Notes
to the Condensed Consolidated Financial Statements
(Unaudited)
1.
Interim Period Reporting
The
accompanying unaudited interim condensed consolidated financial statements, 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 presented. The results of operations for the three and nine months ended September
30, 2016 are not necessarily indicative of results for a full fiscal year or any other period.
The
accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2016 and 2015 have
been prepared by us, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission
(“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance
with accounting principles generally accepted in the U.S. (“U.S. GAAP”) have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto
contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
Operations
Neonode Inc. (collectively with its subsidiaries,
is referred to in this Form 10-Q Report as “Neonode”, “we”, “us”, “our” or the
“Company”). We develop and license user interface and touch technology. We also develop, manufacture and sell, hardware
sensor solutions as modules incorporating our technology.
We offer a patented family of optical touch solutions under the zForce and Multi-Sensing brands. Our optical
touch technology is capable of projecting a full plane of light beams in free air or over any flat touch surface. Our technology
can also send light into a fluid or a glass to achieve a flush design without a bezel. An object touching the touch surface obstructs
a portion of the projected light beams. This small variance of signal is detected with sensitive light sensors connected to our
touch controllers that process the analog signals and produce touch object coordinates.
Reclassifications
Accrued
payroll and employee benefits as of December 31, 2015 is now reported under its own caption, separate from accrued expenses, in
the accompanying condensed consolidated balance sheet, in order to conform to the current period presentation.
Liquidity
We have incurred significant operating
losses and negative cash flows from operations since our inception. The Company incurred net losses attributable to Neonode Inc.
of approximately $2.2 million and $4.9 million and $1.4 million and $5.2 million for the three and nine months ended September
30, 2016 and 2015, respectively, and had an accumulated deficit of approximately $178.6 million and $173.7 million as of September
30, 2016 and December 31, 2015, respectively. Working capital (current assets less current liabilities) was $3.7 million as of
September 30, 2016 compared to $1.5 million as of December 31, 2015. In addition, the Company used cash in operating activities
of approximately $3.7 million for the nine months ended September 30, 2016, compared to approximately $4.9 million for the nine
months ended September 30, 2015.
In August 2016, Neonode entered into a purchase agreement (the “Securities Purchase Agreement”)
with institutional and accredited investors as part of a private placement pursuant to which Neonode agreed to issue a total of
8,627,352 shares of Neonode common stock, as described below, and warrants for an aggregate purchase price of $7.9 million in net
proceeds. The total number of shares includes (i) an aggregate of 427,352 shares at $1.17 per share to Thomas Eriksson, Chief Executive
Officer of Neonode, and Remo Behdasht, SVP AirBar Devices at Neonode (the “Employee Investor Shares”) for gross proceeds
of approximately $500,000, (ii) an aggregate of 4,600,000 shares at a price of $1.00 per share to outside investors (the “Outside
Investor Shares” and, together with the Employee Investor Shares, the “Initial Shares”) for gross proceeds of
$4,600,000, and (iii) up to 3,600,000 shares (the “Pre-Funded Warrant Shares”) issuable upon exercise of warrants (the
“Pre-Funded Warrants” and, together with the Initial Shares, the “Investor Shares”) for which Neonode received
$3,564,000 pre-funded in gross proceeds and up to $36,000 in proceeds upon future cash exercises. In addition, under the terms
of the Securities Purchase Agreement, Neonode issued warrants (the “Purchase Warrants”) to all investors in the private
placement to purchase up to a total of 4,313,676 shares of Neonode common stock (the “Purchase Warrant Shares”) at
an exercise price of $1.12 per share. See Note 4 for additional discussion regarding the Securities Purchase Agreement.
In
June 2014, we filed a shelf registration statement with the SEC that became effective on June 12, 2014. We may from time to time
issue shares of our common stock under our shelf registration in amounts, at prices, and on terms to be announced when and if
the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will
be described in a prospectus supplement and any other offering materials, at the time of the offering. Our shelf registration
statement will expire on June 12, 2017.
On
October 13, 2015, we issued 3,200,000 shares of our common stock from our shelf registration statement to investors in connection
with an equity financing transaction. We sold the stock at $1.90 per share and raised approximately $6.1 million gross and received
approximately $5.4 million in cash, net of direct offering costs including underwriting discounts and legal, audit and other regulatory
costs of approximately $0.7 million.
As
of September 30, 2016 there were 1,800,000 shares remaining for issuance under our existing shelf registration statement.
We believe that, based upon our current
operating plan, our existing cash and cash provided by operations to meet our anticipated cash needs for the next twelve months.
We expect our revenues from license fees, non-recurring engineering fees and AirBar sales will enable us to reduce our operating
losses in 2016. In addition, we have improved the overall cost efficiency of our operations, as a result of the transition from
providing our customers a full custom design solution to providing standardized sensor modules which require limited to no custom
design work. We intend to continue to implement various measures to improve our operational efficiencies. No assurances can be
given that management will be successful in meeting its revenue targets and reducing its operating loss.
In the future, we may require sources of capital
in addition to cash on hand to continue operations and to implement our strategy. No assurances can be given that we will be successful
in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available on acceptable terms,
or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results
of operations and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible
into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt
securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode
Inc. and its wholly owned subsidiaries, as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies
AB. The remaining 49% of Pronode Technologies AB is owned by Propoint AB, located in Gothenburg, Sweden. Pronode Technologies
AB was organized to enable and build a master platform for a successful mass production of sensor modules. All inter-company accounts
and transactions have been eliminated in consolidation.
Neonode
consolidates entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly
or indirectly, more than 50% of the voting rights, and variable interest entities (VIEs) in which Neonode is the primary beneficiary.
In June 2016, we entered into a Joint Venture
(“JV”) with a Swedish based eye-tracking company SMART EYE AB. By combining our technologies, we plan to bring multi-chip
modules to the market for the consumer and automotive markets that provide new opportunities for interaction with cars and devices.
The name of the newly established JV is Neoeye AB (“Neoeye”).
We use the equity method of accounting to record our investments in the common stock of each entity in which
Neonode has the ability to exercise significant influence, but does not own a majority equity interest. Under the equity method,
our investment is originally included in equity interests at cost, and is adjusted to recognize our share of net earnings or losses
of the investee, in our consolidated balance sheets; our share of net income (loss) is reported in our consolidated statements
of operations according to our equity ownership in each entity.
The
unaudited condensed consolidated balance sheet at September 30, 2016, the condensed consolidated statements of operations, comprehensive
loss for the three and nine months ended September 30, 2016 and the cash flows for the nine months ended September 30, 2016 include
our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode
Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and
Neonode Taiwan Ltd. (Taiwan), and the majority-owned subsidiary of Neonode Technologies AB, Pronode Technologies AB.
The
condensed consolidated balance sheet at December 31, 2015 include our accounts and those of our wholly owned subsidiaries, Neonode
Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface
Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), and the majority-owned subsidiary of
Neonode Technologies AB, Pronode Technologies AB.
The
unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September
30, 2015 and cash flows for the nine months ended September 30, 2015 include our accounts and those of our wholly owned subsidiaries,
Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno
User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan).
Estimates
The preparation of financial statements in conformity
with U.S. GAAP 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, collectability of accounts receivable,
the achievement of substantive milestones and vendor-specific objective evidence (“VSOE”) of fair value for purposes
of revenue recognition (or deferral of revenue), net realizable value of inventory, recoverability of capitalized project costs
and long-lived assets, the valuation allowance related to our deferred tax assets, and the fair value of options and warrants
issued for stock-based compensation.
Cash
We
have not had any liquid investments other than normal cash deposits with bank institutions to date. The Company considers all
highly liquid investments with original maturities of three months or less to be cash equivalents.
Concentration
of Cash Balance Risks
Cash
balances are maintained at various banks in the U.S., Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions
in the U.S. the U.S. Federal Deposit Insurance Corporation, provides basic deposit coverage with limits up to $250,000 per owner.
The Swedish government provides insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts.
The Japanese government provides insurance coverage up to 10,000,000 Yen per customer. The Korea Deposit Insurance Corporation
provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance Corporation in Taiwan provides insurance
coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount
of insurance provided.
Accounts
Receivable and Allowance for Doubtful Accounts
Our
accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from
the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial
history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer
when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based
on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer
to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the
case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events
impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should
all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers
based on certain other factors including the length of time the receivables are past due and historical collection experience
with customers. Our allowance for doubtful accounts was approximately $149,000 as of September 30, 2016 and $167,000 as of December
31, 2015.
Projects
in Process
Projects
in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily
comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our condensed
consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue
recognition policy. Costs capitalized in projects in process were $64,000 and $158,000 as of September 30, 2016 and December 31,
2015, respectively.
Inventory
Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”)
and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable
value are recognized in earnings in the current period. As of September 30, 2016, the Company’s inventory consists primarily
of components that will be used in the manufacturing of our first sensor module, AirBar. We segregate inventory for reporting purposes
by raw materials, work-in-process, and finished goods.
Raw
materials, work-in-process, and finished goods at September 30, 2016 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
919
|
|
|
$
|
-
|
|
Work-in-Process
|
|
|
-
|
|
|
|
-
|
|
Finished goods
|
|
|
-
|
|
|
|
-
|
|
Ending inventory
|
|
$
|
919
|
|
|
$
|
-
|
|
Investment
in JV
We
have invested $3,000, a 50% interest in Neoeye (see above). We account for our investment using the equity method of accounting
since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant
influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and
50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining
whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded
at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the condensed
consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company
is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through September 30, 2016.
Neoeye,
as an unconsolidated equity investee, will recognize revenue from technology license agreements at the time a contract is entered
into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement
are satisfied, and the realization of revenue is assured, which is generally upon the receipt of the license proceeds. Neoeye
may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones have
been met.
We
review our investment in Neoeye to determine whether events or changes in circumstances indicate that the carrying amount may
not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and
near term prospects of Neoeye. If a decline in value is deemed to be other than temporary, we would recognize an impairment
loss.
Property
and Equipment
Property
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 as follows:
Estimated
useful lives
|
Computer
equipment
|
3
years
|
|
Furniture
and fixtures
|
5 years
|
|
Equipment
|
7
years
|
Equipment
purchased under a capital lease is recognized over the term of the lease, if that lease term is shorter than the estimated useful
life.
Upon
retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts
and any gains or losses are reflected in the condensed consolidated statement of operations. Maintenance and repairs are charged
to expense as incurred.
Long-lived
Assets
We
assess any impairment by estimating the future cash flow from the associated asset in accordance with relevant accounting guidance.
If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally
estimated, we may incur charges for impairment of these assets. As of September 30, 2016, we believe there was no impairment of
our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our
products and services will continue, which could result in impairment of long-lived assets in the future.
Foreign
Currency Translation and Transaction Gains and Losses
The functional currency of our foreign
subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar.
The translation from Swedish Krona, Japanese Yen, South Korean Won and Taiwan Dollar to U.S. Dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted-average
exchange rate during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated
other comprehensive income (loss). Foreign currency translation losses were $(36,000) and $(102,000) during the three and nine
months ended September 30, 2016, respectively, compared to translation losses of $(20,000) and $(67,000) during the same periods
in 2015, respectively. Gains resulting from foreign currency transactions are included in general and administrative expenses in
the accompanying consolidated statements of operations and were $25,000 and $59,000 during the three and nine months ended September
30, 2016, respectively, compared to $11,000 and $42,000 during the same periods in 2015, respectively.
Concentration
of Credit and Business Risks
Our
customers are located in U.S., Europe and Asia.
As
of September 30, 2016, three customers represented approximately 92% of the Company’s accounts receivable.
As
of December 31, 2015, three customers represented approximately 78% of the Company’s accounts receivable.
Our
net revenues for the three and nine months ended September 30, 2016 were earned from fifteen and twenty-five customers. Customers
who accounted for 10% or more of our net revenues during the three months ended September 30, 2016 are as follows:
|
●
|
Hewlett
Packard Company – 50%
|
|
●
|
Bosch
– 11%
|
Customers
who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:
|
●
|
Hewlett
Packard Company – 42%
|
|
●
|
Amazon–
13%
|
|
●
|
Autoliv Development AB – 12%
|
Our
net revenues for the three and nine months ended September 30, 2015 were earned from twenty-three and thirty-five customers, respectively.
Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2015 are as follows:
|
●
|
Barnes
& Noble – 22%
|
|
●
|
Hewlett
Packard Company – 21%
|
|
●
|
Autoliv
Development AB – 18%
|
Customers who accounted for 10% or more
of our net revenues during the nine months ended September 30, 2015 are as follows:
|
●
|
Hewlett
Packard Company – 26%
|
|
●
|
Amazon
– 15%
|
|
●
|
Autoliv
Development AB – 18%
|
Revenue
Recognition
Licensing
Revenues:
We
derive revenue from the licensing of internally developed intellectual property (“IP”). We enter into IP licensing
agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions
that vary by licensee. Fees under these agreements may include license fees relating to our IP and royalties payable following
the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value
and can be used by the licensee without maintenance and support. We follow U.S. GAAP for revenue recognition as per unit royalty
products are distributed or licensed by our customers. For technology license arrangements that do not require significant modification
or customization of the underlying technology, we recognize technology license revenue when: (1) we enter into a legally binding
arrangement with a customer for the license of technology; (2) the customer distributes or licenses the products; (3) the customer
payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably
assured. Our customers report to us the quantities of products distributed or licensed by them after the end of the reporting
period stipulated in the contract, generally 30 to 45 days after the end of the month or quarter. We recognize licensing revenue
in the period in which royalty reports are received, rather than the period in which the products are distributed or to which
the license relates.
Explicit
return rights are not offered to customers. There have been no returns through September 30, 2016.
Engineering
Services:
We
may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these
services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting
of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all
of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5)
we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more
of these conditions has not been satisfied, we defer recognition of revenue.
Generally,
we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers. Engineering
services are performed under a signed Statement of Work (“SOW”) with a customer. The deliverables and payment terms
stipulated under the SOW provide guidance on the project revenue recognition.
Revenues
from contracts that are short-term in nature and related costs that are difficult to estimate are accounted for under the completed
contract method.
Revenues
from contracts with substantive defined milestones that we have determined are reasonable, relevant to all the deliverables and
payment terms in the SOW that are commensurate with the efforts required to achieve the milestones are recognized under the milestone
recognition method.
Estimated losses on all SOW projects
are recognized in full as soon as they become evident. In the quarters ended September 30, 2016 and 2015, $0 and $165,000 were
recorded as cost of sales due to expected losses related to two SOW projects, respectively.
Product Revenue:
Neonode will recognize revenue from the sale
of products when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically
consisting of a purchase order or contract; (2) our product was delivered and the risk of loss passed to the customer; (3) we
completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable;
and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one
or more of these conditions has not been satisfied, we defer recognition of revenue.
Until we are able to estimate returns, we will record deferred revenue upon invoicing and transfer of ownership
of goods to our customers. We will record estimated commitments related to price protections, marketing development allowances
and rebates as reductions to revenue. If those commitments cannot be reasonably and reliably estimated, we will defer revenue recognition
until reliable estimates can be made.
Revenues from the sales of new products including
AirBar will be stated separately from other types of revenue, and will be reported net of discounts, returns, and allowances.
Warranty Expense
We will record a warranty provision
related to product sales, including AirBar, when amounts can be estimated, which will include an appropriate provision for
return processing charges in compliance with the terms of our contracts with resellers.
Deferred
Revenues
From
time-to-time we receive pre-payments from our customers related to future services or future license fee revenues. We defer the
license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed
and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has
been completed and accepted by our customers.
Advertising
Advertising costs are expensed as incurred.
Advertising costs for the three and nine months ended September 30, 2016 amounted to approximately $76,000 and $193,000, respectively.
Advertising costs for the three and nine months ended September 30, 2015 amounted to approximately $46,000 and $74,000, respectively.
We will classify any reseller marketing allowances related to AirBar in general as sales expense unless we can define an identifiable
benefit to us from the reseller marketing allowance.
Research
and Development
Research
and development (“R&D”) costs are expensed as incurred. R&D costs consist mainly of personnel related costs
in addition to some external consultancy costs such as testing, certifying and measurements.
Stock-Based
Compensation Expense
We
measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based
on the estimated fair value of the award on the grant date, and recognize the value as compensation expense over the period the
employee is required to provide services in exchange for the award, usually the vesting period, net of estimated forfeitures.
We
account for equity instruments issued to non-employees at their estimated fair value. The measurement date for the estimated fair
value for the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by
the consultant or vendor is reached, or (2) the date at which the consultant or vendor’s performance is complete. In the
case of equity instruments issued to consultants, the fair value of the equity instruments is primarily recognized over the term
of the consulting agreement. The estimated fair value of the stock-based compensation is periodically re-measured and income or
expense is recognized during the vesting term.
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.
Noncontrolling
Interests
The
Company recognizes noncontrolling interests as equity in the condensed consolidated financial statements separate from the parent
company’s equity. Noncontrolling interests’ partners have less than 50% share of voting rights at any one of the subsidiary
level companies. The amount of net income (loss) attributable to non-controlling interests is included in consolidated net income
(loss) on the face of the condensed consolidated statements of operations. Changes in a parent entity’s ownership interest
in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling
financial interest. The Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated. Such gain
or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Additionally, operating
losses are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest
partner.
The
Company provides either in the condensed consolidated statement of stockholders’ (deficit) equity, if presented, or in the
notes to condensed consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying
amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the
noncontrolling interest that separately discloses:
|
(1)
|
Net
income or loss.
|
|
(2)
|
Transactions
with owners acting in their capacity as owners, showing separately contributions from and distributions to owners.
|
|
(3)
|
Each
component of other comprehensive income or loss.
|
Income
Taxes
We
recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the
consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions
in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement
and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected
to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable
income. Valuation allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based
on the “more likely than not” criteria of the accounting guidance.
Based
on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of September 30, 2016 and December
31, 2015. 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 paid or payable for the current period.
We
follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing,
de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits.
As of September 30, 2016 and December 31, 2015, we had no unrecognized tax benefits.
Net
Loss per Share
Net
loss per share amounts has been computed based on the weighted average number of shares of common stock outstanding during the
three and nine months ended September 30, 2016 and 2015. Net loss per share, assuming dilution amounts from common stock equivalents,
is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding
during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing
the net loss per share for the three and nine months ended September 30, 2016 and 2015 exclude the potential common stock equivalents,
as the effect would be anti-dilutive (See Note 8).
Other
Comprehensive Income (Loss)
Our
other comprehensive income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation
gains and losses are reflected as a separate component of stockholders’ (deficit) equity in the condensed consolidated balance
sheets as accumulated other comprehensive income (loss).
Cash
Flow Information
Cash
flows in foreign currencies have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective
reporting periods. The weighted-average exchange rate for the condensed consolidated statements of operations was as follows:
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Swedish Krona
|
|
|
8.39
|
|
|
|
8.40
|
|
Japanese Yen
|
|
|
108.60
|
|
|
|
120.90
|
|
South Korean Won
|
|
|
1,158.23
|
|
|
|
1,121.60
|
|
Taiwan Dollar
|
|
|
32.38
|
|
|
|
31.43
|
|
Exchange
rate for the condensed consolidated balance sheets was as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Swedish Krona
|
|
|
8.58
|
|
|
|
8.42
|
|
Japanese Yen
|
|
|
101.19
|
|
|
|
120.36
|
|
South Korean Won
|
|
|
1,100.23
|
|
|
|
1,174.67
|
|
Taiwan Dollar
|
|
|
31.32
|
|
|
|
32.84
|
|
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, accounts receivable, accounts payable and accrued expenses and are deemed to approximate fair value
due to their short maturities.
New
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606
)
” (“ASU 2014-09”). ASU 2014-09 amends
the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic
with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue
recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced
disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other
major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered
in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved
in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment
as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December
15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before
the original effective date or for reporting periods beginning after December 15, 2016. We have not yet selected a transition
method and are currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and
disclosures.
In August 2014, the FASB issued ASU No. 2014-15,
“
Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern”. The amendments in this update provide guidance in U.S. GAAP about management’s responsibilities
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. The main provision of the amendments are for an entity’s management, in connection with the preparation
of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial
doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements
are issued. Management’s evaluation should be based on relevant conditions and events that are known or reasonably knowable
at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial
doubt about an entity’s ability to continue as a going concern, the entity should disclose information that enables users
of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial
doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans); (2)
management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet
its obligations; and (3) management’s plans that alleviated substantial doubt about the entity’s ability to continue
as a going concern or management’s plans that are intended to mitigate the conditions or events that raise substantial doubt
about the entity’s ability to continue as a going concern. The amendments in this update are effective for interim and annual
reporting periods after December 15, 2016 and early application is permitted. We are currently assessing this guidance for future
implementation.
In July 2015, the FASB issued ASU No. 2015-11,
“Inventory (Topic 330)” (“ASU 2015-11”). The amendments in ASU 2015-11 require that an entity measure
inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments
in this update more closely align the measurement of inventory in accounting principles generally accepted in the United States
of America with the measurement of inventory in International Financial Reporting Standards. ASU 2015-11 is effective for annual
and interim periods beginning on or after December 15, 2016. The amendments in this update should be applied prospectively with
early application permitted as of the beginning of the interim or annual reporting period. The Company adopted the provisions
of ASU 2015-11 effective September 1, 2016.
In November 2015, FASB issued ASU 2015-17, “Income
Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”), which eliminates the current
requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified
balance sheet. Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances be classified
as non-current in a classified balance sheet. ASU 2015-17 will be effective for annual reporting periods beginning after December
15, 2016 and interim periods within those annual periods. Early adoption is permitted. Additionally, this guidance may be applied
either prospectively or retrospectively to all periods presented. The Company elected not to early adopt ASU 2015-17 and is evaluating
the effect of the adoption of this ASU to its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, lessees will be required to recognize the following
for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an
asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02
is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application
is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would
not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not
apply a full retrospective transition approach. The Company elected not to early adopt ASU 2016-02 and is evaluating the effect
of the adoption of this ASU to its consolidated financial statements.
In
March 2016, the FASB issued ASU No. 2016-07, “Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the
Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply
the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment.
ASU 2016-07 is effective for years beginning after December 15, 2016. The Company is currently evaluating the impact of this ASU
to its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
“Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU
2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income tax
consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU
2016-09 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual
periods. The Company is currently evaluating the impact of adopting the new stock compensation standard on its consolidated financial
statements.
3.
Deferred Revenues
We
defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed
and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has
been completed and accepted by our customers. As of September 30, 2016 and December 31, 2015, we have $2.1 million and $1.1 million,
respectively, of deferred license fee revenue related to prepayments for future license fees from four and two customers, respectively,
and a total of $0.1 million and $0.4 million, respectively, of deferred engineering development fees from four and one customers.
4.
Stockholders’ Equity
Securities Purchase Agreement
In August 2016, Neonode entered into the Securities Purchase Agreement with institutional and accredited investors
as part of a private placement pursuant to which Neonode agreed to issue a total of 8,627,352 shares of Neonode common stock, as
described below, and warrants for an aggregate purchase price of $7.9 million in net proceeds. The total number of shares includes
(i) an aggregate of 427,352 Employee Investor Shares at $1.17 per share for gross proceeds of approximately $500,000, (ii) an aggregate
of 4,600,000 Outside Investor Shares at a price of $1.00 per share for gross proceeds of $4,600,000, and (iii) up to 3,600,000
Pre-Funded Warrant Shares issuable upon exercise of the Pre-Funded Warrants for which Neonode received $3,564,000 pre-funded in
gross proceeds and up to $36,000 in proceeds upon future cash exercises. The Pre-Funded Warrants were issued to certain outside
investors whose purchase of shares of Neonode common stock would make them the beneficial owners of more than 9.99% of the outstanding
common stock of Neonode. Each of the Pre-Funded Warrants were pre-funded upon closing of the private placement at $0.99 per Pre-Funded
Warrant Share and have an exercise price of $0.01 per Pre-Funded Warrant Share. The Pre-Funded Warrants are immediately exercisable
upon issuance and will not expire prior to exercise.
In addition, under the terms of the Securities
Purchase Agreement, Neonode issued the Purchase Warrants to all investors in the private placement to purchase up to a total of
4,313,676 shares of Neonode common stock at an exercise price of $1.12 per share. The total number of Purchase Warrant Shares represents
a ratio of 50% warrant coverage to the Investor Shares such that investors will be entitled to receive one Purchase Warrant Share
upon cash exercise for every two Initial Shares or Pre-Funded Warrants purchased. The Purchase Warrants will expire five and one-half
years from issuance and are non-exercisable for the first six months. The terms of the Purchase Warrants require that exercise
may only be for cash and not on a cashless basis unless, after a period of six months from closing of the private placement, the
Purchase Warrant Shares are not subject to a registration statement or there has been a failure to maintain the effective registration
of the Purchase Warrant Shares by Neonode as described below.
The exercise price of the Pre-Funded Warrants
and the Purchase Warrants is subject to adjustment for stock splits, stock dividends, recapitalizations, and similar transactions
or a “Fundamental Transaction” as provided for in the terms of the Pre-Funded Warrants and the Purchase Warrants. The
holders may exercise the Pre-Funded Warrants or the Purchase Warrants in whole or in part.
In connection with the Securities Purchase Agreement,
Neonode entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which Neonode
will file a registration statement with the Securities and Exchange Commission relating to the offer and sale by the holders of
the Initial Shares, the Pre-Funded Warrant Shares, and the Purchase Warrant Shares. Pursuant to the Registration Rights Agreement,
Neonode is obligated to file the registration statement within 30 days and to use best efforts to cause the registration statement
to be declared effective within 90 days. Failure to meet those and related obligations, or failure to maintain the effective
registration of the Initial Shares, the Pre-Funded Warrant Shares, and Purchase Warrant Shares will subject Neonode to payment
for liquidated damages. The registration statement was filed and declared effective in September 2016.
Pursuant to the terms of the Securities
Purchase Agreement, Neonode has agreed that during the 90-day period following the required effectiveness of the registration statement
described above, Neonode will not announce, issue, or enter into any agreement to issue any shares of Neonode common stock or equivalents,
subject to certain exceptions including securities issuable pursuant to the Securities Purchase Agreement or pursuant to exercises,
exchanges, or conversions of Neonode’s outstanding securities, issuances pursuant to any employee benefit plan of Neonode,
and issuances pursuant to acquisitions or strategic transactions. In addition, Neonode has agreed not to enter into any “Variable
Rate Transaction” as defined in the Securities Purchase Agreement for a period of up to two years.
Other Common Stock Activity
During
the nine months ended September 30, 2016, a warrant holder exercised warrants to purchase 80,000 shares of common stock using
the cashless net exercise provision allowed in the warrant and received 11,565 shares of our common stock.
Preferred
Stock
We
have one class of preferred stock outstanding. The terms of the Series B Preferred stock are as follows:
Dividends
and Distributions
The
holders of shares of Series B Preferred stock are entitled to participate with the holders of our common stock with respect to
any dividends declared on the common stock in proportion to the number of shares of common stock issuable upon conversion of the
shares of Series B Preferred stock held by them.
Liquidation
Preference
In
the event of any liquidation, dissolution, or winding up of our operations, either voluntary or involuntary, subject to the rights
of the Series B Preferred stock and Senior Preferred stock, shall be entitled to receive, after any distribution to the holders
of senior preferred stock and prior to and in preference to any distribution to the holders of common stock, $0.001 for each share
of Series B Preferred stock then outstanding.
Voting
The
holders of shares of Series B Preferred stock have one vote for each share of Series B Preferred stock held by them.
Conversion
Initially,
each share of Series B Preferred stock was convertible into one share of our common stock. On March 31, 2009, our stockholders
approved a resolution to increase the authorized share capital, and to increase the conversion ratio to 132.07 shares of our common
stock for each share of Series B Preferred stock.
Conversion
of Preferred Stock Issued to Common Stock
The
following table summarizes the amounts as of September 30, 2016.
|
|
Shares of
Preferred
Stock Not
Exchanged
as of
September 30,
2016
|
|
|
Conversion Ratio
|
|
|
Shares of
Common
Stock after
Conversion
of all
Outstanding
Shares of
Preferred
Stock Not
yet
Exchanged at
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock
|
|
|
83
|
|
|
|
132.07
|
|
|
|
10,962
|
|
Warrants
A
summary of all warrant activity is set forth below:
|
|
September 30, 2016
|
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average
Remaining Contractual Life
|
|
Outstanding and exercisable, January 1, 2016
|
|
|
464,073
|
|
|
$
|
3.02
|
|
|
|
0.19
|
|
Granted (Prefunded)
|
|
|
3,600,000
|
|
|
|
0.01
|
|
|
|
-
|
|
Granted (Purchase)
|
|
|
4,313,676
|
|
|
|
1.12
|
|
|
|
-
|
|
Expired/cancelled
|
|
|
(384,073
|
)
|
|
|
3.13
|
|
|
|
-
|
|
Exercised
|
|
|
(80,000
|
)
|
|
|
2.00
|
|
|
|
-
|
|
Outstanding and exercisable, September 30, 2016
|
|
|
7,913,676
|
|
|
$
|
0.62
|
|
|
|
5.39
|
|
Outstanding Warrants to Purchase
Common Stock as of September 30, 2016:
Description
|
|
Issue Date
|
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2016 Investor Prefunded Warrants
|
|
|
8/16/2016
|
|
|
$
|
0.01
|
|
|
|
3,600,000
|
|
|
|
2/16/2022
|
|
August 2016 Investor Warrants
|
|
|
8/17/2016
|
|
|
$
|
1.12
|
|
|
|
4,100,000
|
|
|
|
2/17/2022
|
|
Employee Warrants
|
|
|
8/17/2016
|
|
|
$
|
1.12
|
|
|
|
213,676
|
|
|
|
2/17/2022
|
|
Total Warrants Outstanding
|
|
|
|
|
|
|
|
|
|
|
7,913,676
|
|
|
|
|
|
Certain outside investors whose purchase of shares would
make them the beneficial owners of more than 9.99% of Neonode’s outstanding common stock received pre-funded warrants in
lieu of common stock. These pre-funded warrants for outside investors were sold at $0.99 per share for a total cash payment of
$3.6 million and contain a Pre-Funded warrant exercise price of $0.01 per share to represent a total payment of $1.00 per share.
The warrants issued in the August 2016 financing transaction are not exercisable for six months from the issuance date, until February
2017. The Pre-Funded Warrants are immediately exercisable upon issuance and will not expire prior to exercise.
5.
Stock-Based Compensation
The
stock-based compensation expense for the three and nine months ended September 30, 2016 and 2015 reflects the estimated fair value
of the vested portion of options granted to employees, directors and eligible consultants. Stock-based compensation expense in
the accompanying condensed consolidated statements of operations is as follows (in thousands):
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Product research and development
|
|
$
|
8
|
|
|
$
|
100
|
|
|
$
|
48
|
|
|
$
|
422
|
|
Sales and marketing
|
|
|
19
|
|
|
|
68
|
|
|
|
132
|
|
|
|
240
|
|
General and administrative
|
|
|
27
|
|
|
|
8
|
|
|
|
44
|
|
|
|
286
|
|
Total stock-based compensation expense
|
|
$
|
54
|
|
|
$
|
176
|
|
|
$
|
224
|
|
|
$
|
948
|
|
|
|
Remaining
unrecognized
expense at
September 30,
2016
|
|
Stock-based compensation
|
|
$
|
115
|
|
The
remaining unrecognized expense related to stock options will be recognized on a straight line basis monthly as compensation expense
over the remaining vesting period, which approximates 1.3 years.
The
estimated fair value of stock-based awards is calculated using the Black-Scholes option pricing model, even though this model
was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ
significantly from our stock options. The Black-Scholes model also requires subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of
options granted is derived from historical data on employee exercises and post-vesting employment termination behavior, as well
as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding
period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change
in the future, which would affect fair values of stock options granted in such future periods, and could cause volatility in the
total amount of the stock-based compensation expense reported in future periods.
Stock
Options
We
have adopted equity incentive plans for which stock options and restricted stock awards are available to grant to employees, consultants
and directors. Except for 265,000 options issued to certain Swedish employees during 2015, all employee, consultant 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.
As
of September 30, 2016 we had two equity incentive plans:
|
●
|
The
2006 Equity Incentive Plan; and
|
|
●
|
The
2015 Stock Incentive Plan
|
We
also had expired one non-employee director stock option plan.
|
●
|
The
2001 Non-Employee Director Stock Option Plan (the “Director Plan”), which expired in March 2011.
|
A
summary of the combined activity under all of the stock option plans is set forth below:
|
|
Number of Options Outstanding
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2016
|
|
|
2,184,117
|
|
|
$
|
4.48
|
|
Granted
|
|
|
25,000
|
|
|
|
1.44
|
|
Forfeited
|
|
|
(324,367
|
)
|
|
|
4.57
|
|
Outstanding at September 30, 2016
|
|
|
1,884,750
|
|
|
$
|
4.43
|
|
The
aggregate intrinsic value of the 1,884,750 stock options that are outstanding, vested and expected to vest as of September 30,
2016 was approximately $0.
For
the three and nine months ended September 30, 2016 and 2015, we recorded $54,000 and $0.2 million and $0.2 million and $0.9, respectively,
of compensation expense related to the vesting of stock options. The fair value of the stock-based compensation was calculated
using the Black-Scholes option pricing model as of the date of grant of the stock option.
During the nine months ended September 30, 2016, we granted 25,000 options to purchase shares of our common
stock to employees with a grant fair value of $17,000 computed using the Black-Sholes option pricing model. The weighted-average
grant date fair value of the options during the nine months ended September 30, 2016 was $0.67 per share. We did not grant any
options to purchase shares to any of the members of our board of directors.
See below for assumptions used in the valuation of stock options:
|
|
For the nine months ended
|
|
|
|
September 30, 2016
|
|
|
|
|
|
Annual dividend yield
|
|
|
-
|
|
Expected life (years)
|
|
|
3.50
|
|
Risk-free interest rate
|
|
|
0.83
|
%
|
Expected volatility
|
|
|
65
|
%
|
Stock
options granted under the 2006 and 2015 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.
6. Commitments
and Contingencies
Indemnities
and Guarantees
Our
bylaws require that we 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 we have no liabilities recorded for these agreements as of September 30, 2016 and December 31, 2015.
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 indemnification provisions as of September 30, 2016 and December 31, 2015.
Non-recurring
Engineering Development Costs
On
February 4, 2011, we entered into an Analog Device Development Agreement with an effective date of January 24, 2010 (the “NN1001
Agreement”) with Texas Instruments pursuant to which Texas Instruments integrated Neonode’s intellectual property
into an Application Specific Integrated Circuit (“ASIC”). The NN1001 ASIC only can be sold by Texas Instruments exclusively
to licensees of Neonode. Under the terms of the NN1001 Agreement, we have reimbursed Texas Instruments $500,000 of non-recurring
engineering development costs based on shipments of the NN1001. Under the terms of the NN1001 Agreement, we have reimbursed Texas
Instruments a non-recurring engineering fee of $0.08 per unit for each of the first one million units sold and $0.05 for the next
eight million units sold. During the three and nine months ended September 30, 2015, $0 and $20,000 of non-recurring engineering
expense related to the NN1001 Agreement is included in research and development in the condensed consolidated statements of operations.
All payments under the NN1001 Agreement have been made as of 2015.
On
April 25, 2013, we entered into an additional Analog Device Development Agreement with an effective date of December 6, 2012 (the
“NN1002 Agreement”) with Texas Instruments pursuant to which Texas Instruments will integrate Neonode’s intellectual
property into an ASIC. The NN1002 ASIC only can be sold by Texas Instruments exclusively to licensees of Neonode. Under the terms
of the NN1002 Agreement, we will reimburse Texas Instruments up to $500,000 of non-recurring engineering costs based on shipments
of the NN1002. Under the terms of the NN1002 Agreement we will reimburse Texas Instruments a non-recurring engineering fee of
$0.25 per unit for each of the first two million units sold. The NN1002 began sampling to customers in May 2014. As of September
30, 2016, we had made no payments under the NN1002 Agreement.
On
December 4, 2014, we entered into an additional Analog Device Development Agreement (the “NN1003 Agreement”) with
STMicroelectronics International N.V pursuant to which STMicroelectronics will integrate Neonode’s intellectual property
into an ASIC. The NN1003 ASIC only can be sold by STMicroelectronics exclusively to licensees of Neonode. Under the terms of the
NN1003 Agreement, we will reimburse STMicroelectronics up to $885,000 of non-recurring engineering costs as follows:
|
●
|
$235,000 at the feasibility review and contract signature (paid on January 20, 2015)
|
|
●
|
$300,000 on completion of tape-out (paid on October 31, 2015)
|
|
●
|
$300,000 on completion on product validation ($100,000 paid and $200,000 accrued as of September 30, 2016)
|
Under
the terms of the NN1003 Agreement, we also will reimburse STMicroelectronics a non-recurring engineering fee of $5.00 per each
of the first 10,000 units sold. As of September 30, 2016, we had paid $635,000 under the NN1003 Agreement.
7.
Segment Information
We
have one reportable segment, which is comprised of the touch technology licensing business. All of our sales for the three and
nine months ended September 30, 2016 and 2015 were to customers located in the U.S., Europe and Asia. Of our total assets, 55%
and 73% were held in the U.S. as of September 30, 2016 and December 31, 2015, respectively, and 44% and 22% were held in Sweden,
respectively.
The
following table presents net revenues by geographic region for the three and nine months ended September 30, 2016 and 2015 (in
thousands):
|
|
Three months ended
September 30, 2016
|
|
|
Three months ended
September 30, 2015
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Net revenues from customers in the Americas
|
|
$
|
1,110
|
|
|
|
68
|
%
|
|
$
|
1,856
|
|
|
|
60
|
%
|
Net revenues from customers in Asia
|
|
|
339
|
|
|
|
21
|
%
|
|
|
475
|
|
|
|
15
|
%
|
Net revenues from customers in Europe
|
|
|
190
|
|
|
|
11
|
%
|
|
|
782
|
|
|
|
25
|
%
|
|
|
$
|
1,639
|
|
|
|
100
|
%
|
|
$
|
3,113
|
|
|
|
100
|
%
|
|
|
Nine months ended
September 30, 2016
|
|
|
Nine months ended
September 30, 2015
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Net revenues from customers in the Americas
|
|
$
|
4,459
|
|
|
|
61
|
%
|
|
$
|
5,105
|
|
|
|
63
|
%
|
Net revenues from customers in Asia
|
|
|
1,388
|
|
|
|
19
|
%
|
|
|
1,155
|
|
|
|
14
|
%
|
Net revenues from customers in Europe
|
|
|
1,498
|
|
|
|
20
|
%
|
|
|
1,892
|
|
|
|
23
|
%
|
|
|
$
|
7,345
|
|
|
|
100
|
%
|
|
$
|
8,152
|
|
|
|
100
|
%
|
8.
Net Loss per Share
Basic
net loss per common share for the three and nine months ended September 30, 2016 and 2015 was computed by dividing the net loss
attributable to Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted
loss per common share is computed by dividing net loss attributable to Neonode Inc. by the weighted average number of shares of
common stock and common stock equivalents outstanding.
Potential common stock equivalents of approximately
5,000 and 24,000 outstanding stock options and 5.2 million and 0.1 million outstanding stock warrants under the treasury stock
method, and 11,000 and 11,000 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share
calculation for the nine months ended September 30, 2016 and 2015, respectively, due to their anti-dilutive effect.
(in thousands, except per share amounts)
|
|
Three months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
BASIC AND DILUTED
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
46,252
|
|
|
|
40,525
|
|
Net loss attributable to Neonode Inc.
|
|
$
|
(2,162
|
)
|
|
$
|
(1,368
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.03
|
)
|
(in thousands, except per share amounts)
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
BASIC AND DILUTED
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
44,627
|
|
|
|
40,493
|
|
Net loss attributable to Neonode Inc.
|
|
$
|
(4,860
|
)
|
|
$
|
(5,232
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.13
|
)
|
9.
Subsequent Events
We
have evaluated subsequent events through the filing date of this Form 10-Q, and determined that no subsequent events have occurred
that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than
as discussed in the accompanying notes.