plan for newly granted Stock Awards (including Ten Percent
Stockholders), except that the Board may grant an Option with a lower exercise
price if such Option is granted as part of a transaction to which Section
424(a)
of the Code applies.
(v) To
amend
the Plan or a Stock Award as provided in Section 11.
(vi) To
terminate or suspend the Plan as provided in Section 12.
(vii) Generally,
to exercise such powers and to perform such acts as the Board deems necessary
or
expedient to promote the best interests of the Company and that are not
in
conflict with the provisions of the Plan.
(viii) To
adopt
such procedures and sub-plans as are necessary or appropriate to permit
participation in the Plan by individuals who are foreign nationals or employed
outside the United States.
(c) Delegation
to Committee.
(i) General.
The
Board may delegate some or all of the administration of the Plan to a Committee
or Committees. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board that have been delegated to the Committee,
including the power to delegate to a subcommittee any of the administrative
powers the Committee is authorized to exercise (and references in this
Plan to
the Board shall thereafter be to the Committee or subcommittee), subject,
however, to such resolutions, not inconsistent with the provisions of the
Plan,
as may be adopted from time to time by the Board. The Board may retain
the
authority to concurrently administer the Plan with the Committee and may,
at any
time, revest in the Board some or all of the powers previously
delegated.
(ii) Section
162(m) and Rule 16b-3 Compliance.
In the
sole discretion of the Board, the Committee may consist solely of two (2)
or
more Outside Directors, in accordance with Section 162(m) of the Code,
and/or
solely of two or more Non-Employee Directors, in accordance with Rule 16b-3.
In
addition, the Board or the Committee, in its sole discretion, may (1) delegate
to a committee of one or more members of the Board who need not be Outside
Directors the authority to grant Stock Awards to eligible persons who are
either
(a) not then Covered Employees and are not expected to be Covered Employees
at
the time of recognition of income resulting from such Stock Award, or (b)
not
persons with respect to whom the Company wishes to comply with Section
162(m) of
the Code, and/or (2) delegate to a committee of one or more members of
the Board
who need not be Non-Employee Directors the authority to grant Stock Awards
to
eligible persons who are not then subject to Section 16 of the Exchange
Act.
(d) Delegation
to an Officer.
The
Board may delegate to one or more Officers of the Company the authority
to do
one or both of the following: (i) designate Officers and Employees of the
Company or any of its Subsidiaries to be recipients of Options and the
terms
thereof, and (ii) determine the number of shares of Common Stock to be
subject
to such Options granted to such Officers and Employees; provided,
however, that
the
Board resolutions regarding such delegation shall specify the total number
of
shares of Common Stock that may be subject to the Options granted by such
Officer and that such Officer may not grant an Option to himself or herself.
Notwithstanding the foregoing, the Board may not delegate authority to
an
Officer to determine the Fair Market Value of the Common Stock pursuant
to
Section 2(s)(ii)
above.
(e) Effect
of Board’s Decision.
All
determinations, interpretations and constructions made by the Board in
good
faith shall not be subject to review by any person and shall be final,
binding
and conclusive on all persons.
4. SHARES
SUBJECT TO THE PLAN.
(a) Share
Reserve.
Subject
to the provisions of Section 10(a)
relating
to Capitalization Adjustments, the number of shares of Common Stock that
may be
issued pursuant to Stock Awards shall not exceed in the aggregate one million
five hundred thousand (1,500,000) shares of Common Stock.
(b) Reversion
of Shares to the Share Reserve.
If any
Stock Award shall for any reason expire or otherwise terminate, in whole
or in
part, without having been exercised in full, or if any shares of Common
Stock
issued to a Participant pursuant to a Stock Award are forfeited back to
or
repurchased by the Company, including, but not limited to, any repurchase
or
forfeiture caused by the failure to meet a contingency or condition required
for
the vesting of such shares, then the shares of Common Stock not acquired
under
such Stock Award shall revert to and again become available for issuance
under
the Plan. If any shares subject to a Stock Award are not delivered to a
Participant because such shares are withheld for the payment of taxes or
the
Stock Award is exercised through a reduction of shares subject to the Stock
Award (i.e.,
“net
exercised”), then the number of shares that are not delivered shall revert to
and again become available for issuance under the Plan. If the exercise
price of
any Stock Award is satisfied by tendering shares of Common Stock held by
the
Participant (either by actual delivery or attestation), then the number
of such
tendered shares shall revert to and again become available for issuance
under
the Plan.
(c) Incentive
Stock Option Limit.
Notwithstanding anything to the contrary in Section 4(b),
subject
to the provisions of Section 10(a)
relating
to Capitalization Adjustments the aggregate maximum number of shares of
Common
Stock that may be issued pursuant to the exercise of Incentive Stock Options
shall be one million five hundred thousand (1,500,000) shares of Common
Stock.
(d) Share
Reserve Limitation.
Notwithstanding anything to the contrary in Section 4(a),
if at
the time of each grant of a Stock Award under the Plan, the Company is
subject
to Section 260.140.45, the total number of securities issuable upon exercise
of
all outstanding options and the total number of shares provided for under
this
Plan and any other stock bonus or similar plan or agreement of the Company
shall
not exceed 30% of the then outstanding capital stock of the Company (as
determined pursuant to Section 260.140.45), unless stockholder approval
has been
obtained in compliance with Section 260.140.45 to exceed 30%, in which
case the
limit shall be such higher percentage as approved by the stockholders.
(e) Source
of Shares.
The
stock issuable under the Plan shall be shares of authorized but unissued
or
reacquired Common Stock, including shares repurchased by the Company on
the open
market.
5. ELIGIBILITY.
(a) Eligibility
for Specific Stock Awards.
Incentive Stock Options may be granted only to Employees. Stock Awards
other
than Incentive Stock Options may be granted to Employees, Directors and
Consultants.
(b) Ten
Percent Stockholders.
(i) A
Ten
Percent Stockholder shall not be granted an Incentive Stock Option unless
the
exercise price of such Option is at least one hundred ten percent (110%)
of the
Fair Market Value of the Common Stock on the date of grant and the Option
is not
exercisable after the expiration of five (5) years from the date of grant.
(ii) To
the
extent that the Company is subject to Section 260.140.41 at the time the
Option
is granted, a Ten Percent Stockholder shall not be granted a Nonstatutory
Stock
Option unless the exercise price of such Option is at least (i) one hundred
ten
percent (110%) of the Fair Market Value of the Common Stock on the date
of
grant.
(c) Section
162(m) Limitation on Annual Grants.
Subject
to the provisions of Section 10(a)
relating
to Capitalization Adjustments, no Employee shall be eligible to be granted
Options covering more than one hundred fifty thousand (150,000)
shares of Common Stock during any calendar year.
(d) Consultants.
A
Consultant shall not be eligible for the grant of a Stock Award if, at
the time
of grant, a Form S-8 Registration Statement under the Securities Act
(“Form
S-8”)
is not
available to register either the offer or the sale of the Company’s securities
to such Consultant because of the nature of the services that the Consultant
is
providing to the Company, because the Consultant is not a natural person,
or
because of any other rule governing the use of Form S-8.
6. OPTION
PROVISIONS.
Each
Option shall be in such form and shall contain such terms and conditions
as the
Board shall deem appropriate. All Options shall be separately designated
Incentive Stock Options or Nonstatutory Stock Options at the time of grant,
and,
if certificates are issued, a separate certificate or certificates shall
be
issued for shares of Common Stock purchased on exercise of each type of
Option.
The provisions of separate Options need not be identical; provided,
however,
that
each Option Agreement shall include (through incorporation of provisions
hereof
by reference in the Option or otherwise) the substance of each of the following
provisions:
(a) Term.
Subject
to the provisions of Section 5(b)
regarding Ten Percent Stockholders, no Option shall be exercisable after
the
expiration of ten (10) years from the date of grant, or such shorter period
specified in the Option Agreement.
(b) Exercise
Price of an Incentive Stock Option.
Subject
to the provisions of Section 5(b)
regarding Ten Percent Stockholders, the exercise price of each Incentive
Stock
Option shall be not less than one hundred percent (100%) of the Fair Market
Value of the Common Stock subject to the Option on the date the Option
is
granted. Notwithstanding the foregoing, an Incentive Stock Option may be
granted
with an exercise price lower than that set forth in the preceding sentence
if
such Option is granted pursuant to an assumption or substitution for another
option in a manner consistent with the provisions of Section 424(a) of
the
Code.
(c) Exercise
Price of a Nonstatutory Stock Option.
Subject
to the provisions of Section 5(b)
regarding Ten Percent Stockholders, the exercise price of each Nonstatutory
Stock Option shall be not less than eighty-five percent (85%) of the Fair
Market
Value of the Common Stock subject to the Option on the date the Option
is
granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may
be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution
for
another option in a manner consistent with the provisions of Section 424(a)
of
the Code.
(d) Consideration.
The
purchase price of Common Stock acquired pursuant to the exercise of an
Option
shall be paid, to the extent permitted by applicable law and as determined
by
the Board in its sole discretion, by any combination of the methods of
payment
set forth below. The Board shall have the authority to grant Options that
do not
permit all of the following methods of payment (or otherwise restrict the
ability to use certain methods) and to grant Options that require the consent
of
the Company to utilize a particular method of payment. The methods of payment
permitted by this Section 6(d)
are:
(i) by
cash
or check;
(ii) pursuant
to a program developed under Regulation T as promulgated by the Federal
Reserve
Board that, prior to the issuance of Common Stock, results in either the
receipt
of cash (or check) by the Company or the receipt of irrevocable instructions
to
pay the aggregate exercise price to the Company from the sales proceeds;
(iii) by
delivery to the Company (either by actual delivery or attestation) of shares
of
Common Stock;
(iv) by
a “net
exercise” arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issued upon exercise by the largest whole number
of
shares with a Fair Market Value that does not exceed the aggregate exercise
price; provided,
however,
the
Company shall accept a cash or other payment from the Participant to the
extent
of any remaining balance of the aggregate exercise price not satisfied
by such
reduction in the number of whole shares to be issued; provided,
however,
shares
of Common Stock will no longer be outstanding under an Option and will
not be
exercisable thereafter to the extent that (i) shares are used to pay the
exercise price pursuant to the “net exercise,” (ii) shares are delivered to the
Participant as a result of such exercise, and (iii) shares are withheld
to
satisfy tax withholding obligations;
(v) according
to a deferred payment or similar arrangement with the Optionholder; provided,
however,
that
interest shall compound at least annually and shall be charged at the minimum
rate of interest necessary to avoid (i) the imputation of interest income
to the
Company and compensation income to the Optionholder under any applicable
provisions of the Code, and (ii) the treatment of the Option as a variable
award
or classification of the Option as a liability award for financial accounting
purposes; or
(vi) in
any
other form of legal consideration that may be acceptable to the Board.
(e) Transferability
of Options.
The
Board may, in its sole discretion, impose such limitations on the
transferability of Options as the Board shall determine. In the absence
of such
a determination by the Board to the contrary, the following restrictions
on the
transferability of Options shall apply:
(i) Restrictions
on Transfer.
An
Option shall not be transferable except by will or by the laws of descent
and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder.
(ii) Domestic
Relations Orders.
Notwithstanding the foregoing, an Option may be transferred pursuant to
a
domestic relations order; provided,
however,
that if
an Option is an Incentive Stock Option, such Option shall be deemed to
be a
Nonstatutory Stock Option as a result of such transfer.
(iii) Beneficiary
Designation.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form provided by or otherwise satisfactory
to the
Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option. In the
absence of such a designation, the executor or administrator of the
Optionholder’s estate shall be entitled to exercise the Option.
(f) Vesting
of Options Generally.
The
total number of shares of Common Stock subject to an Option may vest and
therefore become exercisable in periodic installments that may or may not
be
equal. The Option may be subject to such other terms and conditions on
the time
or times when it may or may not be exercised (which may be based on performance
or other criteria) as the Board may deem appropriate. The vesting provisions
of
individual Options may vary. The provisions of this Section 6(f)
are
subject to any Option provisions governing the minimum number of shares
of
Common Stock as to which an Option may be exercised.
(g) Minimum
Vesting.
Notwithstanding the provisions of Section 6(f),
to the
extent that the Company is subject to the following restrictions on vesting
under Section 260.140.41(f) at the time of the grant of the Option,
then:
(i) Options
granted to an Employee who is not an Officer, Director or Consultant shall
provide for vesting of the total number of shares of Common Stock at a
rate of
at least twenty percent (20%) per year over five (5) years from the date
the
Option was granted, subject to reasonable conditions such as continued
employment; and
(ii) Options
granted to Officers, Directors or Consultants may be made fully exercisable,
subject to reasonable conditions such as continued employment, at any time
or
during any period established by the Company.
(h) Termination
of Continuous Service.
In the
event that an Optionholder’s Continuous Service terminates (other than upon the
Optionholder’s death or Disability), the Optionholder may exercise his or her
Option (to the extent that the Optionholder was entitled to exercise such
Option
as of the date of termination of Continuous Service) but only within such
period
of time ending on the earlier of (i) the date three (3) months following
the
termination of the Optionholder’s Continuous Service (or such longer or shorter
period specified in the Option Agreement, which period, to the extent that
the
Company is subject to Section 260.140.41 at the time the Option is granted,
shall not be less than thirty (30) days unless such termination is for
cause),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination of Continuous Service, the Optionholder
does
not exercise his or her Option within the time specified herein or in the
Option
Agreement (as applicable), the Option shall terminate.
(i) Extension
of Termination Date.
An
Optionholder’s Option Agreement may provide that if the exercise of the Option
following the termination of the Optionholder’s Continuous Service (other than
upon the Optionholder’s death or Disability) would be prohibited at any time
solely because the issuance of shares of Common Stock would violate the
registration requirements under the Securities Act, then the Option shall
terminate on the earlier of (i) the expiration of a period of three (3)
months
after the termination of the Optionholder’s Continuous Service during which the
exercise of the Option would not be in violation of such registration
requirements, or (ii) the expiration of the term of the Option as set forth
in
the Option Agreement.
(j) Disability
of Optionholder.
In the
event that an Optionholder’s Continuous Service terminates as a result of the
Optionholder’s Disability, the Optionholder may exercise his or her Option (to
the extent that the Optionholder was entitled to exercise such Option as
of the
date of termination of Continuous Service), but only within such period
of time
ending on the earlier of (i) the date twelve (12) months following such
termination of Continuous Service (or such longer or shorter period specified
in
the Option Agreement, which period, to the extent that the Company is subject
to
Section 260.140.41 at the time the Option is granted, shall not be less
than six
(6) months), or (ii) the expiration of the term of the Option as set forth
in
the Option Agreement. If, after termination of Continuous Service, the
Optionholder does not exercise his or her Option within the time specified
herein or in the Option Agreement (as applicable), the Option shall
terminate.
(k) Death
of Optionholder.
In the
event that (i) an Optionholder’s Continuous Service terminates as a result of
the Optionholder’s death, or (ii) the Optionholder dies within the period (if
any) specified in the Option Agreement after the termination of the
Optionholder’s Continuous Service for a reason other than death, then the Option
may be exercised (to the extent the Optionholder was entitled to exercise
such
Option as of the date of death) by the Optionholder’s estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or
by a
person designated to exercise the option upon the Optionholder’s death pursuant
to Section 6(e)(iii),
but
only within the period ending on the earlier of (i) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement, which period, to the extent that the Company is
subject
to Section 260.140.41 at the time the Option is granted, shall not be less
than
six (6) months), or (ii) the expiration of the term of such Option as set
forth
in the Option Agreement. If, after the Optionholder’s death, the Option is not
exercised within the time specified herein or in the Option Agreement (as
applicable), the Option shall terminate.
(l) Early
Exercise.
The
Option may include a provision whereby the Optionholder may elect at any
time
before the Optionholder’s Continuous Service terminates to exercise the Option
as to any part or all of the shares of Common Stock subject to the Option
prior
to the full vesting of the Option. Subject to the “Repurchase Limitation” in
Section 9(h),
any
unvested shares of Common Stock so purchased may be subject to a repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate. Provided that the “Repurchase Limitation” in Section
9(h)
is not
violated, the Company will not exercise its repurchase option until at
least six
(6) months (or such longer or shorter period of time necessary to avoid
a charge
to earnings for financial accounting purposes) have elapsed following exercise
of the Option unless the Board otherwise specifically provides in the
Option.
7. STOCK
BONUS AWARD PROVISIONS.
Each
Stock Bonus Award Agreement shall be in such form and shall contain such
terms
and conditions as the Board shall deem appropriate. At the Board’s election,
shares of Common Stock may be (i) held in book entry form subject to the
Company’s instructions until any restrictions relating to the Stock Bonus Award
lapse; or (ii) evidenced by a certificate, which certificate shall be held
in
such form and manner as determined by the Board. The terms and conditions
of
Stock Bonus Award Agreements may change from time to time, and the terms
and
conditions of separate Stock Bonus Award Agreements need not be identical;
provided,
however,
that
each Stock Bonus Award Agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance
of
each of the following provisions:
(a) Consideration.
A Stock
Bonus Award may be awarded in consideration for (i) past or future services
rendered to the Company or an Affiliate, or (ii) any other form of legal
consideration that may be acceptable to the Board in its sole discretion
and
permissible under applicable law.
(b) Vesting.
Subject
to the “Repurchase Limitation” in Section 9(h),
shares
of Common Stock awarded under a Stock Bonus Award Agreement may be subject
to
forfeiture to the Company in accordance with a vesting schedule to be determined
by the Board.
(c) Termination
of Participant’s Continuous Service.
Subject
to the “Repurchase Limitation” in Section 9(h),
in the
event a Participant’s Continuous Service terminates, the Company may receive via
a forfeiture condition, any or all of the shares of Common Stock held by
the
Participant which have not vested as of the date of termination of Continuous
Service under the terms of the Stock Bonus Award Agreement.
(d) Transferability.
Rights
to acquire shares of Common Stock under the Stock Bonus Award Agreement
shall be
transferable by the Participant only upon such terms and conditions as
are set
forth in the Stock Bonus Award Agreement, as the Board shall determine
in its
sole discretion, so long as Common Stock awarded under the Stock Bonus
Award
Agreement remains subject to the terms of the Stock Bonus Award
Agreement.
8. COVENANTS
OF THE COMPANY.
(a) Availability
of Shares.
During
the terms of the Stock Awards, the Company shall keep available at all
times the
number of shares of Common Stock required to satisfy such Stock
Awards.
(b) Securities
Law Compliance.
The
Company shall seek to obtain from each regulatory commission or agency
having
jurisdiction over the Plan such authority as may be required to grant Stock
Awards and to issue and sell shares of Common Stock upon exercise of the
Stock
Awards; provided,
however,
that
this undertaking shall not require the Company to register under the Securities
Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant
to
any such Stock Award. If, after reasonable efforts, the Company is unable
to
obtain from any such regulatory commission or agency the authority that
counsel
for the Company deems necessary for the lawful issuance and sale of Common
Stock
under the Plan, the Company shall be relieved from any liability for failure
to
issue and sell Common Stock upon exercise of such Stock Awards unless and
until
such authority is obtained.
(a) Use
of Proceeds.
Proceeds from the sale of shares of Common Stock pursuant to Stock Awards
shall
constitute general funds of the Company.
(b) Stockholder
Rights.
No
Participant shall be deemed to be the holder of, or to have any of the
rights of
a holder with respect to, any shares of Common Stock subject to such Stock
Award
unless and until such Participant has satisfied all requirements for exercise
of
the Stock Award pursuant to its terms.
(c) No
Employment or Other Service Rights.
Nothing
in the Plan, any Stock Award Agreement, or other instrument executed thereunder
or any Stock Award granted pursuant thereto shall confer upon any Participant
any right to continue to serve the Company or an Affiliate in the capacity
in
effect at the time the Stock Award was granted or shall affect the right
of the
Company or an Affiliate to terminate (i) the employment of an Employee
with or
without notice and with or without cause, (ii) the service of a Consultant
pursuant to the terms of such Consultant’s agreement with the Company or an
Affiliate, or (iii) the service of a Director pursuant to the Bylaws of
the
Company or an Affiliate, and any applicable provisions of the corporate
law of
the state in which the Company or the Affiliate is incorporated, as the
case may
be.
(d) Incentive
Stock Option $100,000 Limitation.
To the
extent that the aggregate Fair Market Value (determined at the time of
grant) of
Common Stock with respect to which Incentive Stock Options are exercisable
for
the first time by any Optionholder during any calendar year (under all
plans of
the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000),
the Options or portions thereof that exceed such limit (according to the
order
in which they were granted) shall be treated as Nonstatutory Stock Options,
notwithstanding any contrary provision of the applicable Option
Agreement(s).
(e) Investment
Assurances.
The
Company may require a Participant, as a condition of exercising or acquiring
Common Stock under any Stock Award, (i) to give written assurances satisfactory
to the Company as to the Participant’s knowledge and experience in financial and
business matters and/or to employ a purchaser representative reasonably
satisfactory to the Company who is knowledgeable and experienced in financial
and business matters and that he or she is capable of evaluating, alone
or
together with the purchaser representative, the merits and risks of exercising
the Stock Award; and (ii) to give written assurances satisfactory to the
Company
stating that the Participant is acquiring Common Stock subject to the Stock
Award for the Participant’s own account and not with any present intention of
selling or otherwise distributing the Common Stock. The foregoing requirements,
and any assurances given pursuant to such requirements, shall be inoperative
if
(i) the issuance of the shares upon the exercise or acquisition of Common
Stock
under the Stock Award has been registered under a then currently effective
registration statement under the Securities Act, or (ii) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company,
place
legends on stock certificates issued under the Plan as such counsel deems
necessary or appropriate in order to comply with applicable securities
laws,
including, but not limited to, legends restricting the transfer of the
Common
Stock.
(f) Withholding
Obligations. To
the
extent provided by the terms of a Stock Award Agreement, the Company may,
in its
sole discretion, satisfy any federal, state or local tax withholding obligation
relating to a Stock Award by any of the following means (in addition to
the
Company’s right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) causing the Participant
to
tender a cash payment; (ii) withholding shares of Common Stock from the
shares
of Common Stock issued or otherwise issuable to the Participant in connection
with the Stock Award; [provided,
however,
that no
shares of Common Stock are withheld with a value exceeding the minimum
amount of
tax required to be withheld by law (or such lower amount as may be necessary
to
avoid classification of the Stock Award as a liability); or
(iii)
by such other method as may be set forth in the Stock Award
Agreement.
(g) Information
Obligation.
To the
extent that the Company is subject to Section 260.140.46, the Company shall
deliver financial statements to Participants at least annually. This Section
9(g)
shall
not apply to key Employees whose duties in connection with the Company
assure
them access to equivalent information.
(h) Repurchase
Limitation.
The
terms of any repurchase option shall be specified in the Stock Award, and
the
repurchase price may be either the Fair Market Value of the shares of Common
Stock on the date of termination of Continuous Service or the lower of
(i) the
Fair Market Value of the shares of Common Stock on the date of repurchase
or
(ii) their original purchase price. To the extent that the Company is subject
to
Section 260.140.41 and Section 260.140.42 at the time a Stock Award is
made, any
repurchase option contained in a Stock Award granted to a person who is
not an
Officer, Director or Consultant shall be upon the terms described
below:
(i) Fair
Market Value.
If the
repurchase option gives the Company the right to repurchase the shares
of Common
Stock upon termination of Continuous Service at not less than the Fair
Market
Value of the shares of Common Stock to be purchased on the date of termination
of Continuous Service, then (i) the right to repurchase shall be exercised
for
cash or cancellation of purchase money indebtedness for the shares of Common
Stock within ninety (90) days of termination of Continuous Service (or
in the
case of shares of Common Stock issued upon exercise of Stock Awards after
such
date of termination, within ninety (90) days after the date of the exercise)
or
such longer period as may be agreed to by the Company and the Participant,
and
(ii) the right terminates when the shares of Common Stock become publicly
traded.
(ii) Original
Purchase Price.
If the
repurchase option gives the Company the right to repurchase the shares
of Common
Stock upon termination of Continuous Service at the lower of (i) the Fair
Market
Value of the shares of Common Stock on the date of repurchase, or (ii)
their
original purchase price, then (x) the right to repurchase at the original
purchase price shall lapse at the rate of at least twenty percent (20%)
of the
shares of Common Stock per year over five (5) years from the date the Stock
Award is granted (without respect to the date the Stock Award was exercised
or
became exercisable) and (y) the right to repurchase shall be exercised
for cash
or cancellation of purchase money indebtedness for the shares of Common
Stock
within ninety (90) days of termination of Continuous Service (or in the
case of
shares of Common Stock issued upon exercise of Options after such date
of
termination, within ninety (90) days after the date of the exercise) or
such
longer period as may be agreed to by the Company and the
Participant.
(i) Electronic
Delivery.
Any
reference herein to a “written” agreement or document shall include any
agreement or document delivered electronically or posted on the Company’s
intranet.
10. ADJUSTMENTS
UPON CHANGES IN COMMON STOCK; CORPORATE TRANSACTIONS.
(a) Capitalization
Adjustments.
If any
change is made in, or other events occur with respect to, the Common Stock
subject to the Plan or subject to any Stock Award without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property
other
than cash, stock split, liquidating dividend, combination of shares, exchange
of
shares, change in corporate structure or other transaction not involving
the
receipt of consideration by the Company (each a “Capitalization
Adjustment”)),
the
Board shall appropriately adjust: (i) the class(es) and maximum number
of
securities subject to the Plan pursuant to Section 4(a),
(ii)
the class(es) and maximum number of securities that may be issued pursuant
to
the exercise of Incentive Stock Options pursuant to Section 4(c),
(iii)
the class(es) and maximum number of securities that may be awarded to any
person
pursuant to Section 5(c),
and
(iv) the class(es) and number of securities and price per share of stock
subject
to outstanding Stock Awards. The Board shall make such adjustments, and
its
determination shall be final, binding and conclusive. (Notwithstanding
the
foregoing, the conversion of any convertible securities of the Company
shall not
be treated as a transaction “without receipt of consideration” by the
Company.)
(b) Dissolution
or Liquidation.
In the
event of a dissolution or liquidation of the Company, all outstanding Stock
Awards (other than Stock Awards consisting of vested and outstanding shares
of
Common Stock not subject to the Company’s right of repurchase) shall terminate
immediately prior to the completion of such dissolution or liquidation,
and the
shares of Common Stock subject to the Company’s repurchase option may be
repurchased by the Company notwithstanding the fact that the holder of
such
Stock Award is providing Continuous Service, provided,
however,
that the
Board may, in its sole discretion, cause some or all Stock Awards to become
fully vested, exercisable and/or no longer subject to repurchase or forfeiture
(to the extent such Stock Awards have not previously expired or terminated)
before the dissolution or liquidation is completed but contingent on its
completion.
(c) Corporate
Transaction.
The
following provisions shall apply to Stock Awards in the event of a Corporate
Transaction unless otherwise provided in a written agreement between the
Company
or any Affiliate and the holder of the Stock Award:
(i) Stock
Awards May Be Assumed.
In the
event of a Corporate Transaction, any surviving corporation or acquiring
corporation (or the surviving or acquiring corporation’s parent company) may
assume or continue any or all Stock Awards outstanding under the Plan or
may
substitute similar stock awards for Stock Awards outstanding under the
Plan
(including but not limited to, awards to acquire the same consideration
paid to
the stockholders of the Company pursuant to the Corporate Transaction),
and any
reacquisition or repurchase rights held by the Company in respect of Common
Stock issued pursuant to Stock Awards may be assigned by the Company to
the
successor of the Company (or the successor’s parent company, if any), in
connection with such Corporate Transaction. A surviving corporation or
acquiring
corporation may choose to assume or continue only a portion of a Stock
Award or
substitute a similar stock award for only a portion of a Stock Award. The
terms
of any assumption, continuation or substitution shall be set by the Board
in
accordance with the provisions of Section 3(b).
(ii) Stock
Awards Held by Current Participants.
In the
event of a Corporate Transaction in which the surviving corporation or
acquiring
corporation (or its parent company) does not assume or continue any or
all
outstanding Stock Awards or substitute similar stock awards for such outstanding
Stock Awards, then with respect to Stock Awards that have not been assumed,
continued or substituted and that are held by Participants whose Continuous
Service has not terminated prior to the effective time of the Corporate
Transaction (referred to as the “Current
Participants”),
the
vesting of such Stock Awards (and, if applicable, the time at which such
Stock
Awards may be exercised) shall (contingent upon the effectiveness of the
Corporate Transaction) be accelerated in full to a date prior to the effective
time of such Corporate Transaction as the Board shall determine (or, if
the
Board shall not determine such a date, to the date that is five (5) days
prior
to the effective time of the Corporate Transaction), and such Stock Awards
shall
terminate if not exercised (if applicable) at or prior to the effective
time of
the Corporate Transaction, and any reacquisition or repurchase rights held
by
the Company with respect to such Stock Awards shall lapse (contingent upon
the
effectiveness of the Corporate Transaction).
(iii) Stock
Awards Held by Former Participants.
In the
event of a Corporate Transaction in which the surviving corporation or
acquiring
corporation (or its parent company) does not assume or continue any or
all
outstanding Stock Awards or substitute similar stock awards for such outstanding
Stock Awards, then with respect to Stock Awards that have not been assumed,
continued or substituted and that are held by persons other than Current
Participants, the vesting of such Stock Awards (and, if applicable, the
time at
which such Stock Award may be exercised) shall not be accelerated and such
Stock
Awards (other than a Stock Award consisting of vested and outstanding shares
of
Common Stock not subject to the Company’s right of repurchase) shall terminate
if not exercised (if applicable) prior to the effective time of the Corporate
Transaction; provided,
however,
that any
reacquisition or repurchase rights held by the Company with respect to
such
Stock Awards shall not terminate and may continue to be exercised
notwithstanding the Corporate Transaction.
(iv) Payment
for Stock Awards in Lieu of Exercise.
Notwithstanding the foregoing, in the event a Stock Award will terminate
if not
exercised prior to the effective time of a Corporate Transaction, the Board
may
provide, in its sole discretion, that the holder of such Stock Award may
not
exercise such Stock Award but will receive a payment, in such form as may
be
determined by the Board, equal in value to the excess, if any, of (i) the
value
of the property the holder of the Stock Award would have received upon
the
exercise of the Stock Award, over (ii) any exercise price payable by such
holder
in connection with such exercise.
(d) Change
in Control.
A Stock
Award may be subject to additional acceleration of vesting and exercisability
upon or after a Change in Control as may be provided in the Stock Award
Agreement for such Stock Award or as may be provided in any other written
agreement between the Company or any Affiliate and the Participant. A Stock
Award may vest as to all or any portion of the shares subject to the Stock
Award
(i) immediately upon the occurrence of a Change in Control, whether or
not such
Stock Award is assumed, continued, or substituted by a surviving or acquiring
entity in the Change in Control, or (ii) in the event a Participant’s Continuous
Service is terminated, actually or constructively, within a designated
period
following the occurrence of a Change in Control. In the absence of such
provisions, no such acceleration shall occur.
11. AMENDMENT
OF THE PLAN AND STOCK AWARDS.
(a) Amendment
of Plan.
Subject
to the limitations, if any, of applicable law, the Board at any time, and
from
time to time, may amend the Plan. However, except as provided in Section
10(a)
relating
to Capitalization Adjustments, no amendment shall be effective unless approved
by the stockholders of the Company to the extent stockholder approval is
necessary to satisfy applicable law.
(b) Stockholder
Approval.
The
Board, in its sole discretion, may submit any other amendment to the Plan
for
stockholder approval, including, but not limited to, amendments to the
Plan
intended to satisfy the requirements of Section 162(m) of the Code and
the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to Covered
Employees.
(c) Contemplated
Amendments.
It is
expressly contemplated that the Board may amend the Plan in any respect
the
Board deems necessary or advisable to provide eligible Employees with the
maximum benefits provided or to be provided under the provisions of the
Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it
into
compliance therewith.
(d) No
Impairment of Rights.
Rights
under any Stock Award granted before amendment of the Plan shall not be
impaired
by any amendment of the Plan unless (i) the Company requests the consent
of the
affected Participant, and (ii) such Participant consents in
writing.
(e) Amendment
of Stock Awards.
The
Board, at any time and from time to time, may amend the terms of any one
or more
Stock Awards, including, but not limited to, amendments to provide terms
more
favorable than previously provided in the Stock Award Agreement, subject
to any
specified limits in the Plan that are not subject to Board discretion;
provided,
however,
that the
rights under any Stock Award shall not be impaired by any such amendment
unless
(i) the Company requests the consent of the affected Participant, and (ii)
such
Participant consents in writing.
12. TERMINATION
OR SUSPENSION OF THE PLAN.
(a) Plan
Term.
The
Board may suspend or terminate the Plan at any time. Unless sooner terminated,
the Plan shall terminate on the day before the tenth (10th) anniversary
of the
earlier of (i) the date the Plan is adopted by the Board, or (ii) the date
the
Plan is approved by the stockholders of the Company. No Stock Awards may
be
granted under the Plan while the Plan is suspended or after it is
terminated.
(b) No
Impairment of Rights.
Suspension or termination of the Plan shall not impair rights and obligations
under any Stock Award granted while the Plan is in effect except with the
written consent of the affected Participant.
13. EFFECTIVE
DATE OF PLAN.
The
Plan
shall become effective as determined by the Board, but no Stock Award shall
be
exercised (or, in the case of a Stock Bonus Award shall be granted) unless
and
until the Plan has been approved by the stockholders of the Company, which
approval shall be within twelve (12) months before or after the date the
Plan is
adopted by the Board.
The
law
of the State of Delaware shall govern all questions concerning the construction,
validity and interpretation of this Plan, without regard to that state’s
conflict of laws rules.
ANNEX
D
Opinion
of Our Financial Advisor
The
full
text of the written opinion, which sets forth, among other things, the
assumptions made, general procedures followed, matters considered, limitations
on and qualifications made by Seidman & Co., Inc., or Seidman, in its
review, is set forth as Annex D to this proxy statement and is incorporated
herein by reference. The summary of Seidman’s opinion in this proxy statement is
qualified in its entirety by reference to the full text of the written
opinion.
You are urged to read carefully Seidman’s written opinion in its entirety.
Seidman’s
opinion, which describes the assumptions made, matters considered and
limitations on the review undertaken by Seidman, is attached as Annex D
to this
proxy statement. Seidman’s opinion was directed solely to our board of directors
and addresses only the fairness to SBE, Inc. stockholders of the merger
from a
financial point of view. The Seidman opinion does not address any other
aspect
of the merger and does not constitute a recommendation to any director,
stockholder or other person as to how to vote or act with respect to the
merger.
In
connection with rendering its opinion, Seidman reviewed the
following:
|
1. |
Agreement
and Plan of Merger and Reorganization, dated January 19,
2007;
|
|
2. |
Amendment
No. 1 to Agreement and Plan of Merger and Reorganization, dated
May 18,
2007;
|
|
3. |
Background,
description and financial history of SBE,
Inc.
|
|
4. |
Securities
and Exchange Commission filings by SBE, Inc.,
including:
|
|
FORM |
RECEIVED/PERIOD |
|
8-K |
4/19/07 (4/11/07) |
|
8-K |
4/4/07 (3/30/07) |
|
8-K |
3/23/07 (3/20/07) |
|
8-K |
3/16/07 (1/31/07) |
|
10-Q |
3/16/07 (1/31/07) |
|
DEFM14A |
3/7/07 |
|
10-K |
1/29/07 (10/31/06) |
|
8-K |
1/22/07 (1/19/07) |
|
8-K |
1/12/07
(1/11/07) |
|
5. |
Draft
proxy statement for SBE / Neonode
transaction;
|
|
6. |
Draft
of proposed Senior Secured Note dated May 16,
2007;
|
|
7. |
Proposed
Neonode / SBE $1 million Note Purchase
Agreement;
|
|
8. |
Background,
description, and financial history of Neonode
AB;
|
|
9. |
Presentation
of Neonode multimedia, smartphone cellular mobile handset
product;
|
|
10. |
Financial
estimates provided by Neonode for calendar years ending December
31, 2006
through December 31, 2008;
|
|
11. |
Due
diligence by SBE, Inc. relating to Neonode
AB;
|
|
12. |
Extrapolation
of near term projections provided by Neonode and performance
of discounted
cash flow analyses;
|
|
13. |
Statistical
analyses of selected comparable companies with publicly-traded
common
shares, and derivation of financial ratios typical of companies
in similar
SIC Codes to Neonode;
|
|
14. |
Conditions
in, and the outlook, for the mobile phone handset industry as
of April
2007;
|
|
15. |
Conditions
in, and the outlook for, the international economies, interest
rates and
financial markets proposed to be targeted by Neonode;
and
|
|
16. |
Other
studies, analyses, and investigations as it deemed
appropriate.
|
In
addition, Seidman spoke with members of the senior management of SBE, Inc.
to
discuss the operations, financial condition, future prospects and projected
operations and performance of SBE, Inc. and Neonode.
In
connection with rendering its opinion, Seidman performed a variety of financial
analyses, including those summarized below. These analyses were presented
to the
directors on May 24, 2007. The Seidman opinion necessarily is based upon
economic, market, financial and other conditions as they existed and can
be
evaluated on the date of the opinion and does not address the fairness
as a
result of the proposed transaction on any other date. The summary set forth
below does not purport to be a complete description of the analyses performed
by
Seidman in this regard. The preparation of a fairness opinion involves
various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to a partial
analysis
or summary description. Accordingly, notwithstanding the separate analyses
summarized below, Seidman believes that its analyses must be considered
as a
whole and that selecting portions of its analyses and factors considered
by it,
without considering all of its analyses and factors, or attempting to ascribe
relative weights to some or all of its analyses and factors, could create
an
incomplete view of the evaluation process underlying its opinion.
Fairness
to the shareholders of SBE of the proposed merger of SBE with Neonode
(“Transaction”) is determined by comparison of the fair market value of the
interests held by the shareholders of SBE before and after the subject
Transaction. In the instance of the subject Transaction, the relevant analysis
is the comparison of the fair market value of the merged SBE/Neonode and
the
share exchange value of the Transaction to the present shareholders of
SBE, Inc.
relative to the fair market value of SBE, Inc. prior to and without the
Neonode
transaction. If the pro rata share of the combined Neonode / SBE, Inc.
attributable to the present shareholders of SBE, Inc. is equal to or greater
than the current fair market value of their interest, then the Transaction
is
deemed to be fair to the shareholders of SBE, Inc. from a financial point
of
view.
Because
Neonode is a privately-held company, a key component of the Seidman analysis
was
a determination of the fair market value of Neonode, for which Seidman
employed
both market comparable and discounted cash flow valuation
methodologies.
This
summary does not purport to be a complete description of the analyses underlying
the opinion of Seidman. For each analysis described below, the material
forecasts and estimates that Seidman utilized were provided to it by management
of SBE, Inc. that were obtained, in turn, from management of Neonode.
The
following publicly-traded companies employed in the Seidman analysis have
been
identified as approximately comparable to Neonode. None of the public companies
used in the public companies analysis described above is identical to Neonode.
Accordingly, an analysis of publicly traded comparable companies is not
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics of the comparable
companies and other factors that could affect the public trading value
of the
comparable companies or company to which they are being compared.
|
· |
Backweb
Technologies Ltd.
|
|
· |
Once
Voice Technologies Inc.
|
|
· |
Smith
Micro Software Inc.
|
In
employing the market comparable method of valuation, it typically is necessary
to compare over an historical period, typically three to five years, the
financial performance of the subject company with an appropriate universe
of
“market comparable” companies which have common stock that is publicly-traded.
In-depth financial data for the market comparable companies are then presented
for easy comparison, and selective financial measurements and ratios are
computed and studied.
However,
Seidman observed that Neonode is a company with no operating history and
no
earnings. Under the circumstances, Seidman focused on price/latest year
revenues
of market comparable companies and applying the median multiple of this
universe
to the projected revenues of Neonode in 2007 which is based on delivery
commencement of the Company’s smartphones in June 2007, and the annualization of
these six months of revenues. The median price/revenues multiple for the
market
comparable companies is 1.85x. With Neonode annualized revenues for 2007
projected at approximately $39.5 million, an unadjusted valuation of capitalized
revenues approximating $73 million is indicated. As this is a projected
value
for Neonode, and there is no history of operations, Seidman adjusted this
derived value by a 50% uncertainty factor, consistent with indicated returns
required by the market for a late stage venture capital development company
such
as Neonode, thus indicating a $36.5 million pro forma fair market value
for
Neonode.
Discounted
Cash Flow Analysis.
A
discounted cash flow analysis is a traditional valuation methodology used
to
derive a valuation of an asset by calculating the “present value” of estimated
future cash flows of the asset. “Present value” refers to the current value of
future cash flows or amounts and is obtained by discounting those future
cash
flows or amounts by a discount rate that takes into account macro-economic
assumptions and estimates of risk, the opportunity cost of capital, expected
returns and other appropriate factors. Seidman calculated discounted cash
flow
analyses for Neonode employing financial forecasts for Neonode for calendar
years 2007 through 2011. Assuming discount rates as high as 50%, and terminal
growth rates of EBITDA in the year 2011 of as low as 5%, a range of present
values was derived for Neonode representing fair market value. The minimum
fair
market value of Neonode in the range approximates $21.1 million.
As
of the
date hereof, it observed that SBE sold its embedded hardware business on
March
30, 2007, and its only remaining business is designing and providing
software-based storage networking solutions for an extensive range of business
critical applications, including Disk-to-Disk Back-up and Disaster Recovery.
These storage software products have not gained wide acceptance in the
storage
markets and have not generated significant sales to date and continue to
lose
money and drain cash from SBE. As of the September 30, 2007, projected
closing
date of the proposed SBE /Neonode merger, management of SBE estimates it
will
have substantially exhausted its remaining cash, and the only remaining
assets
held by SBE would be the $1 million pre-merger loan receivable from Neonode
plus
the value attributable to SBE’s status as a publicly-traded company, estimated
to be worth no more than $1 million, and a $150,000 credit for transaction
costs.
At
the
projected date of closing, SBE, in the merger exchange, contributes $1,000,000
of cash in the form of its pre-merger loan to Neonode, plus an imputed
$1,000,000 for the value of a publicly-traded corporation, plus $150,000
for
transactions costs, for a total of $2.15 million. Seidman concluded that
the
$1,000,000 imputed value for the publicly-traded corporation is believed
fair
from a financial point of view. It also is noted that any indicated higher
value
might divert a potential partner to consider other options to obtain a
public
market.
Seidman
observed that the market capitalization of SBE as of the May 24, 2007,
date of
its fairness opinion was approximately $5 million. Seidman believes that
this
market capitalized value already reflects the pro forma combination with
Neonode. Prior to the SBE announcement on January 19, 2007, of the pending
sale
of its Embedded Products Division and of the prospective merger with Neonode,
SBE’s market capitalization doubled from $3.8 million on January 19, 2007,
to a
high of $7.6 million on January 22, 2007, the next trading day. Thus, the
market
capitalization of SBE subsequent to the announcement of the merger with
Neonode
already had given weight to the merger with Neonode rather than to the
fundamentals of SBE, Inc. as a standalone entity. As a standalone entity,
Seidman is of the opinion that SBE value to its stockholders as of the
projected
closing date of the Transaction is no more than the total of its $1 million
loan
receivable owed by Neonode plus the $1 million estimated value of its public
listing, or approximately $2 million.
It
is
indicated that the shareholders of SBE will receive approximately 10% of
the
merged SBE / Neonode entity. Thus, since 10% of both the market comparable
and
discounted cash flow methodologies for valuing the merged SBE / Neonode
entity
result in a value to SBE shareholders equal to or greater than the estimated
$2
million present value attributable to SBE, the proposed merger transaction
is
deemed to be fair to the shareholders of SBE, from a financial point of
view.
Seidman
assumed, without independent verification, that the financial forecasts
and
projections it was provided, and upon which it relied, were reasonably
prepared
and reflected the best currently available estimates and judgments by management
as to the future financial results of operations and financial performance
of
Neonode, and that such results of operations, synergies and financial
performance will be realized. Seidman also assumed that there had been
no
material change in the assets, financial condition or business of Neonode
since
the date of the most recent financial statements and projections made available
to it. Seidman further relied upon the assurance of management of SBE,
Inc. that
they are unaware of any facts that would make the information provided
to
Seidman incomplete or misleading in any respect. Seidman assumed that the
transaction contemplated by the merger agreement will be substantially
consummated as described in the terms herein in the form reviewed by Seidman
and
that all representations and warranties therein of the parties thereto
are true
and accurate in all respects.
Seidman
did not independently verify the accuracy and completeness of the information
supplied to it with respect to Neonode and does not assume any responsibility
with respect to it. Seidman did not meet with or have any discussions with
any
representatives of Neonode. Seidman’s opinion was necessarily based on business,
economic, market and other conditions as they existed and could be evaluated
by
it as of the date of the Seidman opinion. It should be understood that
subsequent developments may affect the Seidman opinion and Seidman does
not have
any obligation to update, revise or reaffirm the Seidman opinion.
The
SBE
board of directors asked Seidman to opine on the fairness to its stockholders
of
the merger from a financial point of view. The Seidman opinion does not
address
the relative merits of the merger as compared to other business strategies
that
might be available to SBE, Inc., nor does it address its underlying business
decision to proceed with the merger. Seidman did not make or take into
account
any independent appraisal or valuation of any of Neonode or SBE, Inc.’s assets
or liabilities, contingent or otherwise. Seidman did not opine on any legal,
tax
or accounting issues concerning the merger, or any terms of the merger
other
than the subject fairness. Seidman did not express an opinion with respect
to
the prices at which SBE, Inc. common stock might trade subsequent to disclosure
or consummation of the merger.
Seidman
did not recommend any specific exchange ratio to the board of directors
or that
any specific exchange ratio constituted the only appropriate exchange ratio
with
respect to the merger agreement. In addition, Seidman’s opinion and presentation
to the board of directors was one of many factors taken into consideration
by
the board of directors in making its decision to approve the merger.
Consequently, the Seidman analyses as described above should not be viewed
as
determinative of the opinion of the board of directors with respect to
the
exchange ratio or whether our board of directors would have been willing
to
agree to a different exchange ratio.
Seidman
is a New York City investment banking firm specializing in securities research,
analysis and valuations that has been in business since 1970 and is engaged
in a
broad range of investment banking and financial advisory activities, including
activities relating to corporate finance, mergers and acquisitions, leveraged
buyouts and private placements.
ANNEX
E
SBE,
INC.
CONDENSED
BALANCE SHEETS
(In
thousands)
|
|
April
30,
|
|
October
31,
|
|
|
|
2007
|
|
2006
(A)
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,239
|
|
$
|
1,147
|
|
Trade
accounts receivable, net
|
|
|
102
|
|
|
930
|
|
Other
|
|
|
750
|
|
|
177
|
|
Current
assets from discontinued operations (B)
|
|
|
—
|
|
|
739
|
|
Total
current assets
|
|
|
2,091
|
|
|
2,993
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
139
|
|
|
231
|
|
Capitalized
software costs, net
|
|
|
939
|
|
|
1,314
|
|
Other
|
|
|
4
|
|
|
5
|
|
Non-current
assets from discontinued operations (B)
|
|
|
|
|
|
325
|
|
Total
assets
|
|
$
|
3,173
|
|
$
|
4,868
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Trade
accounts payable
|
|
$
|
91
|
|
$
|
557
|
|
Accrued
payroll and employee benefits
|
|
|
17
|
|
|
105
|
|
Capital
lease obligations - current portion
|
|
|
34
|
|
|
33
|
|
Deferred
revenues
|
|
|
303
|
|
|
432
|
|
Other
accrued expenses
|
|
|
128
|
|
|
144
|
|
Current
liabilities from discontinued operations (B)
|
|
|
|
|
|
21
|
|
Total
current liabilities
|
|
|
573
|
|
|
1,292
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, net of current portion
|
|
|
61
|
|
|
65
|
|
Long-term
liabilities from discontinued operations (B)
|
|
|
|
|
|
190
|
|
Total
long-term liabilities
|
|
|
61
|
|
|
255
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
634
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
Commitments
(note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Common
stock
|
|
|
35,638
|
|
|
35,186
|
|
Accumulated
deficit
|
|
|
(33,099
|
)
|
|
(31,865
|
)
|
Total
stockholders' equity
|
|
|
2,539
|
|
|
3,321
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,173
|
|
$
|
4,868
|
|
(A) |
Derived
from audited financial statements
|
(B) |
See
Note 1 to the condensed financial statements for information
related to
discontinued operations
|
See
notes
to condensed financial statements.
SBE,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
April
30,
|
|
April
30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
27
|
|
$
|
|
|
$
|
49
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
and impairment of acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
software
and intellectual property
|
|
|
188
|
|
|
1,023
|
|
|
375
|
|
|
2,046
|
|
Product
research and development
|
|
|
252
|
|
|
498
|
|
|
611
|
|
|
1,069
|
|
Sales
and marketing
|
|
|
91
|
|
|
326
|
|
|
273
|
|
|
618
|
|
General
and administrative
|
|
|
724
|
|
|
756
|
|
|
1,186
|
|
|
1,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,255
|
|
|
2,603
|
|
|
2,445
|
|
|
5,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss from continuing operations
|
|
|
(1,228
|
)
|
|
(2,603
|
)
|
|
(2,396
|
)
|
|
(5,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4
|
|
|
12
|
|
|
4
|
|
|
29
|
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(1,224
|
)
|
|
(2,591
|
)
|
|
(2,396
|
)
|
|
(5,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
(224
|
)
|
|
(438
|
)
|
|
(181
|
)
|
|
(520
|
|
Gain
on sale of discontinued operations
|
|
|
1,343
|
|
|
|
|
|
1,343
|
|
|
---
|
|
Net
income (loss) from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
(B)
|
|
|
1,119
|
|
|
(438
|
)
|
|
1,162
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(105
|
)
|
$
|
(3,029
|
)
|
$
|
(1,234
|
)
|
$
|
(5,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.55
|
)
|
$
|
(1.28
|
)
|
$
|
(1.08
|
)
|
$
|
(2.62
|
)
|
Discontinued
operations (B)
|
|
$
|
0.50
|
|
$
|
(0.22
|
)
|
$
|
0.52
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.05
|
)
|
$
|
(1.50
|
)
|
$
|
(0.56
|
)
|
$
|
(2.88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
used in per share computations
|
|
|
2,233
|
|
|
2,025
|
|
|
2,221
|
|
|
2,002
|
|
(B) |
See
Note 1 to the condensed financial statements for information
related to
discontinued operations
|
See
notes
to condensed financial statements.
SBE,
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
months ended April
30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,234
|
)
|
$
|
(5,757
|
)
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
used
by operating activities:
|
|
|
|
|
|
|
|
Equity
based compensation expense
|
|
|
451
|
|
|
1,108
|
|
Depreciation
and amortization
|
|
|
468
|
|
|
2,165
|
|
Impairment
of capitalized software
|
|
|
|
|
|
256
|
|
Gain
on sale of hardware business
|
|
|
(1,343
|
)
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
828
|
|
|
(31
|
)
|
Inventories
|
|
|
|
|
|
95
|
|
Other
assets
|
|
|
(72
|
)
|
|
74
|
|
Trade
accounts payable
|
|
|
(466
|
)
|
|
174
|
|
Other
accrued liabilities
|
|
|
(236
|
)
|
|
97
|
|
Net
cash used by operating activities
|
|
|
(1,604
|
)
|
|
(1,819
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(4
|
)
|
|
(167
|
)
|
Capitalized
software costs
|
|
|
|
|
|
(40
|
)
|
Cash
proceeds from sale of hardware business
|
|
|
1,700
|
|
|
|
|
Net
cash provided (used) in investing activities
|
|
|
1,696
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Stock
offering expense
|
|
|
|
|
|
(2
|
)
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
39
|
|
Net
cash provided by financing activities
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
92
|
|
|
(1,989
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period |
|
|
1,147
|
|
|
3,632
|
|
Cash
and cash equvalents at end of period |
|
$
|
1,239
|
|
$
|
1,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
SCHEDULE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
Non-cash
receivable related to sale of hardware business
|
|
$
|
500
|
|
$
|
|
|
|
|
$
|
209
|
|
$
|
|
|
Non-cash
reduction in assets related to sale of hardware business
|
|
$
|
1,066
|
|
$
|
|
|
See
notes
to condensed financial statements.
SBE,
INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Interim
Period Reporting:
These
condensed consolidated financial statements of SBE, Inc. (the Company)
are
unaudited and include all adjustments, consisting of normal recurring
adjustments, that are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations and cash
flows
for the interim periods. The results of operations for the three and six
months
ended April 30, 2007 are not necessarily indicative of expected results
for the
full 2007 fiscal year.
Certain
information and footnote disclosures normally contained in financial statements
prepared in accordance with generally accepted accounting principles have
been
condensed or omitted. These condensed consolidated financial statements
should
be read in conjunction with the financial statements and notes contained
in our
Annual Report on Form 10-K for the year ended October 31, 2006.
Liquidity
The
accompanying financial statements have been prepared on a going concern
basis,
which contemplates the realization of assets and
the settlement of liabilities and commitments in the normal course of
business. As reflected in the accompanying financial statements, as of
April 30, 2007, we had cash and cash equivalents on hand of $1.2 million
with
cash used in operations of approximately $1.6 million in the six months
ended
April 30, 2007 and an accumulated deficit of approximately $33.1
million. Our ability to continue as a going concern is dependent on
our ability to complete the merger transaction with Neonode Inc. (Neonode).
Our
independent registered public accountants stated in their opinion for the
year
ended October 31, 2006 that there is substantial doubt about our ability
to
continue as a going concern.
On
May
29, 2007, pursuant to Amendment Number 1 to the merger agreement with Neonode,
we advanced Neonode $500,000 under an interest bearing secured note payable
and
are committed to advancing an additional $500,000 on or before June 15,
2007. As
of June 6, 2007 we had $1.3 million in cash and we expect our cash balance,
after advances to Neonode, will be adequate to fund our operations until
the
merger is consummated. If we are unable to consummate our proposed merger
with
Neonode or Neonode is unable to repay the notes on September 30, 2007,as
required, we will be forced to
seek
credit line facilities from financial institutions and/or additional equity
investment. No assurances can be given that we would be successful in obtaining
such additional financing on reasonable terms, or at all.
Sale
of Embedded Hardware Business
On
March
30, 2007, we sold all
of
the assets associated with our hardware business (excluding cash, accounts
receivable and other excluded assets specified in the asset purchase agreement)
to One Stop Systems, Inc. (One Stop Systems or One Stop) for $2.2 million
in
cash plus One Stop Systems’ assumption of the lease of our corporate
headquarters building and certain equipment leases. We received $1.7 million
in
cash on the date of the sale and received an additional $500,000 in cash
on June
5, 2007. Our hardware business represents substantially all of our revenue
to
date.
The
balance sheets as of April 30, 2007 and October 31, 2006 and the statements
of
operations for the three and six months ended April 30, 2007 and 2006 have
been
adjusted to reflect the effect of our discontinued operations related to
the
sale of our hardware business.
We
recorded a $1.3 million gain on the sale of our hardware business to One
Stop.
The gain is based on the difference between the proceeds received and
liabilities assumed from/by One Stop and the carrying value of the assets
transferred to One Stop.
|
|
Gain
on the sale of hardware business
|
|
|
|
|
(in
thousands)
|
|
Cash
and escrow receivable
|
|
$
|
2,200
|
|
Liabilities
assumed
|
|
|
209
|
|
Total
consideration
|
|
|
2,409
|
|
Less
basis of assets transferred in sale
|
|
|
|
|
Inventory
|
|
|
741
|
|
Plant
property & equipment
|
|
|
277
|
|
Other
assets
|
|
|
48
|
|
Total
basis of transferred assets
|
|
|
1,066
|
|
Gain
on Sale
|
|
$
|
1,343
|
|
Merger
and Reorganization:
On
January 19, 2007, we entered into an Agreement and Plan of Merger and
Reorganization (Merger Agreement) with Neonode, a Delaware corporation. It
is anticipated that our name will be changed to “Neonode Inc.” upon completion
of the merger. The securities offered in the merger will not be registered
under
the Securities Act of 1933 and may not be offered or sold in the United
States
absent registration or an applicable exemption from registration
requirements.
Amendment
No. 1 to the Merger Agreement:
On
May
18, 2007, SBE and Neonode entered into Amendment No. 1 to the Agreement
and Plan
of Merger and Reorganization (the Amendment). The Amendment amends the
Merger
Agreement as follows:
(i) |
extends
the date on which the parties may terminate the merger agreement
if
closing hasn’t occurred from May 31, 2007 to September 30,
2007;and
|
(ii) |
specifies
that upon closing of the merger, each outstanding share of Neonode
common
stock will be converted into the right to receive 3.5319 shares
of SBE
common stock, subject to adjustment for stock splits, combinations,
reclassifications, reorganizations or similar corporate transactions;
and
|
(iii) |
allows
for the issuance by SBE and Neonode of certain securities prior
to the
closing, including securities to be issued in connection with
the loan of
$1,000,000 from SBE to Neonode; and
|
(iv) |
provides
for the update of certain of the representations and warranties
and the
respective disclosure schedules of the
parties.
|
It
is
currently estimated that we will issue approximately 20.3 million shares
of our
common stock in exchange for outstanding shares of Neonode common stock,
and
will assume Neonode’s options and warrants exercisable for approximately 7.8
million additional shares of our common stock.
Note
Purchase Agreement:
On
May
18, 2007, we entered into a Note Purchase Agreement with Neonode pursuant
to
which we agreed to loan $1,000,000 to Neonode for working capital purposes
(the
Loan). The Loan is evidenced by a
Senior
Secured Note (the Note) that is repayable on September 30, 2007, bears
an
interest rate of 6% per annum and is secured by all of Neonode’s stock in
Neonode AB, its operating subsidiary, and a pledge of the shares of the
three
principal Neonode stockholders. In
the
event that the merger is consummated pursuant to the terms of the Merger
Agreement, as amended, the Note and all accrued interest thereon will
automatically be cancelled without further obligation on the part of Neonode.
In
the event the merger is not completed by September 30, 2007, Neonode is
obligated to repay the note plus accrued interest. If Neonode is unable
to repay
the loan and accrued interest, we will be adversely affected and may not
have
sufficient cash to continue our operations.
We
expect
to complete the merger transaction in our third quarter of fiscal 2007,
subject
to satisfaction of closing conditions set forth in the Merger Agreement.
In
addition to customary closing conditions, the transaction is subject to
the
approval of both our and Neonode’s shareholders and may require a reverse split
of our outstanding common stock concurrent with the culmination of the
merger.
After the merger is completed, the combined company's headquarters will
be in
Stockholm, Sweden, where Neonode’s corporate headquarters and research and
development activities are located. The combined company’s stock is expected to
continue to trade on the Nasdaq Capital Market.
Reverse
Stock Split
On
April
2, 2007 we effected a one for five reverse stock split. The one for five
reverse
stock split has been reflected in the weighted average shares outstanding
used
to calculate the loss per share amounts presented in these financial statements.
In addition, all amounts in Note 5 Stock-Based Compensation have been adjusted
to reflect the one for five reverse stock split.
Management
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the U.S. requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, as well as
certain
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of net
sales
and
expenses
during the reporting period. Actual results could differ from these estimates.
Significant estimates and judgments made by us include matters such as
warranty
obligations, indemnification obligations, collectibility of accounts receivable,
realizability of inventories and recoverability of capitalized software
and
deferred tax assets.
2. Inventories:
All
of
the inventory related to the embedded hardware business was transferred
to One
Stop upon consummation of the asset sale transaction on March 30, 2007.
The net
book value of the inventory sold to One Stop was $741,000 at March 30,
2007.
3.
Capitalized Software:
Capitalized
software costs comprised the following (in thousands):
|
|
|
April
30,
2007
|
|
|
October
31,
2006
|
|
Purchased
software
|
|
$
|
14,217
|
|
$
|
14,217
|
|
|
|
|
(13,278
|
)
|
|
(12,903
|
)
|
|
|
$
|
939
|
|
$
|
1,314
|
|
Capitalized
software costs consist of software relating to current products and the
design
of future Internet
Small Computer System Interface (iSCSI)
software products acquired with our acquisition of PyX on July 26, 2005.
We did
not capitalize any purchased software in the first six months of fiscal
2007
compared to $40,000 in the six months ended April 30, 2006. Amortization
of
capitalized software costs totaled $188,000 and $375,000 for the three
and six
months ended April 30, 2007 and $1,279,000 and $2,301,000 for the three
and six
months ended April 30, 2006, respectively. In
addition, in the three months ended April 30, 2006, we wrote-off $256,000
of
capitalized software development costs related to our discontinued Voice
over IP
(VoIP) products. This write-off is included in our product research and
development expense for the three and six months ended April 30, 2006.
We
are
amortizing the $0.9 million balance of capitalized software at April 30,
2007 to
amortization and impairment of acquired software and intellectual property
on a
straight line basis over a remaining period of 15 months, which is the
remaining
expected useful life and does not materially differ from the expected cash
inflow from the sale of products related to the acquired storage software
product line. It
is our
belief that no impairment to the remaining $0.9 million balance of our
software
asset exists as of April 30, 2007.
4. Net
Loss Per Share:
(adjusted for one for five reverse stock split effective April 2,
2007)
Basic
and
diluted loss per common share for the three and six months ended April
30, 2007
and 2006 was computed by dividing the net loss for each period by the weighted
average number of shares of common stock outstanding for each period. Common
stock equivalents for the three months and six months ended April 30, 2007
and
2006 were anti-dilutive, and as such were not included in the calculation
of
diluted net income per share.
|
|
Three
months ended
April
30,
|
|
Six
months ended
April
30,
|
|
in
thousands, |
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Common
Stock Equivalents
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
25
|
|
|
463
|
|
|
27
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share is calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
(in
thousands, except per share amounts)
|
|
|
April
30,
|
|
|
April
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
BASIC
AND DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares outstanding
|
|
|
2,233
|
|
|
2,025
|
|
|
2,221
|
|
|
2,002
|
|
Number
of shares for computation of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
income (loss) per share
|
|
|
2,233
|
|
|
2,025
|
|
|
2,221
|
|
|
2,002
|
|
Net
loss from continuing operations
|
|
$
|
(1,224
|
)
|
$
|
(2,591
|
)
|
$
|
(2,396
|
)
|
$
|
(5,237
|
)
|
Net
loss per share from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$
|
(0.55
|
)
|
$
|
(1.28
|
)
|
$
|
(1.08
|
)
|
$
|
(2.62
|
)
|
Net
income (loss) from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
$
|
1,119
|
|
$
|
(438
|
)
|
$
|
1,162
|
|
$
|
(520
|
)
|
Net
income (loss) per share from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
$
|
0.50
|
|
$
|
(0.22
|
)
|
$
|
0.52
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
$
|
(0.05
|
)
|
$
|
(1.50
|
)
|
$
|
(0.56
|
)
|
$
|
(2.88
|
)
|
(a)
|
In
loss periods, all common share equivalents would have had an
anti-dilutive
effect on
net
loss
per share and therefore were
excluded.
|
5.
Stock-Based Compensation:
(adjusted for one for five reverse stock split effective April 2,
2007)
We
have
several approved stock option plans for which stock options and restricted
stock
awards are available to grant to employees, consultants and directors.
All
employee and director stock options granted under our stock option plans
have an
exercise price equal to the market value of the underlying common stock
on the
grant date. There are no vesting provisions tied to performance conditions
for
any options, as vesting for all outstanding option grants was based only
on
continued service as an employee, consultant or director. All of our outstanding
stock options and restricted stock awards are classified as equity instruments.
Stock
Options
We
sponsor four equity incentive plans:
· |
The
1996
Stock Option Plan (the 1996 Plan),which expired in January 2006;
|
· |
the
1998 Non-Officer Stock Option Plan (the 1998 Plan);
|
· |
the
PyX 2005 Stock Option Plan (the PyX Plan), which we assumed in
our
acquisition of PyX but under which we have not granted and will
not grant
any additional equity awards; and
|
· |
the
2006 Equity Incentive Plan (the 2006 Plan).
|
We
also
sponsor one non-employee director stock option plan:
· |
The
2001 Non-Employee Director Stock Option Plan (the Director
Plan).
|
The
following table details the options to purchase shares pursuant to each
plan at
April 30, 2007:
Plan
|
|
Shares
Reserved
|
|
Options
Outstanding
|
|
Available
for
Issue
|
|
Outstanding
Options
Vested
|
|
1996
Plan
|
|
|
546,000
|
|
|
117,498
|
|
|
---
|
|
|
93,556
|
|
1998
Plan
|
|
|
130,000
|
|
|
39,444
|
|
|
39,451
|
|
|
37,627
|
|
PyX
Plan
|
|
|
407,790
|
|
|
204,240
|
|
|
---
|
|
|
110,627
|
|
2006
Plan
|
|
|
300,000
|
|
|
59,000
|
|
|
16,856
|
|
|
33,164
|
|
Director
Plan
|
|
|
68,000
|
|
|
38,000
|
|
|
18,750
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,451,790
|
|
|
458,182
|
|
|
75,057
|
|
|
304,974
|
|
The
1996
Plan terminated effective January 17, 2006 and although we can no longer
issue
stock options out of the 1996 Plan, the outstanding options at the date
of
termination will remain outstanding and vest in accordance with their terms.
Options granted under the Director Plan vest over a one to four-year period,
expire five to seven years after the date of grant and have exercise prices
reflecting market value of the shares of our common stock on the date of
grant.
Stock options granted under the 1996, 1998, 2006 and PyX Plans are exercisable
over a maximum term of ten years from the date of grant, vest in various
installments over a one to four-year period and have exercise prices reflecting
the market value of the shares of common stock on the date of grant.
We
granted 8,000 stock options to employees or members of our Board of Directors
(Board) during the three and six months ended April 30, 2007 compared to
grants
of 495,000 and 730,000 stock options to employees and members of the Board
of
Directors for the three and six months ended April 30, 2006, respectively.
The
fair value of the unearned portion of stock-based compensation related
to the
employee and director stock options is calculated using the Black-Scholes
option
pricing model as of the grant date of the underlying stock options.
Employee
and director stock-based compensation expense related to stock options
in the
accompanying condensed statements of operations (in thousands):
|
|
Three
Months ended April 30,
2006
|
|
Six
Months ended April 30,
2006
|
|
Three
Months ended April 30,
2007
|
|
Six
Months ended April 30,
2007
|
|
Remaining
Unamortized Expense
|
|
Stock
option compensation
|
|
$
|
35
|
|
$
|
41
|
|
$
|
151
|
|
$
|
355
|
|
$
|
1,353
|
|
The
calculation of stock-based compensation and the fair value of each option
grant
is estimated on the date of grant using the Black-Scholes option pricing
model
with the following assumptions:
|
|
Options
Granted
|
|
Options
Granted
|
|
|
|
During
Six Months
|
|
During
Six Months
|
|
|
|
Ended
April 30,
|
|
Ended
April 30,
|
|
|
|
2006
|
|
2007
|
|
Expected
life (in years)
|
|
|
4.00
|
|
|
4.50
|
|
Risk-free
interest rate
|
|
|
4.375
|
%
|
|
4.50
|
%
|
Volatility
|
|
|
97.46
|
%
|
|
108.62
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Forfeiture
rate
|
|
|
5.47
|
%
|
|
2.12
|
%
|
The
fair
value of stock-based awards to employees is calculated using the Black-Scholes
option pricing model, even though this model was developed to estimate
the fair
value of freely tradable, fully transferable options without vesting
restrictions, which differ significantly from our stock options. The
Black-Scholes model also requires subjective assumptions, including future
stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The expected term and forfeiture rate of options granted
is
derived from historical data on employee exercises and post-vesting employment
termination behavior, as well as expected behavior on outstanding options.
The
risk-free rate is based on the U.S. Treasury rates in effect during the
corresponding period of grant. The expected volatility is based on the
historical volatility of our stock price. These factors could change in
the
future, which would affect the stock-based compensation expense in future
periods.
We
award
stock option grants to certain non-employee strategic business advisors
as part
of their fee structure. The fair value of these option grants is estimated
on
the date of grant using the Black-Scholes option-pricing model and is
recalculated on a monthly basis based on market price until vested. For
the
three and six months ended April 30, 2007 we recorded $1,700 and $2,700,
respectively, of compensation expense related to non-employee stock options
compared to $13,500 and $49,000 of compensation expense to non-employees
for the
three and six months ended April 30, 2006, respectively.
The
following table summarizes information with respect to all options to
purchase
shares of common stock outstanding under the
1996
Plan, the 1998 Plan, the 2006 Plan,
the PyX
Plan
and the
Director Plan at April 30, 2007:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Price
|
|
Number
Outstanding
at
4/30/07
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
at
4/30/07
|
|
Weighted
Average
Exercise
Price
|
|
$
0.00 -
$
3.00
|
|
|
2,000
|
|
|
6.2
|
|
$
|
1.80
|
|
|
-- |
|
$
|
--
|
|
$
3.01-
$
4.00
|
|
|
9,000
|
|
|
4.7
|
|
$
|
3.31
|
|
|
1,000
|
|
$
|
3.50
|
|
$
4.01 -
$
5.00
|
|
|
127,300
|
|
|
2.5
|
|
$
|
4.76
|
|
|
104,464
|
|
$
|
4.71
|
|
$
5.01 -
$
6.00
|
|
|
14,400
|
|
|
4.4
|
|
$
|
5.42
|
|
|
12,000
|
|
$
|
5.45
|
|
$
6.01 -
$10.00
|
|
|
5,600
|
|
|
0.2
|
|
$
|
8.20
|
|
|
5,600
|
|
$
|
8.20
|
|
$10.01-
$11.00
|
|
|
204,240
|
|
|
4.8
|
|
$
|
10.85
|
|
|
110,627
|
|
$
|
10.85
|
|
$
11.01 -
$14.00
|
|
|
27,121
|
|
|
4.3
|
|
$
|
13.28
|
|
|
19,493
|
|
$
|
13.31
|
|
$
14.01 -
$18.00
|
|
|
43,700
|
|
|
4.1
|
|
$
|
14.97
|
|
|
27,532
|
|
$
|
14.98
|
|
$
18.01 -
$24.00
|
|
|
15,354
|
|
|
3.2
|
|
$
|
22.66
|
|
|
14,791
|
|
$
|
22.82
|
|
$
24.01 -
$95.00
|
|
|
9,467
|
|
|
2.4
|
|
$
|
33.36
|
|
|
9,467
|
|
$
|
33.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458,182
|
|
|
3.9
|
|
$
|
10.17
|
|
|
304,974
|
|
$
|
10.27
|
|
The
following table summarizes our stock option activity in the six months
ended
April 30, 2007:
|
|
|
|
Weighted
Average
|
|
|
|
Number
of
|
|
Exercise
|
|
|
|
options
|
|
Price
|
|
|
|
|
|
|
|
Outstanding
at October 31, 2006
|
|
|
577,974
|
|
$
|
11.35
|
|
Granted
Stock Options
|
|
|
8,000
|
|
|
3.29
|
|
Exercised
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(127,792
|
)
|
|
15.18
|
|
|
|
|
|
|
|
|
|
Outstanding
at April 30, 2007
|
|
|
458,182
|
|
$
|
10.17
|
|
As
of April 3, 2007:
|
|
|
|
|
|
|
|
Options
exercisable
|
|
|
304,974
|
|
$
|
10.27
|
|
Shares
available for grant
|
|
|
75,057
|
|
|
|
|
The
weighted average grant-date fair value of options granted during the six
months
ended April 30, 2007 and 2006 was $2.55 and $4.45, respectively. The total
intrinsic value of options exercised during the six months ended April
30, 2007
and 2006 was $0 and $16,798, respectively.
Restricted
Stock Awards
On
March
21, 2006, our Board approved restricted stock grants to all employees in
order
to continue to motivate and retain our employees. The shares of restricted
stock
granted vest 25% on the first anniversary of the initial grant date with
the
remainder vesting monthly thereafter for the following six months. A total
of
59,400 restricted shares of our common stock have been issued to employees
under
the restricted stock grants. Since March 21, 2006, a total of 37,400 restricted
shares issued to employees who have terminated their employment prior to
vesting
have been cancelled. The total fair value of the restricted stock grants
on the
date of issuance was $303,000 and is amortized to salary expense, net of
forfeitures, over the 18-month vesting period. For the three and six months
ended April 30, 2007, we recorded $22,000 and $8,000 reductions, respectively,
to salary expense after netting out the value of the forfeitures of restricted
stock granted to employees departed in connection with the sale of our
hardware
business that we sold to One Stop on March 30, 2007. We recorded $9,200
of
salary expense for the three and six months ended April 30, 2006.
|
|
Weighted
Average
|
|
Average
|
|
|
|
Shares
Unvested
|
|
Grant
Date
|
|
|
|
Stock
Units
|
|
Fair
Value
|
|
|
|
|
|
|
|
Unvested
at November 1, 2006
|
|
|
48,400
|
|
$
|
5.20
|
|
Granted
|
|
|
|
|
|
|
|
Vested
|
|
|
(6,800
|
)
|
|
5.20
|
|
Cancelled
|
|
|
(26,400
|
)
|
|
5.20
|
|
Unvested
at April 30, 2007
|
|
|
15,200
|
|
$
|
5.20
|
|
Stock-For-Pay
Plan
On
January 12, 2006, our Board approved a company-wide 30% reduction in employee
base salaries, effective January 16, 2006. In order to continue to motivate
and
retain our employees despite such salary reductions, the Board approved
stock
grants to all of our employees pursuant to the 1996 Plan and 2006 Plan.
Effective April 1, 2006, the Board modified the 30% across the board reduction
in employee base salaries to a cash salary reduction ranging from 10% to
38% of
the employees’ base salaries, coupled with stock grants. The level of reduction
of the cash portion of the salary for each employee is dependent on their
respective position and base salary, and employees with lower salaries
generally
have lower reductions. A total of 49,449 shares of our common stock have
been
issued to employees in the six months ended April 30, 2007 pursuant to
the
stock-for-pay plan compared to 55,692 shares of our common stock for the
same
six month period in 2006. For
the
three and six months ended April 30, 2007, we recorded approximately $32,000
and
$104,000, respectively, of stock-based compensation associated with such
stock
grants. For
the
three and six months ended April 30, 2006, we recorded approximately $261,000
and $320,000, respectively, of stock-based compensation associated with
stock
grants.
In
addition, the Board approved the suspension of all cash payments of Board
and
Board committee fees until further notice. 2,448 shares of our common stock
have
been issued to members of our Board in the six months ended April 30, 2007
pursuant to the stock-for-pay plan compared to 8,732 shares of our common
stock
for the same six month period in 2006. For
the
three and six months ended April 30, 2007, we recorded $6,200 of compensation
expense related to the directors’ stock-for-pay plan. For the three and six
months ended April 30, 2006, we recorded approximately $39,000 and $71,000,
of
stock-based compensation and director expense associated with the stock-for-pay
plan.
On
August
21, 2006, the Board suspended the stock-for-pay program for all of our
directors
and officers, effective as of August 1, 2006 for all directors and August
16,
2006 for all officers. Despite suspension of the stock-for-pay program,
the
previously-announced salary reductions for the officers and cessation of
cash
compensation for the directors will remain in effect until such time as
the
Board shall determine. The Board adopted a bonus plan for the affected
individuals that will pay a prescribed amount of cash or stock upon our
completion of one of a number of specified milestones set forth in the
written
bonus plan, provided that the affected individual remains employed by the
Company or a member of the Board at the time such milestone is achieved.
On
April 2, 2007, the Board authorized bonus payments under the plan to officers
and members of the board totaling $58,000. The Board also reinstated the
stock-for-pay program for all of directors and officers
The
following table summarizes stock-based compensation expense related to
employee
stock options, restricted stock awards, stock-for-pay and non-employee
consultant awards for the three and six months ended April 30, 2007 and
2006, which was allocated to product costs and operating expense as follows
(in
thousands):
|
|
Three
Months
April
30, 2007
|
|
Three
Months
April
30, 2006
|
|
Cost
of hardware products and other revenue
|
|
$
|
4
|
|
$
|
16
|
|
Product
research and development
|
|
|
75
|
|
|
125
|
|
Sales
and Marketing
|
|
|
(23
|
)
|
|
122
|
|
General
and administrative
|
|
|
104
|
|
|
387
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
160
|
|
$
|
650
|
|
|
|
Six
Months
April
30, 2007
|
|
Six
Months
April
30, 2006
|
|
Cost
of hardware products and other revenue
|
|
$
|
19
|
|
$
|
20
|
|
Product
research and development
|
|
|
197
|
|
|
164
|
|
Sales
and Marketing
|
|
|
24
|
|
|
166
|
|
General
and administrative
|
|
|
211
|
|
|
758
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
451
|
|
$
|
1,108
|
|
6. Revenue
Recognition and Concentration of Risk:
Our
policy is to recognize revenue for 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 defer and recognize service
revenue
over the contractual period or as services are rendered. Our policy complies
with the guidance provided by Staff Accounting Bulletin No. 104, Revenue
Recognition in Financial Statements,
issued
by the Securities and Exchange Commission (SEC).
We
account for the licensing of software in accordance with American Institute
of
Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,
Software
Revenue Recognition.
The
application of SOP 97-2 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. We will
defer
all revenues related to the sale of our software products until such time
as we
establish VSOE for the undelivered elements related to our iSCSI software
products or fulfill the undelivered elements. Deferred
revenues represent post-delivery engineering support and the right to receive
specified upgrades or enhancements of our iSCSI software on a
when-and-if-available basis.
Substantially
all of our revenue has been generated by our hardware business that we
sold to
One Stop, and the statements of operations for the three and six months
ended
April 30, 2007 and 2006 have been adjusted to reflect the effect of our
discontinued operations related to the sale of our hardware
business.
Net
revenue from continuing operations for the second quarter of fiscal 2007
was
$27,000, compared to no revenue in the second quarter of fiscal 2006. For
the
first six months of fiscal 2007, net revenue from continuing operations
was
$49,000, which represented a 390% increase over net revenue of $10,000
for the
same period in fiscal 2006. All of our revenue from continuing operations
is
generated from the sales and servicing of our storage software.
Net
revenue from discontinued operations for the second quarter of fiscal 2007
was
$342,000, an 81% decrease from $1.8 million in the second quarter of fiscal
2006. For the first six months of fiscal 2007, net revenue from discontinued
operations was $1.5 million, which represented a 50% decrease over net
sales of
$3.2 million for the same period in fiscal 2006.
For
the
first three and six months of fiscal 2007 and 2006, most of our sales included
in the loss from discontinued operations in the statements of operations
were
attributable to sales of wireless communications products and were derived
from
a limited number of original equipment manufacturer (OEM) customers. Sales
to
two
of our
customers, Data
Connection Limited (DCL) and True Position, represented 45% and 21%,
respectively, and 66% collectively, of
our net
sales during the
second
quarter of fiscal 2007. Sales to three
of our
customers, Raytheon, DCL and Nortel, represented
29%, 19% and 19%, respectively, and 67%
collectively, of net sales during the
second
quarter of fiscal 2006.
Sales
to
three of our customers, DCL, ACAL
Technologies (ACAL) and Nortel, represented 35%, 16% and 13%, respectively,
and
64%
collectively, of total net sales during the first two quarters of fiscal
2007. Sales
to
three of our customers, DCL, Raytheon and Nortel, represented 29%, 19%
and 16%,
respectively, and 64% collectively, of net sales during the first two quarters
of fiscal 2006.
Three
customers, DCL, Pelco and ACAL, accounted for 76%, 15% and 14%, respectively,
of
our net accounts receivable at April 30, 2007. Both DCL and ACAL are customers
for our hardware products that we sold to One Stop. Pelco is a customer
for our
storage software products.
International
sales constituted 52% and 61% of net sales for the three and six month
periods
ended April 30, 2007 compared to 29% and 41% of net sales for the three
and six
month periods ended April 30, 2006, respectively. International sales are
primarily executed with customers in the United Kingdom, which represented
50%
and 51% of our sales for the three and six month periods ended April 30,
2007,
respectively, and 25% and 35% of our sales for the three and six month
periods
ended April 30, 2006, respectively. All international sales are executed
in U.S.
dollars.
7. Warranty
Obligations and Other Guarantees:
The
following is a summary of our agreements that we
have
determined are within the scope of Financial Accounting Standards Board
(FASB)
Interpretation (FIN) No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others
--
an
interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN
34.
We
accrue
the estimated costs to be incurred in performing warranty services at the
time
of revenue recognition and shipment of the products to
our
customers.
The
warranty reserve is related to hardware products that we sold to One Stop.
Our
estimate
of costs
to service our warranty obligations is based on historical experience and
expectation of future conditions. To the extent we experience increased
warranty
claim activity or increased costs associated with servicing those claims,
the
warranty accrual will increase, resulting in decreased gross
margin.
The
following table sets forth an analysis of our warranty reserve (in
thousands):
Six
months ended April 30
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Warranty
reserve at beginning of period
|
|
$
|
13
|
|
$
|
22
|
|
Less:
Cost to service warranty obligations
|
|
|
(10
|
)
|
|
(1
|
)
|
Plus:
Increases to reserves
|
|
|
4
|
|
|
1
|
|
Total
warranty reserve, included in other accrued expenses
|
|
$
|
7
|
|
$
|
22
|
|
We
have
agreed to indemnify each
of
our
executive
officers
and directors for certain events or occurrences arising as a result of
the
officer or director serving in such capacity. The term of the indemnification
period is for the officer's or director's lifetime. The maximum potential
amount
of future payments we could be required to make under these indemnification
agreements is unlimited. However, we have a directors’
and
officers’
liability insurance policy that should
enable
us to
recover a portion of future amounts paid. As a result of our insurance
policy
coverage, we believe the estimated fair value of these indemnification
agreements is minimal and have no liabilities recorded for these agreements
as
of April 30, 2007 and October 31, 2006,
respectively.
We
enter
into indemnification provisions under our agreements with other companies
in the
ordinary course of business, typically with business partners, contractors,
customers and
landlords.
Under these provisions we generally indemnify and hold harmless the indemnified
party for losses suffered or incurred by the indemnified party as a result
of
our activities or, in some cases, as a result of the indemnified party's
activities under the agreement. These indemnification provisions often
include
indemnifications relating to representations made by us with regard to
intellectual property rights. These indemnification provisions generally
survive
termination of the underlying agreement. The maximum potential amount of
future
payments we could be required to make under these indemnification provisions
is
unlimited. We have not incurred material costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, we believe
the
estimated fair value of these agreements is minimal. Accordingly, we have
no
liabilities recorded for these agreements as of April 30, 2007.
We
are
the
secondary guarantor on the building lease assumed by One Stop as part of
the
purchase of our hardware business on March 30, 2007. This lease commitment
expires in September 2010.
8.
Nasdaq Notice of Non-Compliance:
Our
common stock is quoted on The Nasdaq Capital Market under the symbol SBEI.
In
order for our common stock to continue to be quoted on the Nasdaq Capital
Market, we must satisfy various listing maintenance standards established
by
Nasdaq. Among other things, as such requirements pertain to us, we are
required
to have stockholders’ equity of at least $2.5 million and public float value of
at least $1 million and our common stock must have a minimum closing bid
price
of $1.00 per share.
On
July
14, 2006, we received a notice from Nasdaq, indicating that for the preceding
30
consecutive business days, the bid price of our common stock closed below
the
$1.00 minimum bid price required for continued listing by Nasdaq Marketplace
Rule 4310(c)(4), referred to as the Rule. We were provided 180 calendar
days, or
until January 10, 2007, to regain compliance with the Rule. We did not
regain
compliance during the 180 calendar day period. On January 11, 2007; we
received
a notice from Nasdaq that our stock was subject to delisting. We filed
an appeal
of the staff’s determination to the Listings Qualifications Panel. The appeals’
hearing was held on February 22, 2007.
On
April
11, 2007, we received a determination letter from the Nasdaq Listing
Qualifications Panel (Panel) granting our request for continued listing
on
Nasdaq subject to certain conditions. Our continued listing is subject
to
certain specified conditions, including:
|
1.
|
On
or before April 17, 2007, we must have evidenced a closing bid
price of
$1.00 or more for a minimum of ten prior consecutive trading
days. We
maintained a closing bid price for more than the minimum 10 consecutive
days to exceed the requirement.
|
|
2.
|
On
or before April 30, 2007, we must have filed an initial listing
application with Nasdaq with respect to the pending merger with
Neonode,
unless we delay or decide not to go forward with the merger.
The initial
listing application for Neonode was filed with Nasdaq on April
17,
2007.
|
|
3.
|
On
or before May 31, 2007, we must file a Form 8-K with pro forma
financial
information indicating that our plan to report stockholders’ equity of
$2.5 million or greater as of the quarter ended April 30, 2007.
We filed
the required Form 8-K on May 29, 2007 indicating the our stockholders’
equity exceeded the required $2.5 million as of the end of our
latest
fiscal quarter, April 30, 2007.
|
|
4.
|
We
shall immediately notify the Panel if we enter into an agreement
to sell,
transfer or otherwise dispose of our software business before
we
consummate a merger with Neonode, and the Panel may revisit its
determination in such instance.
|
This
action follows recent steps taken by us to come into compliance with Nasdaq
requirements for continued listing including a gain to stockholders’ equity
resulting from the $2.2 million sale of our embedded hardware business
to One
Stop on March 30, 2007 and an increase in bid price resulting from the
one for
five reverse stock split effected on April 2, 2007.
On April
30, 2007, our closing bid price was $2.40 and shareholders’ equity exceeded the
required $2.5 million.
ANNEX
F
Neonode
Inc.
Unaudited
Consolidated Financial Statements for the three months ended March 31,
2007
and
2006,
respectively and as of March 31, 2007 and December 31, 2006,
respectively
Index
to the Consolidated Financial Statements
Consolidated Statements of Financial
Position |
|
2
|
Consolidated Statements of
Operations |
|
3
|
Consolidated Statements of Cash
Flows |
|
4
|
Notes to the Consolidated Financial
Statements |
|
5
|
Neonode,
Inc.
Consolidated
Statements of Financial Position
Unaudited
|
|
March
31,
|
|
December
31,
|
|
Amounts
in US dollars (000) except for share and per share
data
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
|
|
|
2,930
|
|
|
369
|
|
Accounts
receivable, net of allowances for doubtful accounts of $0 for
March 31,
2007 and December 31, 2006
|
|
|
70
|
|
|
46
|
|
Inventories,
net
|
|
|
339
|
|
|
-
|
|
Prepaid
expenses and accrued income
|
|
|
602
|
|
|
621
|
|
Other
current assets
|
|
|
256
|
|
|
117
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
4,197
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment, net
|
|
|
153
|
|
|
65
|
|
Intangible
assets
|
|
|
137
|
|
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
220
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
4,487
|
|
|
1,373
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
|
10,017
|
|
|
5,112
|
|
Accounts
payable
|
|
|
818
|
|
|
245
|
|
Accrued
expenses
|
|
|
840
|
|
|
893
|
|
Deferred
revenue
|
|
|
228
|
|
|
462
|
|
Other
liabilities
|
|
|
705
|
|
|
437
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
12,608
|
|
|
7,149
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
820
|
|
|
854
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
13,428
|
|
|
8,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
deficit
|
|
|
|
|
|
|
|
Common
stock, 10,000,000 and 6,500.000 shares authorized with par
value $0.01 at
Mar 31, 2007 and Dec 31, 2006, respectively; 2,911,217 shares
issued and
outstanding at Mar 31, 2007 and Dec 31, 2006, respectively
|
|
|
29
|
|
|
29
|
|
Additional
paid-in-capital
|
|
|
3,770
|
|
|
3,480
|
|
Accumulated
other comprehensive income
|
|
|
28
|
|
|
88
|
|
Accumulated
deficit
|
|
|
(12,768
|
)
|
|
(10,227
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(8,941
|
)
|
|
(6,630
|
)
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Deficit
|
|
|
4,487
|
|
|
1,373
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
Neonode,
Inc.
Consolidated
Statements of Operations
Unaudited
|
|
Unaudited
|
|
|
|
Three
Months
|
|
Three
Months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
Amounts
in US dollars (000) except for share and per share
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
249
|
|
|
945
|
|
Cost
of sales
|
|
|
2
|
|
|
728
|
|
Gross
profit (loss)
|
|
|
247
|
|
|
217
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,045
|
|
|
349
|
|
Sales
and marketing
|
|
|
486
|
|
|
147
|
|
General
and administrative
|
|
|
1,118
|
|
|
847
|
|
Total
operating expenses
|
|
|
2,649
|
|
|
1,343
|
|
Operating
loss
|
|
|
(2,402
|
)
|
|
(1,126
|
)
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
Interest
income and other income
|
|
|
106
|
|
|
11
|
|
Interest
expense and other expenses
|
|
|
(245
|
)
|
|
(93
|
)
|
Total
other expense
|
|
|
(139
|
)
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(2,541
|
)
|
|
(1,208
|
)
|
Income
tax provision (benefit)
|
|
|
-
|
|
|
-
|
|
Net
loss
|
|
|
(2,541
|
)
|
|
(1,208
|
)
|
|
|
|
|
|
|
|
|
Non-cash
inducement charge related to corporate reorganization Feb.
28,
2006
|
|
|
-
|
|
|
106
|
|
Net
loss available to common shareholders
|
|
|
(2,541
|
)
|
|
(1,314
|
)
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.87
|
)
|
|
(0.48
|
)
|
Diluted
|
|
|
(0.87
|
)
|
|
(0.48
|
)
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
2,911,217
|
|
|
2,723,726
|
|
The
accompanying notes are an integral part of these
Consolidated Financial Statements.
Neonode,
Inc.
Consolidated
Statements of Cash Flows
Unaudited
|
|
Unaudited
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Amounts
in US dollars (000)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
Net
loss
|
|
|
(2,541
|
)
|
|
(1,208
|
)
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
27
|
|
|
21
|
|
Deferred
interest
|
|
|
88
|
|
|
21
|
|
Amortizaton
of debt discount and deferred financing fees
|
|
|
141
|
|
|
26
|
|
Stock-based
compensation expense
|
|
|
163
|
|
|
616
|
|
Change
in fair value of embedded derivative
|
|
|
1
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
(171
|
)
|
|
(68
|
)
|
Prepaid
expenses and accrued income
|
|
|
43
|
|
|
(8
|
)
|
Inventories
|
|
|
(338
|
)
|
|
10
|
|
Accounts
payable and other liabilities
|
|
|
588
|
|
|
(28
|
)
|
Deferred
revenue
|
|
|
(224
|
)
|
|
(200
|
)
|
Net
cash used in operating activities
|
|
|
(2,223
|
)
|
|
(825
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(101
|
)
|
|
(1
|
)
|
Net
cash used in investing activities
|
|
|
(101
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
5,000
|
|
|
4,000
|
|
Deferred
financing fees
|
|
|
(125
|
)
|
|
(278
|
)
|
Payments
on long-term notes payable
|
|
|
(22
|
)
|
|
(32
|
)
|
Proceeds
from sale of employee stock options
|
|
|
122
|
|
|
-
|
|
Proceeds
from sale of common stock
|
|
|
-
|
|
|
198
|
|
Net
cash provided by financing activities
|
|
|
4,975
|
|
|
3,888
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
(90
|
)
|
|
41
|
|
|
|
|
|
|
|
|
|
Net
Increase in cash and cash equivalents
|
|
|
2,561
|
|
|
3,103
|
|
Cash
and cash equivalents - beginning of period
|
|
|
369
|
|
|
199
|
|
Cash
and cash equivalents - end of period
|
|
|
2,930
|
|
|
3,302
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
3
|
|
|
4
|
|
The
accompanying notes are an integral part of these
Consolidated Financial Statements.
NEONODE
INC
Notes
to the Consolidated Financial Statements
(Unaudited)
All
amounts in (000) except for share and per share data
1.
Nature of the business and operations
Neonode,
Inc. (the Company) was incorporated in the State of Delaware in 2006 as
part of
a corporate reorganization of Neonode AB, a company founded in February
2004 and
incorporated in Sweden.
Neonode
designs, develops and sells multimedia mobile phones with a focus on unique
design and user experience. Neonode’s first model, the N1, was released in
November 2004. The Company’s next generation multimedia mobile phone, the
Neonode N2, was launched in February 2007 with first shipments of the phone
estimated during June 2007.
On
January 19, 2007, Neonode entered into an Agreement and Plan of Merger
and
Reorganization with SBE Inc. We expect to complete the transaction in our
third
quarter of fiscal 2007, subject to the satisfaction of the closing conditions
set forth in the merger agreement. In addition to customary closing conditions,
the transaction is subject to the approval of both the SBE and Neonode
shareholders. After the merger is completed, the combined company's headquarters
will be in Stockholm, Sweden, where our corporate headquarters is located
and it
is anticipated that the name of the merged company will be changed to “Neonode
Inc.” The combined company’s stock is expected to continue to trade on the
Nasdaq Capital Market.
The
accompanying financial statements have been prepared on a going concern
basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the ordinary course of business. The Company has incurred net operating
losses and negative operating cash flows since inception. As of March 31,
2007
the Company had an accumulated deficit of $12,768 and a working capital
deficit
of $8,411. In February 2007, the Company completed an offering of $5,000
of its
convertible senior secured notes to existing shareholders, warrant holders,
and
convertible note holders of Neonode Inc and AIGH. In June 2007, the Company
issued of an additional $3,000 of convertible senior secured notes. The
terms
and conditions of these notes are described in Note 4.
Management expects to convert all its convertible debt, including accrued
interest on such debt, prior to maturity. As a result of this financing
transaction, management believes that it will be able to meet its liquidity
needs for the next 12 months. The financial statements do not include any
adjustments related to the recovery of assets and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
2.
Summary of significant accounting policies
Fiscal
Year
The
Company’s fiscal year is the calendar year.
Basis
of Presentation
The
accompanying financial data as of March 31, 2007 and for the three months
ended
March 31, 2007, and 2006 has been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally
accepted in the United States have been condensed or omitted pursuant to
such
rules and regulations. The accompanying December 31, 2006 Consolidated
Balance Sheet was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted
in
the United States. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. These unaudited
Consolidated Financial Statements should be read in conjunction with the
audited
Consolidated Financial Statements and the notes thereto for the fiscal
year
ended December 31, 2006.
In
the
opinion of management, all adjustments (which include normal recurring
adjustments, except as disclosed herein) necessary to present a fair statement
of financial position as of March 31, 2007, results of operations for the
three months ended March 31, 2007 and 2006, cash flows for the three months
ended March 31, 2007 and 2006, as applicable, have been made. The results
of
operations for the three months ended March 31, 2007 are not necessarily
indicative of the operating results for the full fiscal year or any future
periods.
Effects
of recent accounting pronouncements
The
following are expected effects of new US GAAP accounting pronouncements.
In
September 2006, FASB issued SFAS No. 157 Fair Value Measurements. This
Statement
is effective for financial statements issued for fiscal years beginning
after
November 15, 2007. We are currently evaluating this standard and its
effect on our consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities—Including an amendment of
FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair
value accounting but does not affect existing standards which require certain
assets or liabilities to be carried at fair value. The objective of SFAS
159 is
to improve financial reporting by providing companies with the opportunity
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. Under SFAS 159, a company may choose, at specified election
dates,
to measure eligible items at fair value and report unrealized gains and
losses
on items for which the fair value option has been elected in earnings at
each
subsequent reporting date. SFAS 159 is effective as of the beginning of
the
fiscal year that begins after November 15, 2007. The Company is currently
assessing the impact that SFAS 159 will have on its results of operations
and
financial position.
Inventories
consisted of parts and materials as follows:
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Parts
and materials
|
|
$
|
339
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
inventories
|
|
$
|
339
|
|
|
-
|
|
The
Company’s debt consists of the following:
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Senior
secured notes
|
|
$
|
10,000
|
|
|
5,000
|
|
Petrus
Holding SA
|
|
|
766
|
|
|
780
|
|
Loan
- Almi Företagspartner 2
|
|
|
176
|
|
|
201
|
|
Loan
- Almi Företagspartner 1
|
|
|
92
|
|
|
94
|
|
Capital
lease
|
|
|
4
|
|
|
5
|
|
|
|
|
|
|
|
|
|
Total
notes outstanding
|
|
|
11,038
|
|
|
6,080
|
|
|
|
|
|
|
|
|
|
Unamortized
debt discounts
|
|
|
(201
|
)
|
|
(114
|
)
|
Total
debt, net of debt discounts
|
|
$
|
10,837
|
|
|
5,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
portion of long-term debt
|
|
|
(10,017
|
)
|
|
(5,112
|
)
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
820
|
|
|
854
|
|
Senior
secured notes (bridge notes)
On
January 19, 2007, all outstanding bridge notes were modified to include
a
reverse merger with SBE as an event for conversion on the same terms as
an
initial public offering. In addition, the conversion terms relating to
the
senior secured notes were modified whereby the maturity date was extended
from
August 28, 2007 to September 30, 2007.
At
March
31, 2007, the senior secured notes (bridge notes), which bear interest
at 4%,
had a maturity date of September 30, 2007. In May 2007, the maturity date
for
all outstanding senior secured notes was extended from September 30, 2007
to
December 31, 2007. The bridge notes are collateralized by the common stock
shares of Neonode Inc.’s wholly owned subsidiary, Neonode AB and are
subordinated in right of payment to all indebtedness of Neonode AB to Almi
Företagspartner Stockholm AB. In addition, Per Bystedt, Thomas Ericsson and
Magnus Goertz have pledged their beneficial holdings in Neonode Inc. as
collateral for the bridge notes. The bridge notes are convertible under
the
following scenarios:
|
1.
|
In
the event the Merger Agreement is terminated, the senior secured
notes may
be prepaid without premium or penalty, in whole or in part, on
20 days
notice; provided that the Lender shall have the opportunity,
prior to such
prepayment, to convert the senior secured note into common stock
of the
Company at a price based on the pre money valuation set forth
in Scenario
3 below.
|
|
2.
|
In
the event that the Merger is consummated pursuant to the terms
of the
Merger Agreement, the senior secured notes, including without
limitation
all accrued interest (unless paid in cash by the undersigned)
and other
obligations under the senior secured note, shall automatically
convert,
immediately prior to the Closing of the merger and without any
action of
the holder, into a number of units of the undersigned (the “Units”), each
Unit consisting of one share of Common Stock and one half of
a Warrant of
the undersigned determined by dividing the outstanding principal
amount
and accrued interest due on the senior secured notes by $5.00
(the
“Conversion Price”).
|
|
3.
|
In
the event the Merger Agreement is terminated and the Neonode
completes a
registered public offering in the United States, United Kingdom
or Sweden
(the “QIPO”) with gross proceeds in an amount at least equal to the cost
of operating the Company for a period of three months (commencing
after
the QIPO) on or before December 31, 2007 (as amended in May 2007),
this
senior secured notes, including without limitation all accrued
interest
(unless paid in cash by the Company) and other obligations under
the
senior secured notes, shall automatically convert without any
action of
the holder into the securities offered in such financing at a
price per
security equal to the price paid by public investors based on
the
pre-money valuation of the fully-diluted equity of the Company,
including
for this purpose as equity all debt (other than (i) SEK 2,000,000
of debt
held by ALMI Foretagspartner AB and (ii) all principal and interest
under
the Senior Secured Notes) held by stockholders or their affiliates,
of
$15,330; and provided further that the Company has not suffered
any
material adverse change since the date
hereof.
|
|
4.
|
In
the event the Merger Agreement is terminated and Neonode fails
to complete
the QIPO or Merger by December 31, 2007 (as amended in May 2007)
due to
circumstances beyond Neonode’s control, the senior secured notes,
including without limitation all accrued interest and other obligations
under the senior secured notes, shall be converted into common
stock of
the Neonode, Inc. at a price per share equal to the fair market
value of
such shares as determined by negotiations between the Neonode
and the
holders of at least 50.1% of the aggregate outstanding principal
amount of
the senior secured notes (the “Required Holders”),
subject to compliance with applicable securities law;
provided that (i) the pre-money valuation of the fully-diluted
equity of
Neonode in the event and at the time of such conversion, including
for
this purpose as equity all debt (other than (a) SEK 2,000 of
debt held by
ALMI Foretagspartner AB and (b) all principal and interest under
the
senior secured notes) held by stockholders or their affiliates,
does not
exceed US $15,330, (ii) Neonode has not suffered any Material
Adverse
Change since the date hereof and (iii) the Lender and Neonode
enter into
an investor rights agreement which includes certain demand and
piggyback
registration rights, preemptive rights, tagalong rights with
principal
stockholders of Neonode, rights to Company information and a
bar on
issuance of toxic preferreds or other death spiral convertible
securities,
all as negotiated between the undersigned and the Required Holders.
During
the term of the Senior Secured Notes, Neonode shall not issue
any equity
securities or securities convertible into, exercisable to purchase
or
exchangeable for equity securities without offering to holders
of the
senior secured notes rights to purchase up to a percentage (the
“Percentage”) of such issue equal to the ratio of (A) the aggregate
principal amounts of the senior secured notes then outstanding
divided by
(B) the sum of $15,330 and such aggregate principal amounts,
and shall not
permit Neonode AB to issue any such securities or incur any indebtedness
other than reasonable accounts
payable.
|
In
February 2007, we completed an additional $5,000 convertible senior secured
note
financing package that was offered proportionally to our Shareholders.
AIGH had
first right to any subscription amounts not taken by other existing
shareholders. The terms and conditions of these notes are substantially
the same
as for the existing senior secured notes as amended on January 19,
2007.
Derivatives
The
senior secured notes issued above contain an embedded derivative instrument
(conversion feature) with three triggers. Pursuant to Statement of Financial
Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging
Activities and EITF 00-19 Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock, this conversion
feature is considered an embedded derivative and is included in “Other
liabilities”. At the time of issuance of the senior secured notes, the fair
value of the conversion feature was recorded as a debt discount and amortized
to
interest expense over the expected term of the senior secured notes. Changes
in
the fair value of the conversion feature are recorded in “Interest expense and
other expenses”. During the three month period ending March 31, 2007 and 2006,
we recorded $49 and $7 of interest expense associated with the amortization
of
the debt discount along with a reduction of $1 and $7 associated with the
changes in the fair value of the conversion feature liability.
On
January 17, 2007 the Board of Directors approved an employee stock option
plan
the “2007 Plan” for selected employees and directors of the Company and its
subsidiaries (i) who are subject to Swedish income taxation (each, a “Swedish
Participant”) and (ii) who are not subject to Swedish income taxation (each, a
“Non-Swedish Participant”). A total of 433,250 options were issued in accordance
to the 2007 Plan, with 383,250 options issued to Swedish Participants and
50,000
options to a Non-Swedish Participant. The options issued under the plan
to the
Non-Swedish Participant are five year options with 25% vesting immediately
and
the remaining vesting over a three year period. The options issued to the
Swedish participants have terms of 15 -24 months, and are vested upon issuance.
The employees that received the Swedish Participant options paid an aggregate
option premium amounting to $122, which was calculated using the Black-Sholes
option pricing model using assumptions commonly accepted by the Swedish
tax
authorities.
Salary
expense for the three month period ending March 31, 2007 includes a stock
compensation charge relating to the above issuance of Swedish Participant
and
Non-Swedish Participant options. The fair value of the options at the date
of
issuance was calculated using the Black-Scholes option pricing model. These
calculations assumed a risk free interest rate of 4.5%, a volatility of
50% and
a share price of $4.69. The value of the options was allocated to the vested
and
unvested options and the unvested portion is amortized on a straight line
basis
over the remaining vesting period. The stock compensation expense in the
amount
of $163 reflects the fair value of the vested options on the date of issuance
less the option premium received from the Swedish participants.
On
January 18, 2007 the Stockholders approved the 2007 Stock Option Plan and
an
increase in the number of common shares outstanding to 10,000,000.
The
following table shows the options and warrants outstanding in Neonode Inc.
at
March 31, 2007:
|
|
|
|
Number
of
|
|
Expiration
|
|
Exercise
|
|
Date
issued
|
|
Issued
to:
|
|
warrants
|
|
date
|
|
price
|
|
2006
02 28
|
|
|
Almi
|
|
|
22,490
|
|
|
2011
02 28
|
|
|
10.00
|
|
2006
02 28
|
|
|
Iwo
Jima
|
|
|
110,929
|
|
|
2011
02 28
|
|
|
10.00
|
|
2006
02 08
|
|
|
Employees
|
|
|
28,800
|
|
|
2007
06 30
|
|
|
5.73
|
|
2006
02 28
|
|
|
Employees
|
|
|
9,000
|
|
|
2007
06 30
|
|
|
7.17
|
|
2007
01 18
|
|
|
Employees
|
|
|
194,125
|
|
|
2008
04 17
|
|
|
6.50
|
|
2007
01 18
|
|
|
Employees
|
|
|
189,125
|
|
|
2009
01 17
|
|
|
7.50
|
|
2007
01 18
|
|
|
Employees
|
|
|
50,000
|
|
|
2012-01-17
|
|
|
5.00
|
|
Total
number options and warrants outstanding
|
|
604,469
|
|
|
|
|
|
|
|
No
options or warrants were exercised, cancelled or forfeited during the three
month period ending March 31, 2007.
6. |
Warranty
obligations and other
guarantees
|
The
N1
telephone was generally warranted against defects for twelve months following
the sale. We have a twelve month warranty from our manufacturer. We expect
the
warranty terms to be similar for our N2 telephones. Our estimate of costs
to
service our warranty obligations is based on expectation of future conditions.
To the extent we estimate warranty claim activity or increased costs associated
with servicing those claims, a warranty accrual will be created and may
increase
or decrease from time to time, resulting in increases or decreases in gross
margin.
We
enter
into indemnification provisions under our agreements with other companies
in the
ordinary course of business, typically with business partners, contractors,
customers
and
landlords. Under these provisions we generally indemnify and hold harmless
the
indemnified party for losses suffered or incurred by the indemnified party
as a
result of our activities or, in some cases, as a result of the indemnified
party's activities under the agreement.
On
January 8, 2007 Neonode engaged Griffin Securities, Inc. to act as an exclusive
financial advisor in connection with any financial, business combination
or
corporate reorganization transaction in which Neonode, may be involved.
If at
any time Neonode consummates a transaction during period to June 30, 2007,
Neonode shall pay or cause to be paid to Griffin upon consummation of such
Transaction a fee of $250 which will be paid at closing and grant Griffin
warrants to purchase 65,000 units for the same price as the conversion
price
used when converting all outstanding debt immediately prior to the closing
of
the transaction, or $5 per unit. Each unit consists of 1 share of Neonode
common
stock and 0.5 warrants to purchase one share of common stock. The term
of the
agreement shall be until June
30,
2007, provided that if negotiations are pending with respect to any transaction
at the expiration of the term, or if a transaction is consummated during
a
period of 18
months
after
expiration of the term
with a
party introduced to Neonode by Griffin during the term, Griffin shall be
entitled to its fee provided above regardless of when such transaction
is
consummated.
On
January 1, 2007, the Company adopted FIN 48, “Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement
109”.
There
were no adjustments to retained earnings as a result of the implementation
of
FIN 48. Valuation
allowances are recorded to offset certain deferred tax assets due to
management’s uncertainty of realizing the benefits of these items. Management
applies a full valuation allowance for the accumulated losses of Neonode
Inc,
and its subsidiary Neonode AB since it is not determinable using the “more
likely than not” criteria that there will be any future benefit of our deferred
tax assets. This is mainly due to our history of operating losses and due
to the
competitive character of the hand-held media device/mobile telephone market.
The
main components of our deferred tax benefits are the accumulated net operating
loss carry-forwards, which are almost entirely related to the operations
of
Neonode AB in Sweden. Currently, under Swedish tax law these benefits do
not
expire and may be carried forward and utilized indefinitely. At March 31,
2007
and December 31, 2006, Neonode’s unrecognized deferred tax benefit amounted to
$3,232 and $2,534, respectively, all of which will impact the Company’s
effective tax rate when recognized. Our major tax jurisdictions are Sweden
and
the US. The tax years 2004, 2005 and 2006 for Sweden are open and the tax
year
2006 for the US is open.
8. |
Net
income (loss) available to common shareholders per
share
|
Basic
net
income (loss) available to common shareholders per share for the three
month
periods ending March 31, 2007 and 2006 was computed by dividing the net
income
(loss) available to common shareholders for the relevant period by the
weighted
average number of shares of common stock outstanding. The diluted net income
(loss) available to common shareholders per share is computed by dividing
net
income (loss) available to common shareholders by the weighted average
number of
shares of common stock and common stock equivalents outstanding. The Company
had
no potential dilutive shares during the three months ended March 31, 2007
and
2006.
The
components of comprehensive loss are:
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
loss for the period
|
|
$
|
(2,541
|
)
|
|
(1,208
|
)
|
Cumulative
translation adjustment
|
|
|
(60
|
)
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
(2,601
|
)
|
|
(1,235
|
)
|
We
have
one reportable segment. The segment is evaluated based on consolidated
operating
results. We currently operate in one industry segment; the development
and
selling of multimedia mobile phones. To date, we have carried out substantially
all of our operations through our subsidiary in Sweden, although we do
carry out
some development activities together with our manufacturing partner in
Malaysia.
We intend to manage our future growth on a geographic basis and our management
will evaluate the performance of our segments and allocate resources to
them
based upon income (loss) from operations.
In
addition to phone sales, revenues included license revenue amounting to
$225 and
$200 for the three month period ending March 31, 2007 and 2006, respectively.
11. |
Related
party transactions
|
Iwo
Jima
SARL and Spray AB are companies where the Chairman of the Board and a
significant shareholder of Neonode Inc., Per Bystedt, owns or has significant
influence. As part of the note purchase offering in February 2007 as described
in Note 4,
Spray
AB purchased notes in the amount of $35 and Iwo Jima SARL purchased notes
in the
amount of $504. In addition, the CEO of Neonode Inc., Mikael Hagman and
the
President of Neonode AB, Tommy Hallberg purchased senior secured notes
in the
amount of $25 and $15, respectively.
On
May
18, 2007 the Merger agreement between SBE and Neonode was amended to set
the
exchange ratio of SBE shares to Neonode shares at 3.5319 SBE shares per
1
Neonode share. Also in this amendment, it was agreed that SBE may lend
$1,000 to
Neonode and that the 65,000 warrants due to Griffin Securities upon closing
of
the merger in accordance with an agreement described in Note 6
between
Neonode and Griffin Securities may be granted and issued prior to the Merger
between Neonode and SBE.
In
addition, during May, the maturity date for all outstanding bridge notes
was
extended to December 31, 2007 and SBE agreed to lend Neonode $1,000 with
a
maturity date of September 30, 2007 and an annualized interest rate of
6%. A
note under this agreement in the amount of $500 was issued to SBE by Neonode
on
May 25, 2007.
In
June
2007; $3,000 in new bridge notes were issued to existing investors under
the
same terms as the amended existing bridge notes.
Report
of Independent Registered Public Accounting Firm
To
the
shareholders of Neonode Inc.
In
our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements
or
income,
stockholders’
equity and cash flow present fairly, in all material respects, the
financial
position of Neonode Inc. and its subsidiary at December 31, 2006 and
December
31,
2005,
and the results of their operations and their cash flows for each of
the two
years in the
period ended December 31, 2006 and the ten month period ended December
31, 2004
inconformity
with
accounting
principles generally accepted in the United States of America. These
financial
statements are the responsibility of the Company’s management.
Our
responsibility
is to express an opinion on these financial statements based on our
audits. We
conducted
our audits of these statements in accordance with the standards of
the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and
perform the audit to obtain reasonable assurance about whether the
financial
statements are
free
of material misstatement. An audit includes examining, on a test basis,
evidence
supporting
the amounts and disclosures in the financial statements, assessing
the
accounting principles
used and significant estimates made by management, and evaluating the
overall
financial
statement
presentation. We believe that our audits provide a reasonable basis
for our
opinion..
The
accompanying financial statements have been prepared assuming that
the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has
suffered recurring losses from operations and has a net capital deficiency
that
raise substantial
doubt about its ability to continue as a
going
concern. Management’s plans in regard to these matters are also described in
Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Stockholm,
Sweden
April
20,
2007
Ohrlings
PricewaterhouseCoopers AB
/s/
Arne Engvall
|
/s/
Christine Rankin Johansson
|
Arne
Engvall
|
Christine
Rankin Johansson
|
Authorized
Public Accountant
|
Authorized,
Public Accountant
|
ANNEX
F
Neonode
Inc.
Audited
Consolidated Financial Statements for 2006, 2005 and 2004
Index
to the Consolidated Financial Statements
Consolidated
Statements of Financial Position
|
|
|
2
|
|
|
|
|
|
|
Consolidated
Statements of Operations
|
|
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
|
|
4
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
5
|
|
|
|
|
|
|
Notes
to the Consolidated Financial Statements
|
|
|
6
|
|
Neonode,
Inc.
Consolidated
Statements of Financial Position
|
|
|
|
As
of December 31,
|
|
Amounts
in US dollars (000) except for share and per share
data
|
|
Note
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
369
|
|
|
199
|
|
Accounts
receivable, net of allowances for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
of
$0, and $20 for 2006 and 2005, respectively
|
|
|
|
|
|
46
|
|
|
11
|
|
Inventories,
net
|
|
|
3
|
|
|
-
|
|
|
154
|
|
Prepaid
expenses and accrued income
|
|
|
4
|
|
|
621
|
|
|
68
|
|
Other
current assets
|
|
|
5
|
|
|
117
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
1,153
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment, net
|
|
|
6
|
|
|
65
|
|
|
50
|
|
Intangible
assets
|
|
|
7
|
|
|
155
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
1,373
|
|
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
|
|
|
|
5,112
|
|
|
123
|
|
Accounts
payable
|
|
|
|
|
|
245
|
|
|
428
|
|
Accrued
expenses
|
|
|
8
|
|
|
893
|
|
|
120
|
|
Deferred
revenue
|
|
|
|
|
|
462
|
|
|
1,175
|
|
Other
liabilities
|
|
|
9
|
|
|
437
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
7,149
|
|
|
2,148
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
10
|
|
|
854
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
|
|
|
8,003
|
|
|
2,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit)
|
|
|
11,18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, 6,500,000 shares authorized with par value
|
|
|
|
|
|
|
|
|
|
|
$
0.01; 2,911,217 and 2,614,232 shares issued and
|
|
|
|
|
|
|
|
|
|
|
outstanding
at Dec. 31, 2006 and 2005, respectively
|
|
|
|
|
|
29
|
|
|
26
|
|
Additional
paid-in-capital
|
|
|
|
|
|
3,480
|
|
|
2,674
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
88
|
|
|
146
|
|
Accumulated
deficit
|
|
|
|
|
|
(10,227
|
)
|
|
(5,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficit)
|
|
|
|
|
|
(6,630
|
)
|
|
(2,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity (deficit)
|
|
|
|
|
|
1,373
|
|
|
712
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
Neonode,
Inc.
Consolidated
Statements of Operations
|
|
|
|
Twelve
|
|
Twelve
|
|
*
Ten
|
|
|
|
|
|
Months
Ended
|
|
Months
Ended
|
|
Months
Ended
|
|
|
|
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
|
|
Note
|
|
2006
|
|
2005
|
|
2004
|
|
Amounts
in US dollars (000) except for share and per share
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
17
|
|
|
1,644
|
|
|
1,499
|
|
|
248
|
|
Cost
of sales
|
|
|
|
|
|
1,297
|
|
|
1,436
|
|
|
573
|
|
Gross
profit (loss)
|
|
|
|
|
|
347
|
|
|
63
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
|
|
|
2,226
|
|
|
1,656
|
|
|
661
|
|
Sales
and marketing
|
|
|
|
|
|
746
|
|
|
711
|
|
|
145
|
|
General
and administrative
|
|
|
11
|
|
|
1,846
|
|
|
1,061
|
|
|
286
|
|
Total
operating expenses
|
|
|
18
|
|
|
4,818
|
|
|
3,428
|
|
|
1,092
|
|
Operating
loss
|
|
|
|
|
|
(4,471
|
)
|
|
(3,365
|
)
|
|
(1,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income and other income
|
|
|
|
|
|
117
|
|
|
19
|
|
|
2
|
|
Interest
expense and other expenses
|
|
|
|
|
|
(764
|
)
|
|
(336
|
)
|
|
(12
|
)
|
Total
other expense
|
|
|
|
|
|
(647
|
)
|
|
(317
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
|
|
|
(5,118
|
)
|
|
(3,682
|
)
|
|
(1,427
|
)
|
Income
tax provision (benefit)
|
|
|
13
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
loss
|
|
|
|
|
|
(5,118
|
)
|
|
(3,682
|
)
|
|
(1,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
inducement charge related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
corporate
reorganization Feb. 28, 2006
|
|
|
|
|
|
106
|
|
|
-
|
|
|
-
|
|
Net
loss available to common shareholders
|
|
|
|
|
|
(5,224
|
)
|
|
(3,682
|
)
|
|
(1,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
(1.82
|
)
|
|
(1.45
|
)
|
|
(0.68
|
)
|
Diluted
|
|
|
|
|
|
(1.82
|
)
|
|
(1.45
|
)
|
|
(0.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding:
|
|
|
|
|
|
2,864,985
|
|
|
2,535,507
|
|
|
2,105,509
|
|
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
*
The ten
month period for 2004 began on February 18, 2004
Neonode
Inc.
Consolidated
Statements of Stockholder's Equity
Amounts
in US dollars (000) except for share amounts
|
|
Common
stock
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued (1)
|
|
Par
value
|
|
Additional
paid-in capital
|
|
Accumulated
other
comprehensive
income
|
|
Accu-
mulated
deficit
|
|
Stockholders'
equity
(deficit)
|
|
Compre-
hensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
February 18, 2004
|
|
|
1,800,000
|
|
|
18
|
|
|
-
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
Issuance
of common stock
|
|
|
550,613
|
|
|
6
|
|
|
1,425
|
|
|
|
|
|
|
|
|
1,431
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
56
|
|
|
56
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,427
|
)
|
|
(1,427
|
)
|
|
(1,427
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,371
|
)
|
Balance,
December 31, 2004
|
|
|
2,350,613
|
|
|
24
|
|
|
1,425
|
|
|
56
|
|
|
(1,427
|
)
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
263,619
|
|
|
2
|
|
|
935
|
|
|
|
|
|
|
|
|
937
|
|
|
|
|
Stock
compensation charge in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conjunction
with payable converted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stock
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation charge in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conjunction
with issuance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants
|
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of warrants
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
Debt
discount in conjunction with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuance
of warrants with debt
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
90
|
|
|
|
|
|
90
|
|
|
90
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,682
|
)
|
|
(3,682
|
)
|
|
(3,682
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,592
|
)
|
Balance
December 31, 2005
|
|
|
2,614,232
|
|
|
26
|
|
|
2,674
|
|
|
146
|
|
|
(5,109
|
)
|
|
(2,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
36,000
|
|
|
0
|
|
|
198
|
|
|
|
|
|
|
|
|
198
|
|
|
|
|
Issuance
of common stock and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants
as part of Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reorganization
Feb. 28, 2006
|
|
|
260,985
|
|
|
3
|
|
|
719
|
|
|
|
|
|
|
|
|
722
|
|
|
|
|
Non-cash
inducement charge in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conjuction
with reorganization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb.28,
2006 (see note 11)
|
|
|
|
|
|
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of warrants to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liability
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
(58
|
)
|
|
(58
|
)
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,118
|
)
|
|
(5,118
|
)
|
|
(5,118
|
)
|
Comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,176
|
)
|
Balance
December 31, 2006
|
|
|
2,911,217
|
|
|
29
|
|
|
3,480
|
|
|
88
|
|
|
(10,227
|
)
|
|
(6,630
|
)
|
|
|
|
(1)
Shares issued have been converted to Neonode Inc. common stock per
February 28,
2006 as if conversion took place for all periods with an exchange
rate of 1
share of Neonode AB common stock for 1.8 shares of Neonode Inc. common
stock.
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
Neonode,
Inc.
Consolidated
Statements of Cash Flows
|
|
Twelve
|
|
Twelve
|
|
*
Ten
|
|
|
|
Months
|
|
Months
|
|
Months
|
|
|
|
Ended
|
|
Ended
|
|
Ended
|
|
|
|
Dec.
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Amounts
in US dollars (000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,118
|
)
|
|
(3,682
|
)
|
|
(1,427
|
)
|
Adjustments
to reconcile net loss to cash
|
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
90
|
|
|
88
|
|
|
47
|
|
Deferred
interest
|
|
|
76
|
|
|
-
|
|
|
-
|
|
Amortizaton
of debt discount and deferred financing fees
|
|
|
240
|
|
|
11
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
616
|
|
|
249
|
|
|
-
|
|
Write-down
of inventories
|
|
|
133
|
|
|
195
|
|
|
-
|
|
Change
in fair value of embedded derivative
|
|
|
(18
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable and other current assets
|
|
|
(97
|
)
|
|
90
|
|
|
(153
|
)
|
Prepaid
expenses and accrued income
|
|
|
(379
|
)
|
|
13
|
|
|
(88
|
)
|
Inventories
|
|
|
38
|
|
|
85
|
|
|
(457
|
)
|
Accounts
payable and other liabilities
|
|
|
425
|
|
|
(101
|
)
|
|
988
|
|
Deferred
revenue
|
|
|
(851
|
)
|
|
1,229
|
|
|
-
|
|
Net
cash used in operating activities
|
|
|
(4,845
|
)
|
|
(1,823
|
)
|
|
(1,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of intangible assets
|
|
|
-
|
|
|
-
|
|
|
(171
|
)
|
Acquisition
of property and equipment
|
|
|
(34
|
)
|
|
(5
|
)
|
|
(72
|
)
|
Net
cash used in investing activities
|
|
|
(34
|
)
|
|
(5
|
)
|
|
(243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
5,000
|
|
|
1,022
|
|
|
-
|
|
Deferred
financing fees
|
|
|
(307
|
)
|
|
-
|
|
|
-
|
|
Payments
on long-term notes payable
|
|
|
(93
|
)
|
|
(37
|
)
|
|
-
|
|
Proceeds
from sale of warrants
|
|
|
-
|
|
|
23
|
|
|
-
|
|
Proceeds
from sale of common stock
|
|
|
198
|
|
|
937
|
|
|
1,449
|
|
'Net
cash provided by financing activities
|
|
|
4,798
|
|
|
1,945
|
|
|
1,449
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
251
|
|
|
(101
|
)
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase in cash and
|
|
|
|
|
|
|
|
|
|
|
cash
equivalents
|
|
|
170
|
|
|
16
|
|
|
183
|
|
Cash
and cash equivalents - beginning
|
|
|
|
|
|
|
|
|
|
|
of
period
|
|
|
199
|
|
|
183
|
|
|
-
|
|
Cash
and cash equivalents - end of
|
|
|
|
|
|
|
|
|
|
|
period
|
|
|
369
|
|
|
199
|
|
|
183
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
14
|
|
|
35
|
|
|
2
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
|
|
|
Short-term
payable converted to common stock
|
|
|
-
|
|
|
100
|
|
|
-
|
|
Non-cash
investing activities:
|
|
|
|
|
|
|
|
|
|
|
Loan
assumed as part of acquisition of intangible assets.
|
|
|
-
|
|
|
-
|
|
|
141
|
|
*
The ten month period for 2004 began on February 18, 2004
|
|
|
|
The
accompanying notes are an integral part of these Consolidated
Financial
Statements.
|
|
|
NEONODE
INC
Notes
to the Consolidated Financial Statements
All
amounts in (000) except for share and per share data
1.
Nature of the business and operations
Neonode,
Inc. (the Company) was incorporated in the State of Delaware in 2006 as
the
parent of Neonode AB, a company founded in February 2004 and incorporated
in
Sweden. In February 2004, Neonode AB acquired the assets, including intangible
assets, relating to the current business, in exchange for cash of SEK 1,200
($168) and the assumption of a loan of SEK 1,000 ($141). The Company allocated
the consideration to intangible assets in the amount of SEK 2,024 ($284)
and to
equipment in the amount of SEK 176 ($25) based on relative fair values.
In
February, 2006, a corporate reorganization was effected by issuing all
of the
shares of Neonode Inc. to the stockholders of Neonode AB based upon the
number
and class of shares owned by each in exchange for all of the outstanding
stock
of Neonode AB. Following the reorganization, Neonode AB became a wholly-owned
subsidiary of Neonode Inc. The reorganization was accounted for with no
change
in accounting basis for Neonode AB, since there was no change in control
of the
Group. The consolidated accounts comprise the accounts of the Companies
as if
they had been owned by the Company throughout the entire reporting period.
In
connection with the reorganization, the Company commenced borrowing from
a group
of new investors (AIGH).
Neonode
designs, develops and sells multimedia mobile phones with a focus on unique
design and user experience. Neonode’s first model, the N1, was released in
November 2004. Approximately 7,000 units of the N1 were sold. The Company’s next
generation multimedia mobile phone, the Neonode N2, was launched in February
2007 with first shipments of the phone estimated during May 2007.
The
accompanying financial statements have been prepared on a going concern
basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the ordinary course of business. The Company has incurred net operating
losses and negative operating cash flows since inception. As of December
31,
2006 the Company had an accumulated deficit of $10,227 and a working capital
deficit of $5,972. In February 2007, the company completed an offering
of $5,000
of its convertible senior secured notes to existing shareholders, warrant
holders, and convertible note holders of Neonode Inc and AIGH. The terms
and
conditions of these notes are substantially the same as for the senior
secured
notes described in Note 10.
Management expects to convert all its convertible debt, including accrued
interest on such debt, prior to maturity. As a result of this financing
transaction, management believes that it will be able to meet its liquidity
needs for the next 12 months. The financial statements do not include any
adjustments related to the recovery of assets and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
2.
Summary of significant accounting policies
Principles
of Consolidation
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
and
include the accounts of Neonode Inc and its subsidiary based in Sweden,
Neonode
AB. All inter-company accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior period
amounts
to conform to the current period presentation.
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires making estimates and assumptions that affect,
at
the date of the financial statements, the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenue and expenses. Actual results could differ from these
estimates. Significant estimates include but are not limited to collectibility
of accounts receivable, carrying value of inventory, estimated useful lives,
recoverable amounts and fair values of intangible assets, and the fair
value of
securities such as options and warrants issued for stock-based compensation
and
in certain financing transactions.
Cash
We
have
not had any liquid investments other than normal cash deposits with bank
institutions to date.
Accounts
receivable
Our
net
accounts receivable are stated at net realizable value. We regularly evaluate
the collectibility of our trade receivable balances based on a combination
of
factors. Our policy is to maintain allowances for specifically identified
estimated losses resulting from the inability of our customers to make
required
payments.
Inventories
Inventories
are stated at the lower of cost, using the first-in, first-out method,
or
market. Our policy is to establish inventory reserves when conditions exist
that
suggest that our inventory may be in excess of anticipated demand or is
obsolete
based upon our assumptions about future demand for our products and market
conditions.
Machinery
and equipment
Machinery
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 one
to five
years as follows:
|
|
Estimated
useful lives
|
|
|
|
|
|
3
years
|
Furniture
and fixtures
|
|
1
to 5 years
|
Equipment
purchased under capital leases are 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
on such assets are removed from the accounts and any gains or losses are
reflected in the statement of operations. Maintenance and repairs are charged
to
expense as incurred.
Intangible
assets
Intangible
assets with finite lives are recorded at cost less accumulated amortization.
Amortization is computed over the estimated useful life of the asset, which
is
generally five years for our patents.
Long-lived
assets
We
assess
any impairment by estimating the future cash flow from the associated asset
in
accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
If the
estimated undiscounted cash flow related to these assets decreases in the
future
or the useful life is shorter than originally estimated, we may incur charges
for impairment of these assets. The impairment is based on the estimated
discounted cash flow associated with the asset.
Foreign
currency translation
The
functional currency of our foreign subsidiary is the applicable local currency,
the Swedish krona. The translation from Swedish kronor 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
such
translation are included as a separate component of accumulated other
comprehensive income. Gains or losses resulting from foreign currency
transactions are included in other income (expense). Foreign currency
transaction losses which are included in other income and (expense) were
$265,
$2 and $1 during the twelve month periods ending December 31, 2006 and
2005 and
for the 10 month period ending December 31, 2004, respectively.
Derivatives
We
do not
enter into derivative contracts for purposes of risk management or speculation.
However, from time to time, we enter into contracts that are not
considered derivative financial instruments in their entirety but that
include
embedded derivative features. Such embedded derivatives are assessed at
inception of the contract and, depending on their characteristics, are
accounted
for as separate derivative financial instruments pursuant to FAS 133. We
account
for these derivatives under FAS No. 133, "‘‘Accounting for Derivative
Instruments and Hedging Activities,’’ as amended (together, FAS 133).
FAS
133
requires that we analyze all material contracts and determine whether or
not
they contain embedded derivatives. Any such derivatives are then bifurcated
from
their host contract and recorded on the consolidated balance sheet at fair
value
and the changes in the fair value of these derivatives are recorded each
period in the consolidated statements of operations.
Revenue
recognition
Our
policy complies with the guidance provided by the Securities and Exchange
Commission’s Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition in Financial Statements,
issued
by the Securities and Exchange Commission. We recognize revenue from the
sale of
our mobile phones when all of the following conditions have been met: (1)
evidence exists of an arrangement with the customer, typically consisting
of a
purchase order or contract; (2) the goods have been delivered and risk
of loss
has passed to the customer; (3) we have completed all of the necessary
terms of
the contract; (4) the amount of revenue to which we are entitled is fixed
or
determinable; and (5) we are reasonably assured that we will be able to
collect
the amount due from the customer. To the extent that one or more of these
conditions has not been satisfied, we defer recognition of revenue. Judgments
are required in evaluating the credit worthiness of our customers. Credit
is not
extended to customers and revenue is not recognized until we have determined
that collectibility is reasonably assured.
Revenue
for the twelve months ending December 31, 2006 and December 31, 2005 includes
revenue from the sales of the N1 multimedia mobile phone and revenue from
a
licensing agreement with a major Asian manufacturer. In July 2005, we entered
into a licensing agreement with a major Asian manufacturer whereby we licensed
our touch screen technology for use in a mobile phone to be included in
their
product assortment. In this agreement, we received €1,500 in return for granting
an exclusive right to use our software over a two year period. The exclusive
rights do not limit our right to use our licensed technology for our own
use,
nor to grant to third parties to use our licensed technology in other devices
than mobile phones. The net revenue related to this agreement has been
allocated
over the term of the agreement, amounting to $851 in 2006 and $399 in 2005.
The
contract also included consulting services to be provided by Neonode on
an “as
needed basis”. The fees for these consultancy services vary from hourly rates to
monthly rates and are based on reasonable market rates for such services.
Another component of the agreement provides that should the Asian manufacture
begin selling a mobile based on our technology, a fee of €2 per telephone would
be due to Neonode. As of December 31, 2006, the Asian Manufacturer had
not sold
any mobile telephones using our technology.
Warranty
Reserve
Our
products are generally warranted against defects for twelve months following
the
sale. We have a twelve month warranty from the manufacturer of the mobile
phones. Reserves for potential warranty claims not covered by the manufacturer
are provided at the time of revenue recognition and are based on several
factors, including current sales levels and an estimate of repair
costs.
Advertising
Advertising
costs are expensed as incurred. For the years ending December 31, 2006,
2005 and
2004, such costs have not been significant.
Research
and Development
Research
and Development costs are expensed as incurred. Software development costs
are
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed." Costs incurred in the product development
of new
software products are expensed as incurred until technological feasibility
has
been established. To date, the establishment of technological feasibility
of our
products and general release substantially coincide. As a result, we have
not
capitalized any software development costs since such costs have been
immaterial.
Research
and development costs consists mainly of personnel related costs in addition
to
some external consultancy costs such as testing, certifying, measurements,
etc.
Concentration
of Risk
Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of accounts receivable with customers. Since we are
in the
process of getting our product to market, our first customers will comprise
over
10 percent of revenue and we will need to rely on a smaller customer base
as we
grow. In addition, we usually sell to customers with either prepayment,
letter
of credit or bank guarantees. Our customers are generally distributors
of
telecommunications equipment. We will maintain allowances for potential
credit
losses, if necessary.
Risk
and uncertainties
Our
long-term success is dependent on obtaining sufficient capital to fund
our
operations and development of our products, bringing such products to the
worldwide market, and obtaining sufficient sales volume to be profitable.
To
achieve these objectives, we will be required to raise additional capital
through public or private financings or other arrangements. It can not
be
assured that such financings will be available on terms attractive to us,
if at
all. Such financings may be dilutive to our stockholders and may contain
restrictive covenants.
We
are
subject to certain risks common to technology-based companies in similar
stages
of development. Principal risks include uncertainty of growth in market
acceptance for our products; history of losses since inception, ability
to
remain competitive in response to new technologies, costs to defend, as
well as
risks of losing patent and intellectual property rights, reliance on limited
number of suppliers, reliance on outsourced manufacture of our products
for
quality control and product availability, ability to increase production
capacity to meet demand for our products, concentration of our operations
in a
limited number of facilities, uncertainty of demand for our products in
certain
markets, ability to manage growth effectively, dependence on key members
of our
management and development team, limited experience in conducting operations
internationally, and ability to obtain adequate capital to fund future
operations.
Since
we
are in the process of launching a new generation of our product, the first
customers will comprise over 10 percent of revenue and we will need to
rely on a
smaller customer base as we grow. In addition we will produce telephones
through
an agreement with a production partner. This exposes us to the risk that
the
partner may not fulfil contracted volumes or deliveries. Even the sources
of
components used in our product could cause delays in production and deliveries.
We
are exposed
to a number of economic and industry factors that could result in portions
of
our inventory becoming either obsolete or in excess of anticipated usage,
or
subject to lower of cost or market issues. These factors include, but are
not
limited to, technological changes in our markets, our ability to meet changing
customer requirements, competitive pressures in products and prices, and
the
availability of key components from our suppliers.
A
significant portion of our business is conducted in currencies other than
the
U.S. dollar (the currency in which its financial statements are stated),
primarily the Swedish krona and, to a lesser extent, the Euro. We incur
a
significant portion of our expenses in Swedish kronor, including a significant
portion of our product development expense and a substantial portion of
our
general and administrative expenses. As a result, appreciation of the value
of
the Swedish krona relative to the other currencies in which the Company
generates revenues, particularly the U.S. dollar, could adversely affect
operating results. We do not currently undertake hedging transactions to
cover
our currency exposure, but we may choose to hedge a portion of our currency
exposure in the future as it deems appropriate.
Our
future success depends on market acceptance of our products as well as
our
ability to introduce new versions of our products to meet the evolving
needs of
our customers.
Stock
based compensation expense
We
account for stock-based employee compensation arrangements in accordance
with
Statement of Financial Accounting Standards ("SFAS") No. 123R, Accounting
for
Stock-Based Compensation. We account for equity instruments issued to
non-employees in accordance with SFAS No. 123R and Emerging Issues Task
Force
("EITF") 96-18, Accounting for Equity Instruments that are Issued to Other
than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services,
which require that such equity instruments be recorded at their fair value.
When
determining stock based compensation expense involving options and warrants,
we
determine the estimated fair value of options and warrants using the
Black-Scholes option pricing model.
Accounting
for debt issued with stock purchase warrants
We
account for debt issued with stock purchase warrants in accordance with
APB
opinion 14 Accounting
for Convertible Debts and Debts issued with stock purchase
warrants.
We
allocate the proceeds of the debt between the debt and the detachable warrants
based on the relative fair values of the debt security without the warrants
and
the warrants themselves.
Income
taxes
We
account for income taxes in accordance with SFAS No. 109, Accounting for
Income
Taxes (SFAS 109). SFAS 109 requires recognition of deferred tax liabilities
and
assets for the expected future tax consequences of items that have been
included
in the financial statements or tax returns. The Company estimates income
taxes
based on rates in effect in each of the jurisdictions in which it operates.
Deferred income tax assets and liabilities are determined based upon differences
between the financial statement and income tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are
expected to reverse. The realization of deferred tax assets is based on
historical tax positions and expectations about future taxable income.
Valuation
allowances are recorded against net deferred tax assets where, in our opinion,
realization is uncertain based on the “not more likely than not” criteria of
SFAS No. 109.
Based
on
the uncertainty of future pre-tax income, we fully reserved our net deferred
tax
assets as of December 31, 2006 and 2005. 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 determination
was made. The provision for income taxes represents the net change in deferred
tax amounts, plus income taxes payable for the current period.
Net
income (loss) per share
Net
income (loss) per share amounts have been computed in accordance with SFAS
No.
128, "Earnings per Share". For each of the periods presented, basic earnings
per
share amounts were computed based on the weighted average number of shares
of
common stock outstanding during the period. Net income (loss) per share
-
assuming dilution amounts are computed based on the weighted average number
of
shares of common stock and potential common stock outstanding during the
period.
The Company had no dilutive potential common stock during the twelve month
periods ending December 31, 2006 and 2005 and during the 10 month period
ending
December 31 2004, since they would be antidilutive.
Comprehensive
loss
We
apply
Statement of Financial Standard ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 which establishes standards for reporting and displaying
all changes in equity other than transaction with owners in their capacity
as
owners. Our comprehensive loss includes foreign currency translation gains
and
losses reflected in equity. We have reported the components of comprehensive
loss in our Consolidated Statements of Stockholders' Equity.
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.
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
and
cash equivalents, receivables and payables and current portions of long-term
debt are deemed to approximate fair value due to their short maturities.
The
carrying amount of long-term debt with banks and capitalized lease obligations
are also deemed to approximate their fair values.
Effects
of recent accounting pronouncements
The
following are expected effects of new US GAAP accounting pronouncements.
In
February 2006, the FASB issued SFAS No. 155 Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements No. 133 and 140. This
Statement is effective for all financial instruments acquired or issued
after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. We do not believe that SFAS No. 155 will have any impact on our
consolidated financial statements.
In
March
2006, FASB issued SFAS No. 156 Accounting for Servicing of Financial Assets—an
amendment of FASB Statement No. 140. An entity should adopt this Statement
as of the beginning of its first fiscal year that begins after September
15,
2006. We do not believe that SFAS No. 156 will have any impact on our
consolidated financial statements.
On
July
13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in
Income Taxes—an interpretation of FASB Statement No. 109. Interpretation 48
clarifies the accounting for uncertainty in income taxes recognized in
an
enterprise’s financial statements in accordance with Statement 109, Accounting
for Income Taxes. This Interpretation prescribes a recognition threshold
and
measurement attribute for financial statement recognition, measurement
and
disclosure of tax positions that a company has taken or expects to be take
on a
tax return. Additionally, Interpretation 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
transition. Interpretation 48 is effective for fiscal years beginning after
December 15, 2006, with early adoption permitted. We do not believe that
the
adoption of FASB issued interpretation No. 48 will have any significant
effect
on our consolidated financial statements.
In
September 2006, FASB issued SFAS No. 157 Fair Value Measurements. This
Statement
is effective for financial statements issued for fiscal years beginning
after
November 15, 2007. We do not believe the adoption of SFAS No. 157 will
have a material effect on our consolidated financial statements.
At
December 31, 2006 and 2005, inventories consisted of parts, materials and
finished products as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Parts
and materials
|
|
$
|
-
|
|
|
154
|
|
|
|
|
|
|
|
|
|
Total
inventories
|
|
$
|
-
|
|
|
154
|
|
During
2006 and 2005 we have taken write-down charges of $133 and $195 related
to
components and spare parts. In 2006 management made a decision to stop
further
production of the N1 phone and deemed the component and spare parts inventories
not to be of any use in the coming production of the N2 mobile phone. In
2005
management determined that some components used in the production of the
N1
mobile phone were no longer of value due to issues with quality and
modifications to the N1.
4. Prepaid
expenses and accrued income
Prepaid
expenses and accrued income consist of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Prepayment
to supplier
|
|
$
|
350
|
|
|
|
|
Deferred
financing fees
|
|
|
149
|
|
|
-
|
|
Prepaid
rent
|
|
|
83
|
|
|
62
|
|
Other
|
|
|
39
|
|
|
6
|
|
Total
prepaid expenses and accrued income
|
|
$
|
621
|
|
|
68
|
|
The
prepayment to supplier is to our production partner and is for the sourcing
of
component inventories relating to the new N2 mobile telephone to be launched
in
2007. The deferred financing fees consist of legal fees incurred relating
to the
senior secured notes described in note 10.
Other
current assets consist of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Value
added tax receivable
|
|
$
|
116
|
|
|
35
|
|
Receivable
from suppliers
|
|
|
1
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
4
|
|
Total
other current assets
|
|
$
|
117
|
|
|
39
|
|
6. Machinery
and equipment
Machinery
and equipment consists of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
124
|
|
|
82
|
|
less
accumulated depreciation
|
|
|
(59
|
)
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
Machinery
and equipment, net
|
|
$
|
65
|
|
|
50
|
|
|
|
|
|
|
|
|
|
Depreciation
expense
|
|
$
|
29
|
|
|
28
|
|
January
1, 2005, we entered into a capital lease for office furniture that extends
over
a 36 month period with an annualized interest rate of 9%. The amount of
the
lease at inception was $12. The present value of the lease payments is
recorded
as notes payable. Lease payments are recorded as interest and principle
payments. The assets are depreciated over a five year period. The future
lease
payments related to the capital lease are as follows:
|
|
Future
|
|
|
|
minimum
|
|
|
|
payments
on
|
|
|
|
capital
leases
|
|
Year
Ending December 31,
|
|
|
|
2007
|
|
$
|
5
|
|
2008
|
|
|
-
|
|
2009
|
|
|
-
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
future minimum lease payments
|
|
$
|
5
|
|
7. Intangible
assets
Intangible
assets consist of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Patents
|
|
$
|
328
|
|
|
284
|
|
less
accumulated amortization
|
|
|
(173
|
)
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
Patents,
net
|
|
$
|
155
|
|
|
191
|
|
|
|
|
|
|
|
|
|
Amortization
expense
|
|
$
|
61
|
|
|
60
|
|
We
have
not recorded any further investment in our patents since 2004. The change
in the
carrying value of intangibles is due to balance sheet currency fluctuations
between the USD and the Swedish krona, since the patents are held by the
Swedish
subsidiary with a functional currency in SEK. The amortization of patents
for
future years 2007, 2008 and 2009 is estimated at approximately $65, $65
and $25,
respectively.
Accrued
expenses consist of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Legal
settlement
|
|
$
|
291
|
|
|
-
|
|
Earned
vacation compensation
|
|
|
164
|
|
|
58
|
|
Accrued
pension premiums
|
|
|
21
|
|
|
-
|
|
Accrued
consultant fees
|
|
|
11
|
|
|
16
|
|
Accrued
Interest expense
|
|
|
161
|
|
|
31
|
|
Accrued
audit and legal fees
|
|
|
244
|
|
|
6
|
|
Other
costs
|
|
|
1
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses
|
|
$
|
893
|
|
|
120
|
|
For
a
description of the legal settlement see note 15.
Other
liabilities consist of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Embedded
derivative of convertible debt
|
|
$
|
124
|
|
|
-
|
|
Customer
pre-payments
|
|
|
145
|
|
|
242
|
|
Employee
withholding taxes
|
|
|
65
|
|
|
28
|
|
Social
security fees
|
|
|
52
|
|
|
26
|
|
Other
|
|
|
51
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Total
other liabilities
|
|
$
|
437
|
|
|
302
|
|
The
Company’s debt consists of the following:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Senior
secured notes
|
|
$
|
5,000
|
|
|
-
|
|
Petrus
Holding SA
|
|
|
780
|
|
|
629
|
|
Loan
- Almi Företagspartner 2
|
|
|
201
|
|
|
251
|
|
Loan
- Almi Företagspartner 1
|
|
|
94
|
|
|
91
|
|
Capital
lease
|
|
|
5
|
|
|
9
|
|
|
|
|
|
|
|
|
|
Total
notes outstanding
|
|
|
6,080
|
|
|
980
|
|
|
|
|
|
|
|
|
|
Unamortized
debt discounts
|
|
|
(114
|
)
|
|
(30
|
)
|
Total
debt, net of debt discounts
|
|
$
|
5,966
|
|
|
950
|
|
Debt
maturities per year for the above loans are as follows:
|
|
Future
debt
|
|
|
|
maturities
|
|
Year
Ending December 31,
|
|
|
|
2007
|
|
$
|
5,189
|
|
2008
|
|
|
90
|
|
2009
|
|
|
801
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
future repayments of debt principle
|
|
$
|
6,080
|
|
The
short-term portion of the unamortized debt discounts amounts to
$77.
The
Petrus Holding SA and ALMI Företagspartner Stockholm AB loans described below
were issued to Neonode, Inc.’s Swedish subsidiary company, Neonode AB, and are
denominated in Swedish Kronor.
Loan
agreement - Petrus Holding SA (Petrus)
On
December 22, 2004 Neonode AB entered into a Loan agreement with Petrus
Holding
SA, a company incorporated under the laws of Luxemburg. The funds under
this
loan agreement were received in January 2005. In this loan arrangement,
Petrus
Holding SA granted a loan of SEK 5,000 to Neonode AB at an interest rate
of 5%
per annum. The loan shall be repaid no later than 22 December 2009. The
Petrus
loan is subordinated in right of payment to all indebtedness of Neonode
to Almi
Företagspartner Stockholm AB.
Loan
agreements - ALMI Företagspartner Stockholm AB (Almi)
Almi
1
On
April
29, 2004, Neonode AB entered into a loan agreement with ALMI Företagspartner
Stockholm AB (Almi) in the initial amount of SEK 1,000 with the following
principle conditions. The credit period for the loan is expected to be
44 months
starting April 29, 2004 with an annualized interest rate of 9.75%. Neonode
was
not required to make any repayments of principle for the first 14 months,
after
which the loan should be repaid with quarterly principle payments of SEK
91. We
have the right to redeem the loan at any time prior to expiration subject
to a
prepayment penalty of $14. A floating charge (chattel mortgage) of SEK
1,000 is
pledged as security. Individual guarantees by related parties have been
provided
as security for the loan and amount to SEK 150.
Almi
2
On
April
6, 2005 Neonode AB entered into a second loan agreement with Almi in the
amount
of SEK 2,000 with 40,000 detachable warrants in Neonode AB (corresponding
to
72,000 warrants when converted into Neonode Inc. shares). The loan has
an
expected credit period of 48 months with an annualized interest rate of
2%.
Neonode was not required to make any repayments of principle for the first
nine
months. Quarterly repayments of principle thereafter amounted to SEK 154.
We
have the right to redeem the loan at any time prior to expiration subject
to a
prepayment penalty of 1%, on an annualized basis, of the outstanding principle
amount over the remaining term of the loan. A floating charge (chattel
mortgage)
of SEK 2,000 is pledged as security.
A
fair
market value allocation was made in accordance with APB opinion 14 Accounting
for Convertible Debts and Debts issued with stock purchase
warrants.
In our
accounts, we have allocated the proceeds of the second Almi loan between
the
debt and the detachable warrants based on the relative fair values of the
debt
security without the warrants and the warrants themselves. To calculate
the debt
discount related to the warrants, the fair market value of the warrants
was
calculated using the Black-Scholes options pricing model (see note 11
for the
assumptions used) and the fair value of the debt was discounted using an
interest rate of 6.0 percent. The aggregate debt discount amounted to $42
and is
amortized over the expected term of the loan agreement using the effective
interest rate method.
Senior
secured notes (bridge notes)
On
February 28, 2006, we commenced borrowing from a new group of investors
(AIGH).
The senior secured notes (bridge notes) issued under the note purchase
agreement
bear interest at 4% and have a maturity date of August 28, 2007. At December
31,
2006, we had drawn down $5,000 out of the total amount of $5,500 available.
The
bridge notes are collateralized by the common stock shares of Neonode Inc.’s
wholly owned subsidiary, Neonode AB and are subordinated in right of payment
to
all indebtedness of Neonode AB to Almi Företagspartner Stockholm AB. In
addition, Per Bystedt, Thomas Ericsson and Magnus Goertz have pledged their
beneficial holdings in Neonode Inc. as collateral for the bridge notes.
The
bridge notes are convertible under three scenarios: (i) in the event of
a
successful initial public offering (“IPO”); (ii) in the event that we choose to
prepay the principle; or (iii) in the event that we do not complete a successful
IPO.
(i) |
In
the event of a successful initial public offering on or before
August 28,
2007, the bridge notes, including without limitation all accrued
interest
and other obligations under the notes, shall automatically convert
without
any action of the holder into units in the Company at a price
of $5 per
unit, each unit consisting of one share of Company common stock
and 0.5
five-year warrant, each exercisable to purchase one share at
$10 per
share. These warrants may be called by us for $0.10 should the
price of
the Company’s common stock trade over $12.50 on a public exchange for more
than 20 consecutive days (see note 11
for warrant terms).
|
(ii) |
The
bridge notes may be prepaid without premium or penalty, in whole
or in
part, on 20 days notice; provided that the bridge note investors
shall
have the opportunity, prior to such prepayment, to convert the
amounts
borrowed under the bridge notes into common stock of the Company
at a
ratio equal to the outstanding debt and interest divided by $5.
|
(iii) |
In
the event that we fail to complete a registered public offering
with gross
proceeds in excess of $5,500 by August 28, 2007 the notes shall
be
converted into common stock of the company at a price per share
equal to
the fair market value of such shares as determined by negotiation.
The
number of shares to be issued as a result of such a negotiation
cannot be
less than the amounts borrowed including accrued interest under
the bridge
notes divided by $5.
|
Derivatives
The
senior secured notes issued on February 28, 2006 and November 20, 2006
contain
an embedded derivative instrument (conversion feature) with three triggers.
Pursuant to Statement of Financial Accounting Standards No. 133 Accounting
for
Derivative Instruments and Hedging Activities and EITF 00-19 Accounting
for
Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company's Own Stock, this conversion feature is considered an embedded
derivative and is included in “Other liabilities”. At the time of issuance of
the $4,000 senior secured notes on February 28, 2006, the fair value of
the
conversion feature was $125, which was recorded as a debt discount and
amortized
to interest expense over the expected term of the senior secured notes.
An
additional $24 was added to the fair value of the conversion feature on
November
20, 2006 upon issuance of an additional $1,000 in senior secured notes.
Changes
in the fair value of the conversion feature are recorded in “Interest expense
and other expenses”. During 2006, we recorded $72 of interest expense associated
with the amortization of the debt discount along with a reduction of $25
associated with the changes in the fair value of the conversion feature
liability.
Debt
modifications
In
March
2006 the SEK 1,000 Almi1 loan with an outstanding balance of SEK 646 was
amended
to provide for conversion rights as defined in (i) above and a waiver of
further
principle payments until the conversion date. In addition, the Almi2 loan
was
amended to state that in the event the related warrants are called by Neonode
Inc., Almi is entitled to make payment for the securities issued by reducing
the
par value of the outstanding balance of the Almi2 loan.
On
October 26, 2006 the Petrus loan agreement was amended to include accrued
interest to May 31, 2006 in the loan amount, which increased the loan amount
to
SEK 5,353 and instated the same conversion rights as the Bridge Notes as
defined
under scenario (i) above. For accounting purposes, the change in terms
was
accounted for as a modification of the Petrus loan and resulted in recording
a
debt discount amounting to $24 with a corresponding increase in other
liabilities. The debt discount is amortized as interest expense using the
effective interest method over the remaining term of the loan.
All
share, warrant and option amounts below related to Neonode AB have been
converted at a rate of 1 Neonode AB share to 1.8 Neonode Inc
shares.
Neonode
AB was founded in February 2004 with the issuance of 1,800,000 shares of
common
stock at a par value of .01 per share. Immediately thereafter, 18 shares
of
common stock were issued to Serwello AB for an aggregate amount of SEK
1,900
($250). Serwello AB is a company registered in Sweden.
In
May
2004, a private placement consisting of 317,652 shares of common stock
was
carried out to Iwo Jima SARL, amounting to SEK 5,000 ($648). Iwo Jima SARL
is a
company registered in Luxembourg.
In
August
2004 105,883 shares of common stock were issued for SEK 2,000 ($260) with
50%
going to Iwo Jima SARL and 50% going to Spray AB. Spray AB is a company
registered in Sweden.
In
October 2004 127,060 shares of common stock were issued for SEK 2,000 ($273)
whereby Iwo Jima SARL subscribed 50,825 (40%) Serwello AB subscribed 25,412
(20%) and the remaining 40% were subscribed by six other private investors.
In
April
2005, 263,619 common shares were issued for SEK 6,618 ($937) with the majority
going to Jourbemanning AB (128,619 shares) and the rest to 7 smaller investors.
Of the shares that went to Jourbemanning, 74,619 shares were paid for by
converting an existing receivable from Neonode AB. The receivable, which
was
originally a deposit made to Neonode AB as a prepayment for telephones,
was
converted to Neonode AB common stock using a share price at the time the
transaction was agreed upon. When the new share issue was later carried
out and
subscribed, the share value had increased, resulting in the agreed upon
price
for Jourbemanning being lower than the fair market value of the shares
at the
time of issuance. The difference between the fair market value of the shares
at
issuance and the share value at the time of agreement with Jourbemanning
was
recorded as a finance expense, as a stock based compensation charge of
$100.
Also
in
April 2005 together with loan financing as described above, 427,135 warrants
were issued in Neonode AB. Of these warrants, 355,135 two year warrants
with an
exercise price of 4.82 were issued to Iwo Jima SARL in exchange for $17.
The
fair value of these warrants was calculated using the Black-Scholes option
pricing model and amounted to $166. The difference between the Black-Scholes
calculated amount and the amount received was recorded as a stock compensation
charge in “Interest expense and other expenses”. The remaining 72,000 warrants
were issued with the Almi 2 SEK 2,000 loan with an exercise price of 5.07
and an
expected term of 3 years. The Black-Scholes calculated fair market value
of the
warrants that were attached to the Almi 2 loan was recorded as a debt discount
based on their relative fair market value to the debt amounting to $42
(see note
10).
The
calculation of fair market value of the warrants issued to Iwo Jima SARL
and
Almi assumed a fair value share price of $3.93 volatility of 30% and an
interest
rate of 4.5%.
In
June
2005 37,800 warrants to buy Neonode AB shares were issued to employees
with an
aggregate cash option premium, based on fair market value calculated using
the
Black-Scholes option pricing model, amounting to $6. The assumptions for
the
Black-Scholes option pricing model included a volatility of 30%, a share
price
of $3.64, a term of two years and an interest rate of 1.83%.
The
following table shows the warrants outstanding in Neonode AB immediately
prior
to the reorganization and the assumptions used in the Black-Sholes option
pricing model. The exercise prices per share are translated from Swedish
kronor
at the exchange rate on the date of issue and adjusted for the conversion
of
Neonode AB shares to Neonode Inc shares at 1.8 shares of Neonode Inc for
1 share
of Neonode AB. All options and warrants issued were fully exercisable and
vested
on date of grant:
|
|
|
|
Number
of
|
|
Expiration
|
|
Exercise
|
|
Date
issued
|
|
Issued
to:
|
|
warrants
|
|
date
|
|
price
|
|
2005
04 06
|
|
|
Almi
|
|
|
72,000
|
|
|
2008
05 01
|
|
|
5.07
|
|
2005
04 19
|
|
|
Iwo
Jima
|
|
|
355,135
|
|
|
2007
05 01
|
|
|
4.82
|
|
2005
06 30
|
|
|
Employees
|
|
|
28,800
|
|
|
2007
06 30
|
|
|
5.69
|
|
2005
06 30
|
|
|
Employees
|
|
|
9,000
|
|
|
2007
06 30
|
|
|
7.11
|
|
Total
number of warrants outstanding
|
|
464,935
|
|
|
|
|
|
|
|
In
February 2006, 36,000 common stock shares were issued for SEK 1,533 ($198)
to
Neomagic Corporation.
In
February, 2006, we completed a corporate reorganization by issuing all
of the
shares of Neonode Inc. to the stockholders of Neonode AB based upon the
number
and class of shares owned by each in exchange for all of the outstanding
stock
of Neonode AB. Following the reorganization, Neonode AB became a wholly-owned
subsidiary of Neonode Inc. The reorganization was accounted for with no
change
in accounting basis for Neonode AB, since there was no change in control
of the
Group. In connection with the reorganization, we commenced borrowing from
a new
group of investors (AIGH).
At
the
time of the Company’s reorganization on February 28, 2006, Iwo Jima SARL
received 216,993 shares of Neonode Inc common shares corresponding to an
aggregate fair market value of $939 and 110,929 warrants with an aggregate
fair
market value of $25 to retire previously issued warrants in Neonode AB
valued at
$348. The transaction resulted in a non-cash stock based compensation charge
to
operating expenses under “General and administrative” amounting to $616. In
addition, Almi received 43,993 shares of common stock with a fair market
value
of $190 and 22,490 warrants with a fair value of $5 to retire previously
issued
warrants in Neonode AB valued at $89. In substance, the Almi transaction
is seen
as a sale of the Neonode AB warrants. Accordingly an inducement charge
was
recognized as an adjustment to “Additional paid-in-capital” amounting to $106.
The inducement charge related to this transaction was calculated as the
difference between the fair value of the Neonode AB warrants surrendered
in
return for Neonode Inc. common stock and warrants. The Black-Scholes assumptions
used in calculating the fair market value of the new warrants included
a
volatility of 50%, interest rate of 4.60% and a share price of $4.33. The
exercise price and term of the new warrants are shown in the table below.
The
assumptions for the valuation of the warrants surrendered were the same,
except
for the term of the warrants.
The
new
warrants issued to Iwo Jima SARL and to Almi in 2006 in connection with
the
company reorganization have the following terms and conditions:
· |
Exercisable
on the date of grant of February 28, 2006 through February 28,
2011.
|
· |
Exercise
price of USD 10.00/share.
|
·
|
May
be called by us for USD 0.10 per warrant if the common stock
closes on any
exchange market for 20 consecutive business days at a price of
USD 12.50
or more.
|
· |
The
holders have pre-emptive rights to participate in any issuances
of equity
by Neonode Inc while the warrants are outstanding, subject to
exceptions
of the following issuances: (i) options under employee incentive
plans
approved by the stockholders, (ii) reasonable warrants granted
to bona
fide leasing companies, strategic partners, or major lenders
or (iii) in
connection with bona fide
acquisitions
|
· |
The
holders will be protected against stock splits, stock dividends,
reverse
splits, combination of shares, reclassifications and similar
transactions.
|
· |
The
new warrants can be exercised by surrender of the new warrants
through a
customary “net exercise” provision only if the new warrants are not
exercisable pursuant to an effective registration statement.
The net
exercise provision has the meaning of a net share settlement
and is not
available once the warrants are
registered.
|
The
warrants issued to Almi on February 28, 2006 were recorded as a liability
at a
fair market value of $5 based on a Black-Scholes option pricing model
calculation. The warrants are recorded at their fair market value using
the
Black-Scholes option pricing model on the balance sheet dates, with any
changes
in value reflected in “Other income and expenses”.
The
employee warrants were converted into 37,800 Neonode Inc. warrants with
the same
exercise dates and relative strike prices as the Neonode AB warrants with
the
exception that the new employee warrants include a provision that the new
warrants can be exercised by surrender of the new warrants through a net
share
settlement only if the new warrants are not exercisable pursuant to an
effective
registration statement.
The
following table shows the new warrants outstanding in Neonode Inc immediately
after the reorganization described above:
|
|
|
|
Number
of
|
|
Expiration
|
|
Exercise
|
|
Date
issued
|
|
Issued
to:
|
|
warrants
|
|
date
|
|
price
|
|
2006
02 28
|
|
|
Almi
|
|
|
22,490
|
|
|
2011
02 28
|
|
|
10.00
|
|
2006
02 28
|
|
|
Iwo
Jima
|
|
|
110,929
|
|
|
2011
02 28
|
|
|
10.00
|
|
2006
02 28
|
|
|
Employees
|
|
|
28,800
|
|
|
2007
06 30
|
|
|
5.73
|
|
2006
02 28
|
|
|
Employees
|
|
|
9,000
|
|
|
2007
06 30
|
|
|
7.17
|
|
Total
outstanding warrants
|
|
171,219
|
|
|
|
|
|
|
|
Other
than as disclosed in the above reorganization, we did not grant any new
options
or warrants and no options or warrants were exercised during the remainder
of
the twelve month period ending December 31, 2006.
12. Warranty
obligations and other guarantees
The
following is a summary of our agreements that we
have
determined are within the scope of FASB Interpretation (FIN) No. 45 Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others
--
an
interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN
34.
Our
products are generally warranted against defects for twelve months following
the
sale. We generally have a twelve month warranty from the manufacturers
of our
products. Our estimate of costs to service our warranty obligations is
based on
expectation of future conditions. To the extent we estimate warranty claim
activity or increased costs associated with servicing those claims, a warranty
accrual will be created and may increase or decrease from time to time,
resulting in increases or decreases in gross margin.
We
enter
into indemnification provisions under our agreements with other companies
in the
ordinary course of business, typically with business partners, contractors,
customers
and
landlords. Under these provisions we generally indemnify and hold harmless
the
indemnified party for losses suffered or incurred by the indemnified party
as a
result of our activities or, in some cases, as a result of the indemnified
party's activities under the agreement.
13. Income
taxes
Loss
before income taxes was distributed geographically as follows:
|
|
|
|
|
|
|
|
|
|
Twelve
|
|
Twelve
|
|
*Ten
|
|
|
|
Months
|
|
Months
|
|
Months
|
|
|
|
Ended
Dec.
|
|
Ended
|
|
Ended
|
|
|
|
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
US
|
|
$
|
(1,359
|
)
|
|
-
|
|
|
-
|
|
Non-US
|
|
|
(3,759
|
)
|
|
(3,682
|
)
|
|
(1,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,118
|
)
|
|
(3,682
|
)
|
|
(1,427
|
)
|
We
had no
provision (benefit) for income taxes at December 31, 2006, 2005 and 2004.
The
effective income tax rate differs from the statutory federal income tax
rate for
the following reasons:
|
|
Twelve
|
|
Twelve
|
|
*Ten
|
|
|
|
Months
|
|
Months
|
|
Months
|
|
|
|
Ended
Dec.
|
|
Ended
|
|
Ended
|
|
|
|
31,
|
|
Dec.
31,
|
|
Dec.
31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Amount
at standard tax rates
|
|
|
-35
|
%
|
|
-35
|
%
|
|
-35
|
%
|
Increase
in valuation allowance for deferred tax asset
|
|
|
25
|
%
|
|
24
|
%
|
|
28
|
%
|
Foreign
taxes calculated at 28%
|
|
|
5
|
%
|
|
7
|
%
|
|
7
|
%
|
Non-deductible
expense (stock comp)
|
|
|
5
|
%
|
|
4
|
%
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
-
|
|
|
-
|
|
|
-
|
|
*
The ten
month period for 2004 began on February 18, 2004
Significant
components of the deferred tax balances are as follows:
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
2,534
|
|
|
1,222
|
|
Amortization
|
|
|
-
|
|
|
46
|
|
Other
|
|
|
-
|
|
|
-
|
|
Total
deferred tax assets
|
|
$
|
2,534
|
|
|
1,268
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(2,534
|
)
|
|
(1,268
|
)
|
|
|
|
|
|
|
|
|
Total
net deferred tax assets
|
|
$
|
-
|
|
|
-
|
|
Valuation
allowances are recorded to offset certain deferred tax assets due to
management’s uncertainty of realizing the benefits of these items. Management
applies a full valuation allowance for the accumulated losses of Neonode
Inc,
and its subsidiary Neonode AB since it is not determinable using the “more
likely than not” criteria that there will be any future benefit of our deferred
tax assets. This is mainly due to our history of operating losses and due
to the
competitive character of the hand-held media device/mobile telephone market.
The
main components of our deferred tax benefits are the accumulated net operating
loss carry-forwards, which are almost entirely related to the operations
of
Neonode AB in Sweden. Currently, under Swedish tax law these benefits do
not
expire and may be carried forward and utilized indefinitely.
14. Employee
benefit plans
We
participate in a number of individual defined contribution pension plans
for our
employees in Sweden. Contributions by the Company relating to these defined
contribution plans for the years ended December 31, 2006, 2005 and 2004
were
$26, $7 and $1, respectively.
15. Commitments
and contingencies
Legal
proceedings
During
2006, a reserve was recorded for a dispute that developed between Neonode
and a
supplier. Neonode AB contracted with a supplier for the production and
delivery
of telephones during 2005. Neonode AB believes that the supplier did not
deliver
the telephones in accordance with its obligations under the contract, which
entitled Neonode AB to terminate the contract. Neonode AB terminated the
contract in June 2006. Since the contract was terminated due to the supplier’s
breach of contract, Neonode believed that the supplier had no right to
payment
in excess of what had already been paid for telephones delivered. The invoices
for the produced but not delivered telephones amounted to $860. Neonode
and the
supplier came to agreement in a settlement in December 2006 were Neonode
AB
should pay the supplier $410 in three instalments for three shipments of
500
phones each, after which none of the parties will have any claims on the
other
party except for warranty claims. The first instalment of $119 was paid
in
December 2006. Since the company is not certain that any telephones received
in
this settlement will be sellable in the future, due to newer models currently
being introduced, the cost for the settlement has been included in the
2006
results in full.
There
were no significant legal proceedings at December 31, 2005 or 2004.
Operating
leases
We
lease
office facilities and certain office equipment under various non-cancellable
operating lease agreements. Aggregate future minimum lease payments under
our
non-cancellable operating leases are as follows as of December 31,
2006:
|
|
Future
|
|
|
|
minimum
|
|
|
|
payments
on
|
|
|
|
operating
|
|
|
|
leases
|
|
Year
Ending December 31,
|
|
|
|
2007
|
|
$
|
276
|
|
2008
|
|
|
2
|
|
2009
|
|
|
-
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
future minimum lease payments
|
|
$
|
278
|
|
Total
rent expense under the leases was $244, $211 and $27 for the years ended
December 31, 2006, 2005 and 2004, respectively.
During
2006, we began working together with a manufacturing partner with facilities
in
Malaysia for the mechanical design, industrialization, sourcing and production
of the N2 multi media mobile phone. Although no formal agreement between
Neonode
and the manufacturing partner was signed during 2006, the parties have
entered
into an interim agreement whereby we have made a prepayment of $350 for
preliminary sourcing and the delivery of some initial telephones to be
used for
testing and marketing purposes. As the N2 moves to sourcing and production,
a
formal agreement between the parties is expected during early 2007.
16. Net
income (loss) available to common shareholders per
share
Basic
net
income (loss) available to common shareholders per share for the twelve
month
periods ending December 31, 2006 and 2005 and for the ten month period
ending
December 31, 2004 was computed by dividing the net income (loss) available
to
common shareholders for the relevant period by the weighted average number
of
shares of common stock outstanding. The diluted net income (loss) available
to
common shareholders per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of shares
of
common stock and common stock equivalents outstanding.
Weighted
average common stock equivalents of approximately 143,543 and 318,636 were
excluded from the diluted net income (loss) available to common shareholders
per
share calculation for the twelve month periods ending December 31, 2006
and
2005, respectively, due to their anti-dilutive effect. There were no common
stock equivalents at December 31, 2004.
We
have
one reportable segment. The segment is evaluated based on consolidated
operating
results. We currently operate in one industry segment; the development
and
selling of multimedia mobile phones. To date, we have carried out substantially
all of our operations through our subsidiary in Sweden, although we do
carry out
some development activities together with our manufacturing partner in
Malaysia.
We intend to manage our future growth on a geographic basis and our management
will evaluate the performance of our segments and allocate resources to
them
based upon income (loss) from operations.
Geographic
data for revenues based upon customer location as follows:
|
|
Twelve
|
|
|
|
Twelve
|
|
|
|
*
Ten
|
|
|
|
|
|
Months
|
|
|
|
Months
|
|
|
|
Months
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
|
|
Dec.
31,
|
|
|
|
Dec.
31,
|
|
|
|
Dec.
31,
|
|
|
|
|
|
2006
|
|
%
|
|
2005
|
|
%
|
|
2004
|
|
%
|
|
Russia
|
|
$
|
740
|
|
|
45
|
%
|
$
|
501
|
|
|
33
|
%
|
$
|
-
|
|
|
0
|
%
|
Sweden
|
|
|
31
|
|
|
2
|
%
|
|
190
|
|
|
13
|
%
|
|
-
|
|
|
0
|
%
|
Korea
|
|
|
851
|
|
|
52
|
%
|
|
399
|
|
|
27
|
%
|
|
-
|
|
|
0
|
%
|
Other
countries - Web Sales
|
|
|
22
|
|
|
1
|
%
|
|
409
|
|
|
27
|
%
|
|
248
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,644
|
|
|
100
|
%
|
$
|
1,499
|
|
|
100
|
%
|
$
|
248
|
|
|
100
|
%
|
*
The ten month period ending December 31, 2004 began on February
18,
2004.
|
|
|
In
addition to phone sales, revenues included license revenue amounting to
$851 and
$399 for 2006 and 2005, respectively. We had two significant customers
in the 12
month period ending December 31, 2005 with one customer accounting for
32% of
revenues and the other accounting for 30% of revenue. There were no significant
customers in the 10 month period ending December 31, 2004.
18. |
Related
party transactions
|
Upon
formation of the Company in February 2004, of the shares acquired by Serwello
AB, 407,880 and 611,820 were further sold to Wirelesstoys Sweden AB and
Rector
AB, respectively. Wirelesstoys Sweden AB is beneficially owned by Thomas
Eriksson and Rector AB is beneficially owned by Magnus Goertz, both founders
and
employees of Neonode AB. Magnus Goertz is also the Secretary of Neonode
Inc.
During
2004 and 2005, we had a consultancy agreement with Rector AB for services
performed by Magnus Goertz. Magnus Goertz, the owner of Rector AB, was
a board
member during the period of this agreement. The amount invoiced to us during
these periods under the agreement amounted to $7 thousand during 2004,
$107
thousand during 2005. The consultancy agreement with Magnus Goertz was
terminated in 2005.
During
2004 and 2005, the Company had a consultancy agreement with Wireless Toys
AB for
services performed by Thomas Eriksson. Thomas Eriksson, the owner of Wireless
Toys AB, was a board member during the period of this agreement. The amount
invoiced to the company during these periods under the agreement amounted
to $7
thousand during 2004, $107 thousand during 2005. The consultancy agreement
with
Thomas Eriksson was terminated in 2005.
Iwo
Jima
SARL and Spray AB as described in Note 11 Stockholders Equity are companies
where the Chairman of the Board and a significant shareholder of Neonode
Inc.,
Per Bystedt, owns or has significant influence. Consequently, all the
transactions described in Notes 10 and 11 relating to Iwo Jima SARL and
Spray AB
should be regarded as related party transactions.
Relating
to the Almi 1 loan in Note 10, Thomas Ericsson and Magnus Goertz have issued
personal guaranties for the repayment of the loan amounting to approximately
$5
(SEK 35) each. In addition, a Board Member at the time of the issuance
of the
loan, Philip Edner, has issued a personal guaranty of approximately $10
(SEK
75).
Relating
to the senior secured notes, Per Bystedt, Thomas Ericsson and Magnus Goertz
have
pledged their beneficial holdings in Neonode Inc as underlying collateral
for
the notes.
On
January 8, 2007 Neonode engaged Griffin Securities, Inc. to act as an exclusive
financial advisor in connection with any financial, business combination
or
corporate reorganization transaction in which Neonode, directly or through
a
subsidiary or affiliate, may be involved (the “Transaction”). Specifically, but
without limitation, it is contemplated that Neonode may merge with SBE,
Inc., a
Delaware corporation, which is a reporting company under the Securities
Exchange
Act of 1934 (“SBE”), or a subsidiary of SBE, in which the equity holders of
Neonode will become equity holders of SBE, as provided in a proposed Agreement
and Plan of Reorganiziation between SBE and Neonode (the “Merger Agreement”), a
draft that was provided by Neonode to Griffin. If at any time Neonode
consummates a Transaction during period to June 30, 2007, Neonode shall
pay or
cause to be paid to Griffin upon consummation of such Transaction a fee
of
$250
which will be paid at closing and grant Griffin warrants to purchase 65,000
units for the same price as the conversion price used when converting all
outstanding debt immediately prior to the closing of the Transaction, or
$5 per
unit. Each unit consists of 1 share of Neonode common stock and 0.5 warrants
to
purchase one share of common stock.
On
January 17, 2007 the Board of Directors approved an employee stock option
plan
the “2007 Plan” for selected employees and directors of the Company and its
subsidiaries (i) who are subject to Swedish income taxation (each, a “Swedish
Participant”) and (ii) who are not subject to Swedish income taxation (each, a
“Non-Swedish Participant”). In addition, a total of 433,250 options were issued
in accordance to the 2007 Plan, with 383,250 options approved to be issued
to
Swedish Participants and 50,000 options to a Non-Swedish
Participant.
On
January 18, 2007 the Stockholders approved the 2007 Stock Option Plan and
an
increase in the number of common shares outstanding to 10,000,000.
On
January 19, 2007, the outstanding bridge notes were modified to include
a
proposed reverse merger with SBE as an event for conversion on the same
terms as
an initial public offering. In addition, the conversion terms relating
to the
senior secured notes were modified whereby the maturity date was extended
to
September 30, 2007.
On
January 19, 2007, we entered into an Agreement and Plan of Merger and
Reorganization with SBE Inc. Although the exact number of shares to be
issued in
the merger will be determined at the closing of the merger according to
a
formula contained in the merger agreement, it is currently estimated that
SBE
will issue approximately 57 million shares of its common stock in exchange
for
outstanding shares of Neonode common stock and will assume all of Neonode’s
outstanding options and warrants exercisable for approximately 17 million
additional shares of SBE common stock.
We
expect
to complete the transaction in our second quarter of fiscal 2007, subject
to the
sale of SBE’s embedded business and the satisfaction of other closing conditions
set forth in the merger agreement. In addition to customary closing conditions,
the transaction is subject to the approval of both the SBE and Neonode
shareholders and a reverse split of the SBE outstanding common stock. The
number
of shares referenced above is presented on a pre-split basis. After the
merger
is completed, the combined company's headquarters will be in Stockholm,
Sweden,
where our corporate headquarters is located and it is anticipated that
the name
of the merged company will be changed to “Neonode Inc.” The combined company’s
stock is expected to continue to trade on the Nasdaq Capital Market.
In
February 2007, we completed an additional $5,000 convertible senior secured
note
financing package that was offered proportionally to our Shareholders,
and
guaranteed by AIGH. In return for the guarantee, AIGH had first right to
any
subscription amounts not taken by other existing shareholders. The terms
and
conditions of these notes are substantially the same as for the Senior
Secured
Notes described in Note 10
and as
amended on January 19, 2007.
ANNEX
G
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The
following unaudited pro forma condensed combined balance sheets as of March
31,
2007 and the unaudited pro forma condensed combined statements of operations
for
the year ended December 31, 2006 and the three months ended March 31, 2007
are based on the historical financial statements of SBE, Inc. (SBE) and Neonode
Inc. (Neonode). The pro forma condensed combined financial statements give
effect to the proposed merger as a purchase of SBE by Neonode using the purchase
method of accounting and applying the assumptions and adjustments described
in
the accompanying notes to the unaudited pro forma condensed combined financial
statements. Because the Neonode stockholders will receive a majority of the
shares of the combined company in the merger, the historical financial
statements of Neonode will become the historical financial statements of the
combined company as of the completion of the merger. Neonode uses a fiscal
year
end of December 31. Accordingly, the balance sheet dates and statement of
operations periods for the pro forma financial statements are presented based
on
a December 31 fiscal year end
SBE
and
Neonode have different fiscal year ends. Accordingly, the unaudited pro forma
condensed combined balance sheet as of March 31, 2007 combines SBE’s historical
condensed balance sheet as of April 30, 2007 with Neonode’s historical
consolidated balance sheet as of March 31, 2007, giving effect to the
merger as if it had occurred on the date of the balance sheets presented. The
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 2006 combines SBE’s historical consolidated statements
of operations, after reflecting the sale of the SBE hardware business to One
Stop Systems, for the year ended October 31, 2006 with Neonode’s historical
consolidated statements of operations for the year ended December 31, 2006.
The unaudited pro forma condensed combined statement of operations for the
three
months ended March 31, 2007 combines SBE’s historical condensed statement
of operations for the three months ended April 30, 2007 with Neonode’s
historical consolidated statements of operations for the three months ended
March 31, 2007. The unaudited pro forma condensed combined statements of
operations give effect to the merger as if it had occurred on January 1,
2006.
On
March
30, 2007, SBE sold all of the assets associated with its hardware business
(excluding cash, accounts receivable and other excluded assets specified in
the
asset purchase agreement) to One Stop Systems for $2.2 million in cash plus
One
Stop Systems’ assumption of the lease of SBE’s corporate headquarters building
and certain equipment leases. SBE received $1.7 million cash on the date of
the
sale and received $500,000 of cash held in escrow on June 5, 2007. SBE’s
hardware business represents substantially all of SBE’s revenue to date. The
unaudited pro forma condensed balance sheet reflects the sale of the SBE
hardware business to One Stop Systems.. The unaudited pro forma condensed
statement of operations reflecting the sale of the SBE hardware business to
One
Stop Systems is presented giving effect to the sale of the SBE hardware business
as if it had occurred at the beginning of SBE’s fiscal year, November 1, 2005.
For
accounting purposes, Neonode is considered to be acquiring SBE in this
transaction. Accordingly, the purchase price is allocated among the fair values
of the assets and liabilities of SBE, while the historical results of Neonode
are reflected in the results of the combined company. The transaction will
be
accounted for under the purchase method of accounting in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. Under
the
purchase method of accounting, the total estimated purchase price, calculated
as
described in the Notes to the unaudited pro forma condensed consolidated balance
sheet for Neonode and SBE, is allocated to SBE’s net tangible and intangible
assets acquired and liabilities assumed in connection with the transaction,
based on their estimated fair values as of the completion of the transaction.
This preliminary valuation and purchase price allocation is done on the basis
of
the estimates of fair value reflected in these unaudited pro forma condensed
consolidated financial statements. The allocation of the estimated purchase
price is preliminary because the proposed merger has not yet been completed
as
of March 31, 2007, the date of these pro forma financial statements. The
purchase price determination will remain preliminary until the closing of the
merger. The final determination of the purchase price allocation is anticipated
to be completed as soon as practicable after completion of the merger and will
be based on the fair values of the assets acquired and liabilities assumed
as of
the closing date of the merger. The final amounts allocated to assets acquired
and liabilities assumed could differ significantly from the amounts presented
in
the unaudited pro forma condensed combined financial statements.
As
noted
above, the merger is being accounted for using the purchase method of
accounting. Accordingly, the pro forma adjustments are based on certain
assumptions and estimates regarding the fair value of assets acquired and
liabilities assumed and the amount of goodwill that will arise from the merger.
The amount of goodwill to be recorded as of the merger date represents the
best
estimate of the fair value of SBE on the date the merger was consummated,
adjusted for the fair value of assets acquired and liabilities assumed based
on
information available to management as of the date hereof, including all merger
and related costs. The actual goodwill arising from the acquisition will be
based on the difference between the cost and the fair value of the assets
acquired and liabilities assumed on the date the merger was consummated as
adjusted for all charges pertaining to the merger. No assurance can be given
that actual goodwill will not be more or less than the estimated amount
reflected in the pro forma financial statements.
The
unaudited pro forma condensed combined financial information is based on various
other assumptions and estimates, and is subject to a number of uncertainties,
relating to the merger and related matters, including, among other things,
estimates, assumptions and uncertainties regarding: (1) the amount of
accruals for direct acquisition costs and the amount of expenses and other
costs
relating to the merger; (2) as noted above, the actual amount of goodwill
that will result from the merger; and (3) the fair values of certain assets
acquired and liabilities assumed, which are sensitive to assumptions and market
conditions. Accordingly, the unaudited pro forma condensed combined financial
information does not purport to be indicative of the actual results of
operations or financial condition that would have been achieved had the merger
in fact occurred on the dates indicated, nor does it purport to be indicative
of
the results of operations or financial condition that may be achieved in the
future.
Set
forth
below is the following unaudited pro forma financial statements:
|
· |
|
the
unaudited pro forma condensed combined balance sheet as of March 31,
2007, assuming the merger between SBE and Neonode and the sale of
the SBE
hardware business to One Stop Systems occurred as of the balance
sheet
date presented; and
|
|
|
|
|
|
· |
|
the
unaudited pro forma condensed combined statement of operations
for the
fiscal year ended December 31, 2006 assuming the merger between SBE
and Neonode occurred as of January 1, 2006;
and
|
|
|
|
|
|
· |
|
the unaudited
pro forma
condensed combined statement of operations for the three months ended
March 31, 2007 assuming the merger between SBE and Neonode occurred
as of the beginning of Neonode’s fiscal year, January 1, 2007.
|
The
unaudited pro forma condensed combined financial statements are presented for
informational purposes only, are based on certain assumptions that we believe
to
be reasonable, and do not purport to represent the combined company’s financial
condition nor its results of operations had the merger occurred as of the dates
noted above or to project results for any future date or period. In the opinion
of management, all adjustments have been made that are needed to present fairly
the unaudited pro forma condensed combined financial information.
The
unaudited pro forma condensed combined financial information should be read
in
conjunction with the historical financial statements and related attached notes
included elsewhere in this filing.
Unaudited
Pro Forma Condensed Combined Balance Sheet
of
Neonode and SBE as of March 31, 2007
(in
thousands)
The
Unaudited Pro Forma Condensed Combined Balance Sheet of Neonode and SBE set
forth below is presented as if the merger transaction occurred on March 31,
2007. The amounts presented for Neonode are from the historical Neonode
consolidated balance sheet as of March 31, 2007 and the amounts for SBE are
from the historical SBE condensed balance sheet as of April 30, 2007.
|
|
Neonode
|
|
SBE
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,930
|
|
$
|
1,239
|
|
|
|
|
|
|
|
$
|
4,169
|
|
Accounts
receivable, net
|
|
|
70
|
|
|
102
|
|
|
|
|
|
|
|
|
172
|
|
Inventories,
net
|
|
|
339
|
|
|
—
|
|
|
|
|
|
|
|
|
339
|
|
Prepaid
expenses and other current assets
|
|
|
858
|
|
|
750
|
|
|
(304
|
)
|
|
(g)
|
|
|
1,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
4,197
|
|
|
2,091
|
|
|
|
|
|
|
|
|
5,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
153
|
|
|
139
|
|
|
|
|
|
|
|
|
292
|
|
Intangible
assets, net
|
|
|
137
|
|
|
939
|
|
|
|
|
|
|
|
|
1,076
|
|
Other
assets
|
|
|
—
|
|
|
4
|
|
|
|
|
|
|
|
|
4
|
|
Goodwill
|
|
|
—
|
|
|
—
|
|
|
4,255
|
|
|
(a)
|
|
|
4,255
|
|
Total
assets
|
|
$
|
4,487
|
|
$
|
3,173
|
|
$
|
3,951
|
|
|
|
|
$
|
11,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
10,017
|
|
$
|
—
|
|
$
|
(10,128
|
)
|
|
(b)
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
201
|
|
|
(c)
|
|
|
|
|
Accounts
payable
|
|
|
818
|
|
|
91
|
|
|
|
|
|
|
|
|
909
|
|
Deferred
revenue
|
|
|
228
|
|
|
303
|
|
|
(303
|
)
|
|
(d)
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(249
|
)
|
|
(b)
|
|
|
|
|
Other
accrued liabilities
|
|
|
1,545
|
|
|
179
|
|
|
1,180
|
|
|
(e)
|
|
|
2,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
12,608
|
|
|
573
|
|
|
(9,500
|
)
|
|
|
|
|
3,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
820
|
|
|
61
|
|
|
(730
|
)
|
|
(b
|
)
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
13,428
|
|
|
634
|
|
|
(10,230
|
)
|
|
|
|
|
3,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and additional paid-in capital
|
|
|
3,799
|
|
|
35,638
|
|
|
(35,638
|
)
|
|
(f)
|
|
|
20,823
|
|
|
|
|
|
|
|
|
|
|
5,917
|
|
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,107
|
|
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304
|
)
|
|
(g)
|
|
|
|
|
Accumulated
deficit
|
|
|
(12,740
|
)
|
|
(33,099
|
)
|
|
33,099
|
|
|
(f)
|
|
|
(13,044
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
(8,941
|
)
|
|
2,539
|
|
|
14,181
|
|
|
|
|
|
7,779
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
4,487
|
|
$
|
3,173
|
|
$
|
3,951
|
|
|
|
|
$
|
11,611
|
|
Notes
to Unaudited Pro Forma Condensed Combined Balance Sheet of Neonode and SBE
On
January 19, 2007, amended May 18, 2007, SBE and Neonode entered into the
merger agreement for a transaction accounted for as a purchase under accounting
principles generally accepted in the United States. Pursuant to this merger
agreement, a wholly-owned subsidiary of SBE will be merged with and into Neonode
and SBE will issue approximately 20.4 million shares of its common stock for
all
of Neonode’s outstanding shares of common stock. After the merger is completed
the current SBE shareholders will own approximately 10% of the combined
companies.
Neonode
shareholders will exchange each share of Neonode common stock for 3.5319 shares
of SBE common stock (exchange ratio). For accounting purposes, the merger is
considered a reverse acquisition with application of the purchase method of
accounting by SBE, under which Neonode is considered to be acquiring SBE.
Accordingly, the purchase price is allocated among the fair values of the assets
acquired and liabilities assumed of SBE, while the historical results of Neonode
are reflected in the results of the combined company. The approximately
2.2 million shares of SBE common stock outstanding at the date of the
merger agreement, the outstanding SBE warrants and options, and the estimated
direct acquisition costs are considered as the basis for determining the
consideration in the reverse merger transaction. Each Neonode warrant and stock
option that was outstanding on the closing date will be converted into SBE
warrants and stock options by multiplying the Neonode stock options by the
same
exchange ratio described above. The new exercise price was also determined
by
dividing the old exercise price by the same exchange ratio. Each of these
warrants and options is subject to the same terms and conditions that were
in
effect for the related Neonode warrants and options. Neonode stockholders and
employees will own approximately 28.4 million shares of SBE common stock or
instruments convertible into common stock, or 90.5% of the fully diluted
capitalization, including warrants and options, of the combined company,
immediately following consummation of the merger. The following table is the
estimated number of shares of common stock, warrants and stock options
outstanding immediately following the consummation of the merger. The actual
number of common stock, warrants to purchase common stock and stock options
issued and outstanding will be determined on the basis of the actual number
outstanding on the date of the merger.
|
|
SBE
|
|
Neonode
|
|
Total
|
|
Common
Stock
|
|
|
2,277,000
|
|
|
20,388,000
|
|
|
22,665,000
|
|
Warrants
to purchase common stock
|
|
|
232,000
|
|
|
6,002,000
|
|
|
6,234,000
|
|
Employee
stock options
|
|
|
458,000
|
|
|
1,989,000
|
|
|
2,447,000
|
|
Total
|
|
|
2,967,000
|
|
|
28,379,000
|
|
|
31,346,000
|
|
The unaudited pro forma condensed combined financial statements reflect the
merger of Neonode with SBE as a reverse merger wherein Neonode is deemed to
be
the acquiring entity from an accounting perspective. Under the purchase method
of accounting, SBE estimates that it will have approximately 2,277,000
outstanding shares of common stock and in-the-money warrants and stock options
immediately prior to the consummation of the merger. The estimated SBE shares
outstanding are valued on May 18, 2007, the date of the signing of the amendment
to the merger transaction, using the average closing price on The Nasdaq
Capital Market of $2.41 per share for the two days before and May 18, 2007.
The
determination of the actual purchase price will be determined based on the
number of outstanding shares of SBE common stock and its in-the-money warrants
and stock options and the closing bid price of the SBE common stock on the
Nasdaq Capital Market on the day of the consummation of the merger. The fair
values of the SBE outstanding stock options and warrants were determined using
the Black-Scholes option pricing model with the following assumptions: stock
price of $2.41, which is the value ascribed to the SBE shares in determining
the
purchase price; volatility of 89.9% to 179.9%; risk-free interest rate of 2.6%
to 6.5%; and an expected life of 2.3 to 5.2 years.
SBE
outstanding shares (approximately 2.3 million shares at $2.41/share)
|
|
$
|
5,488
|
|
Fair
value of warrant, and options
|
|
|
429
|
|
Long-term
liabilities assumed
|
|
|
61
|
|
Current
liabilities assumed
|
|
|
270
|
|
Estimated
transaction costs
|
|
|
980
|
|
Estimated
stock registration costs
|
|
|
200
|
|
|
|
$
|
7,428
|
|
The aggregate consideration paid by SBE in connection with the merger, together
with the direct costs of the merger, will be allocated to SBE’s tangible and
intangible assets and liabilities based on their fair market values. The assets
and liabilities of SBE will be consolidated into Neonode’s assets and
liabilities as of the effective date of the merger.
The
consideration was allocated on a preliminary basis as follows (in thousands):
|
|
$
|
2,091
|
|
Machinery
and equipment
|
|
|
139
|
|
Amortizable
intangible assets
|
|
|
939
|
|
Other
assets
|
|
|
4
|
|
Estimated
goodwill
|
|
|
4,255
|
|
|
|
$
|
7,428
|
|
Additional
notes regarding pro forma adjustments:
|
(a)
|
|
To
record goodwill.
|
|
(b)
|
|
Simultaneously
with the consummation of the merger transaction with SBE, holders
of $10.9
million of convertible notes payable will convert these notes and
the
accrued interest related to these notes totaling $249,000 into Neonode
equity; 2.2 million shares of Neonode common stock and warrants to
purchase 1.1 million shares of Neonode common stock. This adjustment
eliminates current notes payable in the amount of $10.1 million and
long-term notes payable of $730,000 plus the accrued interest of
$249,000
and increases common stock and additional paid in capital by an equal
amount.
|
|
(c)
|
|
To
eliminate the unamortized discount related to the Company’s debt that was
recorded as a reduction of the current debt and an increase in accrued
liabilities.
|
|
(d)
|
|
To
reduce the SBE deferred revenue to fair value.
|
|
(e)
|
|
To
record the estimated direct transactions costs for investment banking
advisors, legal, accounting and other services associated with the
merger
and the post merger registration of the SBE stock issued to holders
of
Neonode common stock and warrants to purchase common stock.
|
|
(f)
|
|
To
eliminate SBE’s common stock and retained deficit
|
|
(g)
|
|
To
eliminate the unamortized deferred financing fee related to Neonode’s debt
that was recorded as a reduction of the current prepaid expense and
an
increase in accumulated deficit.
|
|
(h)
|
|
To
record the fair value of SBE common stock, warrants and employee
stock
options exchanged in the transaction.
Details
of the acquisition of Neonode by SBE based upon the following
assumptions:
|
|
a.
|
The
acquisition transaction is based upon the total number of common
shares
(2,277,000) of SBE estimated outstanding common stock when the merger
is
consummated.
|
|
b.
|
The
shareholders of Neonode will own approximately 90% of the voting
securities of SBE immediately after the merger is consummated.
|
|
c.
|
SBE
will issue of common stock, $.01 par value, in a 3.5319 ratio to
effectuate the transaction.
|
|
d.
|
Based
upon assumptions a, b and c, SBE would issue 20,388,000 shares of
common
stock in exchange for all the outstanding common stock (5,772,000)
of
Neonode and 7,991,000 shares of common stock in exchange for all
of the
outstanding warrants and options (2,262,000) of Neonode.
|
|
e.
|
Neonode
will incur an estimated $1.2 million of costs associated with the
acquisition transaction and subsequent registration of SBE shares
of
common stock issued to Neonode shareholders, including financial
advisor,
legal and accounting fees.
|
The
determination of the purchase price allocation will be based on the fair value
of assets acquired and liabilities assumed at the date of the closing of the
merger. The purchase price allocation will remain preliminary until the
finalization of the valuation of significant intangible assets acquired, at
which time we will adjust the fair value of the intangible assets acquired.
The
final purchase price allocation is expected to be completed as soon as
practicable. Once the determination of the purchase price is complete, the
actual amounts allocated to assets acquired could differ significantly from
the
amounts presented in the unaudited pro forma condensed combined balance sheet.
Long-lived assets acquired will be subject to a recoverability test under the
applicable accounting rules.
Unaudited
Pro Forma Condensed Combined Statement of Operations
of
Neonode and SBE
for
the Year Ended December 31, 2006
(In
thousands, except per share amounts)
The
Unaudited Pro Forma Condensed Combined Statement of Operations of Neonode and
SBE set forth below is presented as if the merger transaction had occurred
on
the first day of Neonode’s fiscal year, January 1, 2006. The amounts
presented for Neonode are from the historical Neonode Consolidated Statement
of
Operations for the year ended December 31, 2006 and the amounts for SBE are
from the Condensed Statement of Operations of SBE for the year ended October
31,
2006, adjusted to reflect the sale of SBE ’ s hardware
business.
|
|
Neonode
|
|
SBE
|
|
Adjustments
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
1,644
|
|
$
|
53
|
|
$
|
|
|
|
|
|
$
|
1,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,297
|
|
|
9,891
|
|
|
|
|
|
|
|
|
11,188
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
|
|
|
2,592
|
|
|
3,336
|
|
|
|
|
|
|
|
|
5,928
|
|
Research
and development
|
|
|
2,226
|
|
|
2,348
|
|
|
|
|
|
|
|
|
4,574
|
|
Total
costs and expenses
|
|
|
6,115
|
|
|
15,575
|
|
|
|
|
|
|
|
|
21,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
(4,471
|
)
|
|
(15,522
|
)
|
|
|
|
|
|
|
|
(19,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(expense),
net
|
|
|
(647
|
)
|
|
42
|
|
|
388
|
|
|
(a)
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
—
|
|
|
7
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(5,118
|
)
|
|
(15,487
|
)
|
|
388
|
|
|
|
|
|
(20,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
charge inducement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related
to corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reorganization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Feb.
28, 2006
|
|
|
106
|
|
|
—
|
|
|
—
|
|
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations available to common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shareholders
|
|
$
|
(5,224
|
)
|
$
|
(15,487
|
)
|
$
|
388
|
|
|
|
|
$
|
(20,323
|
)
|
Net
loss from continuing operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.82
|
)
|
$
|
(7.51
|
)
|
|
|
|
|
|
|
$
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
2,865
|
|
|
2,061
|
|
|
18,622
|
|
|
(b)
|
|
|
23,548
|
|
Notes
to Unaudited Pro Forma Condensed Combined Statement of Operations
Reference
should be made to the accompanying Notes to Unaudited Pro Forma Condensed
Combined Balance Sheet of Neonode and SBE as of March 31, 2007 for a summary
description of the accounting for the merger transaction.
Additional
notes regarding pro forma adjustments:
|
(a)
|
|
Simultaneously
with the consummation of the merger transaction with SBE, holders
of $10.9
million of notes payable will convert these notes into Neonode equity;
2.2
million shares of Neonode common stock and warrants to purchase 1.1
million shares of Neonode common stock. Therefore, these are adjustments
to record a reduction in the interest expense related to these convertible
notes of Neonode and to record an increase in the number of shares
outstanding by 1.2 million to reflect the exercise of employee stock
options for the calculation of the basic and diluted shares.
|
|
|
|
|
|
(b)
|
|
The
weighted average number of common shares used in the calculation
of pro
forma loss per share includes the addition of approximately
20.4 million shares issued to Neonode stockholders pursuant to the
merger agreement. The number of shares of common stock are not adjusted
by
any reverse stock split contemplated by this proxy statement.
|
Unaudited
Pro Forma Condensed Combined Statement of Operations
of
Neonode and SBE
for
the Three Months Ended March 31, 2007
(In
thousands, except per share amounts)
The
Unaudited Pro Forma Condensed Combined Statement of Operations of Neonode and
SBE set forth below is presented as if the merger transaction had occurred
on
the first day of Neonode’s fiscal year, January 1, 2007. The amounts presented
for Neonode are from the historical Neonode consolidated statement of operations
for the three months ended March 31, 2007 and the amounts for SBE are from
the historical condensed statements of operations for the quarter ended April
30, 2007.
|
|
|
Neonode
|
|
|
SBE
|
|
|
Adjustments
|
|
|
|
|
|
Pro
Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
249
|
|
$
|
27
|
|
|
|
|
|
|
|
$
|
$276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2
|
|
|
188
|
|
|
|
|
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative
|
|
|
1,604
|
|
|
815
|
|
|
|
|
|
|
|
|
2,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,045
|
|
|
252
|
|
|
—
|
|
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
2,651
|
|
|
1,255
|
|
|
|
|
|
|
|
|
3,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
loss from continuing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
|
(2,402
|
)
|
|
(1,228
|
)
|
|
|
|
|
|
|
|
(3,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income (expense),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
|
|
|
(139
|
)
|
|
4
|
|
|
233
|
|
|
(a)
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(2,541
|
)
|
|
(1,224
|
)
|
|
233
|
|
|
|
|
|
(3,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.87
|
)
|
$
|
(0.55
|
)
|
|
|
|
|
|
|
$
|
(0.15
|
)
|
Weighted
average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
2,911
|
|
|
2,233
|
|
|
18,576
|
|
|
(b)
|
|
|
23,720
|
|
Notes
to Unaudited Pro Forma Condensed Combined Statement of Operations of Neonode
and
SBE
Reference
should be made to the accompanying Notes to Unaudited Pro Forma Condensed
Combined Balance Sheet as of March 31, 2007 for a summary description of the
accounting for the merger transaction.
Additional
notes regarding pro forma adjustments:
|
(a)
|
|
Simultaneously
with the consummation of the merger transaction with SBE, holders
of $10.9
million of notes payable will convert these notes into Neonode equity;
2.2
million shares of Neonode common stock and warrants to purchase 1.1
million shares of Neonode common stock. Therefore, these are adjustments
to record a reduction in the interest expense related to these convertible
notes of Neonode and to record an increase in the number of shares
outstanding by 1.2 million to reflect the exercise of employee stock
options for the calculation of the basic and diluted shares.
|
|
|
|
|
|
(b)
|
|
The
weighted average number of common shares used in the calculation
of pro
forma loss per share includes the addition of approximately
20.4 million shares issued to Neonode stockholders pursuant to the
merger agreement. . The number of shares of common stock are not
adjusted
by any reverse stock split contemplated by this proxy statement.
|