Notes
to the Consolidated Financial Statements
1.
|
Nature
of the Business and Operations
|
Background
and Organization
Neonode Inc. (“we”, “us”, “our”,
or the “Company”) was incorporated in the State of Delaware in 1997 as the parent of Neonode AB, a company founded
in February 2004 and incorporated in Sweden. On December 29, 2008, we entered into a share exchange agreement with AB Cypressen
nr 9683 (renamed Neonode Technologies AB), a Swedish engineering company, and Neonode Technologies AB became our wholly owned
subsidiary. In 2013, we established additional wholly owned subsidiaries: Neonode Japan Inc. (Japan); Neno User Interface Solutions
AB (Sweden); NEON Technology Inc. (U.S.); and Neonode Americas Inc. (U.S.). In 2014, we established one additional wholly owned
subsidiary: Neonode Korea Ltd. (South Korea). In 2015, we established one additional wholly owned subsidiary: Neonode Taiwan Ltd.
(Taiwan). In 2015, we established Pronode Technologies AB, a majority-owned subsidiary of Neonode Technologies AB. In 2016, we
entered into a joint venture, named Neoeye AB, between SMART EYE AB and our subsidiary Neonode Technologies AB.
Operations
Neonode Inc., collectively
with its subsidiaries is referred to as “Neonode”, develops and licenses user interfaces and optical touch technology
to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed the Neonode technology into devices that
they produce and sell. In 2016, Neonode started to manufacture and sell standardized embedded sensors that incorporate Neonode
technology.
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 consolidated balance sheet, in order to conform to the current period presentation.
Liquidity
We
incurred net losses of approximately $5.3 million, $7.8 million and $14.2 million for the years ended December 31, 2016, 2015
and 2014, respectively, and had an accumulated deficit of approximately $179.0 million as of December 31, 2016. In addition, we
used cash in operating activities of approximately $6.3 million, $8.1 million and $11.8 million for the years ended December 31,
2016, 2015 and 2014, respectively.
In June 2014, we filed a shelf registration
statement with the SEC that became effective on June 12, 2014. As of December 31, 2016, there were 1,800,000 shares remaining
for issuance under this existing shelf registration statement. This shelf registration statement will expire on June 12, 2017.
We may from time to time issue shares of our
common stock under an effective shelf registration statement 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.
We intend to file a new shelf registration statement
with the SEC concurrent with the filing of this Annual Report. Upon its effectiveness, this new shelf registration statement will
allow us to offer and sell common stock in one or more offerings with an aggregate offering price of up to $20 million.
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.
In August 2016, we entered into a Securities Purchase
Agreement with institutional and accredited investors as part of a private placement pursuant to which we issued a total of 8,627,352
shares of common stock, as described below, and warrants for an aggregate purchase price of $7.9 million in net proceeds. The
total number of shares included (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 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 for gross proceeds of $4,600,000, and (iii) up to 3,600,000
shares issuable upon exercise of warrants (the “Pre-Funded Warrants”) by outside investors for which we received $3,564,000
pre-funded in proceeds and will receive up to $36,000 in proceeds upon future cash exercises.
Under the terms of the August 2016 Securities Purchase
Agreement, we issued warrants (the “Purchase Warrants”) to all investors in the private placement to purchase up to
a total of 4,313,676 shares of common stock at an exercise price of $1.12 per share. The Purchase Warrants became exercisable
February 17, 2017 and will expire February 17, 2022. None of the Purchase Warrants have been exercised as of March 10, 2017. If
the warrants are fully exercised, we will receive approximately $4.8 million in proceeds.
The consolidated financial statements included herein
have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the
repayment of liabilities in the ordinary course of business. Management evaluated the significance of the Company’s operating
loss and determined that the Company’s current operating plan and sources of capital would be sufficient to alleviate concerns
about the Company’s ability to continue as a going concern.
We expect our revenues from license fees, non-recurring
engineering fees and AirBar sales will enable us to reduce our operating losses in 2017. We have received purchase orders from
our distributors for AirBar and entered into an agreement with an OEM customer for our sensor modules. 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.
As described above, upon the exercise of the Purchase
Warrants issued in August 2016, we will receive up to approximately $4.8 million in proceeds. These Purchase Warrants are presently
exercisable and are “in-the-money.” As also described above, concurrent with the filing of this Annual Report, we intend
to file a new shelf registration statement with the SEC concurrent with the filing of this Annual Report. Upon its effectiveness,
this new shelf registration statement will allow us to offer and sell common stock in one or more offerings with an aggregate offering
price of up to $20 million. In the future, we may require sources of capital in addition to cash on hand to continue operations
and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments
or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable
terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business
plans and it could have a negative effect on our business, results of operations and financial condition. In addition, if funds
are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our
common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could
impair our ability to engage in certain business transactions.
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 (“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 sell engineering services
within the automotive markets. 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 to develop multi-chip modules for the consumer and automotive markets.
The name of this 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
consolidated statements of operations, comprehensive loss and cash flows for the year ended December 31, 2014 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) and Neonode Korea Ltd. (South Korea).
The
consolidated balance sheets at December 31, 2016 and 2015 and the consolidated statements of operations, comprehensive loss and
cash flows for the years then ended 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), as well as Pronode Technologies AB (Sweden), a 51% majority
owned subsidiary of Neonode Technologies AB.
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, provisions
for uncollectible receivables and sales returns, warranty liabilities, 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 of less to be cash equivalents.
Concentration
of Cash Balance Risks
Cash balances are maintained at various banks
in the United States, Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions in the United States 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 and $167,000 as of December 31, 2016 and 2015,
respectively.
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 balance sheet as an asset and deferred until revenue
for each project is recognized in accordance with our revenue recognition policy. There were no costs capitalized in projects in
process as of December 31, 2016. Costs capitalized in projects in process were $158,000 as of December 31, 2015.
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 December 31, 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 December 31 are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
Raw materials
|
|
$
|
522
|
|
Work-in-Process
|
|
|
42
|
|
Finished goods
|
|
|
132
|
|
Ending inventory
|
|
$
|
696
|
|
Investment
in JV
We have invested $3,000, a 50% interest
in Neoeye AB (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 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 December 31, 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 depreciated 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 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 December 31, 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 or the 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). Gains or (losses) resulting from foreign currency transactions are included in general and administrative
expenses in the accompanying consolidated statements of operations and were $74,000, $62,000 and ($37,000) during the years ended
December 31, 2016, 2015 and 2014, respectively. Foreign currency translation gains or (losses) were ($217,000), ($103,000) and
$138,000 during the years ended December 31, 2016, 2015 and 2014, respectively.
Concentration
of Credit and Business Risks
Our customers are located in United States, Europe
and Asia.
As
of December 31, 2016, three customers represented approximately 59% of our consolidated accounts receivable.
As
of December 31, 2015, three customers represented approximately 78% of our consolidated accounts receivable.
Customers
who accounted for 10% or more of our net revenues during the year ended December 31, 2016 are as follows.
|
●
|
Hewlett-Packard
Company – 38%
|
|
●
|
Amazon
– 11%
|
|
●
|
Autoliv
– 11%
|
Customers
who accounted for 10% or more of our net revenues during the year ended December 31, 2015 are as follows.
|
●
|
Hewlett-Packard
Company – 25%
|
|
●
|
Autoliv
– 21%
|
|
●
|
Amazon
– 14%
|
Customers
who accounted for 10% or more of our net revenues during the year ended December 31, 2014 are as follows.
|
●
|
Hewlett-Packard
Company – 24%
|
|
●
|
KOBO
Inc. – 10%
|
|
●
|
Leap
Frog Enterprises Inc. – 11%
|
|
●
|
Sony
Corporation – 10%
|
The Company conducts business in the United States,
Europe and Asia. At December 31, 2016, the Company maintained approximately $2,189,000, $1,872,000 and $74,000 of its net assets
(liabilities) in the United States, Europe and Asia, respectively. At December 31, 2015, the Company maintained approximately $2,533,000,
($909,000) and $209,000 of its net assets (liabilities) in the United States, Europe and Asia, respectively.
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 December 31, 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 year ended December 31, 2015, $165,000
was recorded as cost of sales due to expected losses related to two SOW projects. In the years ended December 31, 2016 and 2014,
no losses related to SOW projects were recorded.
Optical Sensor Modules Revenues:
We derive revenue
from the sales of sensor modules hardware products sold directly to our OEM and Tier 1 supplier customers who embed our hardware
into their products and from sales of branded consumer products that incorporate our sensor modules sold to distributors or directly
to end users. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits
for changes in selling prices, and participate in various cooperative marketing programs. We enter into sales agreements that generally
provide customers with limited rights of return and warranty provisions. U.S. GAAP allows companies to make reasonable aggregations
and approximations of returns data with regard to returns. Our returns and warranty experience to date has enabled us to make reasonable
returns estimates, which are further supported by the fact that our product sales involve homogenous transactions.
Revenue
is recognized when all of the following criteria have been met:
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Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.
|
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●
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Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.
|
|
●
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The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
|
|
●
|
Collectibility is reasonably assured. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.
|
In
instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria
have been met. As our business and offerings are expected to evolve over time, our pricing practices may be required to be modified
accordingly, which could result in changes in selling prices.
We make sales to distributors and revenue
from distributors is recognized based on a sell-through basis using sales and inventory information provided by these distributors.
Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as
title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal
terms. The associated sales and cost of sales are deferred and are included in deferred revenues in the consolidated balance sheet.
When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known,
we recognize previously deferred revenues as sales and cost of sales. Distributors participate in various cooperative marketing
and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received
by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience,
our revenue could be adversely affected.
A reserve for future
sales returns is established based on historical trends in product return rates. The reserve for future sales returns as of December
31, 2016 was $0.1 million and was recorded as a reduction of our accounts receivable and revenue. If the actual future returns
were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.
Product
Warranty
The
following table summarizes the activity related to the product warranty liability (in thousands):
|
|
Year ended
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Balance at beginning of period
|
|
$
|
-
|
|
|
$
|
-
|
|
Provisions for warranty issued
|
|
|
11
|
|
|
|
-
|
|
Balance at end of period
|
|
$
|
11
|
|
|
$
|
-
|
|
The Company accrues
for warranty costs as part of its cost of sales of sensor modules based on estimated costs. The Company’s products are generally
covered by a warranty for a period of 12 to 36 months from the customer receipt of the product.
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 December 31, 2016 and 2015, we have $1.8 million and $1.1 million, respectively, of deferred license fee revenue
related to prepayments for future license fees from four and two customers, respectively. We defer AirBar revenues until distributors
sell the AirBar to their end customers. As of December 31, 2016, we had $0.1 million of deferred revenue from our AirBar sales.
As of December 31, 2015, there was no deferred revenue from AirBar sales. As of December 31, 2016 there were no deferred engineering
development fees and a total of $0.4 million of deferred engineering development fee from one customer as of December 31, 2015.
Advertising
Advertising
costs are expensed as incurred. 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. Advertising costs amounted to approximately
$299,000, $328,000 and $172,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
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 share 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 estimated 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 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 noncontrolling interests is included in consolidated net income (loss)
on the face of the 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 consolidated
statements of stockholders’ equity, if presented, or in the notes to 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 December 31, 2016 and 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 payable for the current period.
We
follow U.S. GAAP related to uncertain tax positions, which provisions include a two-step approach to recognizing, de-recognizing
and measuring uncertain tax positions. As a result, we did not recognize a liability for unrecognized tax benefits. As of December 31,
2016 and 2015, we had no unrecognized tax benefits.
Net
Loss per Share
Net
loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding during the
years ended December 31, 2016, 2015 and 2014. 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 years ended December 31, 2016, 2015 and 2014 exclude the potential common stock equivalents, as the effect
would be anti-dilutive (see Note 14).
Other
Comprehensive Income (Loss)
Our comprehensive loss includes foreign
currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component
of stockholders’ equity in the 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 consolidated statements of operations was as follows:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Swedish Krona
|
|
|
8.55
|
|
|
|
8.43
|
|
|
|
6.86
|
|
Japanese Yen
|
|
|
108.75
|
|
|
|
121.03
|
|
|
|
105.84
|
|
South Korean Won
|
|
|
1,157.14
|
|
|
|
1,130.22
|
|
|
|
1,050.63
|
|
Taiwan Dollar
|
|
|
32.22
|
|
|
|
31.73
|
|
|
|
-
|
|
Exchange
rate for the consolidated balance sheets was as follows:
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Swedish Krona
|
|
|
9.07
|
|
|
|
8.42
|
|
Japanese Yen
|
|
|
116.97
|
|
|
|
120.36
|
|
South Korean Won
|
|
|
1,205.11
|
|
|
|
1,174.67
|
|
Taiwan Dollar
|
|
|
32.28
|
|
|
|
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 (Subtopic 205-40): 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 ending after December 15, 2016 and early application
is permitted. We adopted this pronouncement effective December 31, 2016 and have included disclosure in Note 1 to our consolidated
financial statements based upon ASU No. 2014-15.
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 and the adoption did not have a material impact on our consolidated financial statements.
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 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. We have not yet selected a transition method and are currently assessing the impact of adoption of ASU No.
2016-02 will have on our 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 this ASU to its consolidated financial
statements.
In June 2016, the FASB issued ASU
No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments”,
(“ASU 2016-13”). The new standard requires entities to measure all expected credit losses for financial assets held
at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13
will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company
is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.
3.
|
Prepaid
Expenses and Other Current Assets
|
Prepaid
expense and other current assets consist of the following (in thousands):
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
125
|
|
|
$
|
119
|
|
Prepaid rent
|
|
|
46
|
|
|
|
52
|
|
VAT receivable
|
|
|
247
|
|
|
|
337
|
|
Prepaid inventory
|
|
|
715
|
|
|
|
-
|
|
Advances to suppliers
|
|
|
596
|
|
|
|
-
|
|
Other
|
|
|
220
|
|
|
|
239
|
|
Total prepaid expenses and other current assets
|
|
$
|
1,949
|
|
|
$
|
747
|
|
4.
|
Property
and Equipment
|
Property
and equipment consist of the following (in thousands):
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Computers, software, furniture and fixtures
|
|
$
|
930
|
|
|
$
|
637
|
|
Equipment under capital lease
|
|
|
1,661
|
|
|
|
428
|
|
Less accumulated depreciation and amortization
|
|
|
(560
|
)
|
|
|
(471
|
)
|
Property and equipment, net
|
|
$
|
2,031
|
|
|
$
|
594
|
|
Depreciation and amortization expense was $360,000, $187,000
and $202,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
Accrued
expenses consist of the following (in thousands):
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Accrued returns and warranty
|
|
$
|
11
|
|
|
$
|
-
|
|
Accrued consulting fees and other
|
|
|
161
|
|
|
|
382
|
|
Total accrued expenses
|
|
$
|
172
|
|
|
$
|
382
|
|
6.
|
Fair
Value Measurements
|
Accounting
guidance defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair
value measurements. The accounting guidance does not mandate any new fair value measurements and is applicable to assets and liabilities
that are required to be recorded at fair value under other accounting pronouncements.
There
were no assets or liabilities recorded at fair value on a recurring basis in 2016 and 2015.
The
three levels of the fair value hierarchy are described as follows:
Level
1: Applies to assets or liabilities for which there are quoted prices (unadjusted) in active markets for identical assets and
liabilities. We had no Level 1 assets or liabilities.
Level
2: Applies to assets or liabilities for which there are inputs other than quoted prices that are included in Level 1 observable,
either directly or indirectly. We had no Level 2 assets or liabilities.
Level
3: Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant
to the measurement of the fair value of the assets or liabilities. We had no Level 3 assets or liabilities.
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. As of December 31, 2016 and 2015, we have $1.8 million and $1.1 million, respectively, of deferred license fee revenue
related to prepayments for future license fees from four and two customers, respectively. We defer AirBar revenues until distributors
sell the AirBar to their end customers. As of December 31, 2016, we had $0.1 million of deferred revenue from our AirBar sales.
As of December 31, 2015, there was no deferred revenue from AirBar sales. As of December 31, 2016 there were no deferred engineering
development fees and a total of $0.4 million of deferred engineering development fee from one customer as of December 31, 2015.
Common
Stock
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. 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.
Warrants and Other Common Stock Activity
In addition to the Pre-Funded Warrants described
above, 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 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.
During the year ended December 31, 2016, a warrant holder
exercised warrants to purchase 80,000 shares of common stock using the cashless exercise provisions allowed in the warrant and
received 11,565 shares of our common stock.
During
the year ended December 31, 2015, we issued 3,200,000 shares of our common stock to investors in connection with an equity financing
transaction. These shares of common stock were a portion of the 5,000,000 shares previously registered in 2014 under a shelf registration
statement. We issued 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. Per Bystedt (Chairman of our Board of Directors), Thomas Eriksson (our Chief Executive Officer and
a member of our Board of Directors), and Mats Dahlin (a member of our Board of Directors) purchased an aggregate of 157,893 shares
of common stock in the offering at the public offering price per share for an aggregate purchase price of approximately $300,000.
During the year ended December 31, 2015,
warrant holders exercised warrants to purchase 280,000 shares of common stock using the cashless net exercise provision allowed
in the warrant and received 150,234 shares of our common stock.
During
the year ended December 31, 2014, we sold 2,500,000 shares of our common stock at a price of $4.00 per share to an accredited
institutional investor for an aggregate purchase price of $10,000,000 in gross proceeds and net proceeds of approximately $9.3
million after expenses and fees, including a $600,000 placement agent fee.
In addition, we issued a warrant to purchase up to an
aggregate of 2,500,000 shares of our common stock at an exercise price of $5.09 per share that expired on November 15, 2015. In
addition, we issued to the placement agent a warrant to acquire up to an aggregate of 75,000 shares of our common stock that also
expired on November 15, 2015.
During the year ended December 31, 2014, warrant holders
exercised warrants to purchase 17,000 shares of common stock using the cashless net exercise provision allowed in the warrant
and received 10,053 shares of our common stock. In addition, warrant holders exercised warrants to purchase 11,500 shares of common
stock at an exercise price of $3.13 per share for total cash proceeds of approximately $36,000.
A summary of all warrant activity
is set forth below:
Outstanding and exercisable
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average
Remaining Contractual Life
|
|
January 1, 2014
|
|
|
828,573
|
|
|
|
2.39
|
|
|
|
2.06
|
|
Issued
|
|
|
2,575,000
|
|
|
|
5.09
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
(40,000
|
)
|
|
|
3.98
|
|
|
|
-
|
|
Exercised
|
|
|
(28,500
|
)
|
|
|
2.85
|
|
|
|
-
|
|
December 31, 2014
|
|
|
3,335,073
|
|
|
|
4.45
|
|
|
|
0.93
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
(2,591,000
|
)
|
|
|
5.06
|
|
|
|
-
|
|
Exercised
|
|
|
(280,000
|
)
|
|
|
1.30
|
|
|
|
-
|
|
December 31, 2015
|
|
|
464,073
|
|
|
|
3.02
|
|
|
|
0.19
|
|
Issued (Prefunded)
|
|
|
3,600,000
|
|
|
|
0.01
|
|
|
|
-
|
|
Issued (Purchase)
|
|
|
4,313,676
|
|
|
|
1.12
|
|
|
|
|
|
Expired/forfeited
|
|
|
(384,073
|
)
|
|
|
3.13
|
|
|
|
-
|
|
Exercised
|
|
|
(80,000
|
)
|
|
|
2.00
|
|
|
|
-
|
|
Outstanding and exercisable, December 31, 2016
|
|
|
7,913,676
|
|
|
$
|
0.62
|
|
|
|
5.13
|
|
Outstanding Warrants to Purchase Common Stock as of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Issue Date
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2016 Prefunded Warrants
|
|
08/16/16
|
|
$
|
1.00
|
|
|
|
3,600,000
|
|
|
02/16/22
|
August 2016 Purchase Warrants
|
|
08/17/16
|
|
$
|
1.12
|
|
|
|
4,313,676
|
|
|
02/17/22
|
Total Warrants Outstanding
|
|
|
|
|
|
|
|
|
7,913,676
|
|
|
|
Preferred
Stock
The
terms of our 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 December 31, 2016:
|
|
Shares of Preferred Stock Not Exchanged as of December 31, 2016
|
|
|
Conversion Ratio
|
|
|
Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
83
|
|
|
|
132.07
|
|
|
|
10,962
|
|
9.
|
Stock-Based
Compensation
|
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.
Stock
Options
During the year ended 2015, our shareholders approved
the Neonode Inc. 2015 Stock Incentive Plan (the “2015 Plan”) which replaces our 2006 Equity Incentive Plan (the “2006
Plan”). Under the 2015 Plan, 2,100,000 shares of common stock have been reserved for awards, including nonqualified stock
option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards
granted under the 2015 Plan are set by our compensation committee at its discretion. During the year ended December 31, 2016,
25,000 stock options were granted under the 2015 Plan.
Accordingly,
as of December 31, 2016, we had two equity incentive plans:
|
●
|
The
2006 Equity Incentive Plan (the “2006 Plan”).
|
|
●
|
The
2015 Equity Incentive Plan (the “2015 Plan”).
|
We
also had one non-employee director stock option plan as of December 31, 2016:
|
●
|
The 2001
Non-Employee Director Stock Option Plan (the “Director Plan”), which expired for new awards in March
2011.
|
The
following table summarizes information with respect to all options to purchase shares of common stock outstanding under the 2006
Plan, the 2015 Plan and the Director Plan at December 31, 2016:
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Price
|
|
Number Outstanding at 12/31/16
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number Exercisable at 12/31/16
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.44 - $ 3.50
|
|
|
200,000
|
|
|
|
5.30
|
|
|
$
|
2.85
|
|
|
|
147,083
|
|
|
$
|
2.78
|
|
$ 3.51 - $ 5.00
|
|
|
1,426,000
|
|
|
|
2.85
|
|
|
$
|
4.23
|
|
|
|
1,426,000
|
|
|
$
|
4.23
|
|
$ 5.01 - $ 6.50
|
|
|
130,000
|
|
|
|
3.63
|
|
|
$
|
5.98
|
|
|
|
129,166
|
|
|
$
|
5.98
|
|
$ 6.51 - $ 8.21
|
|
|
90,000
|
|
|
|
0.02
|
|
|
$
|
8.21
|
|
|
|
90,000
|
|
|
$
|
8.21
|
|
|
|
|
1,846,000
|
|
|
|
3.03
|
|
|
$
|
4.39
|
|
|
|
1,792,249
|
|
|
$
|
4.43
|
|
A
summary of the combined activity under all of the stock option plans is set forth below:
During the year ended December 31, 2014, we granted options
to purchase 395,200 shares of our common stock to employees and an option to purchase 10,000 shares of our common stock to a former
member of our board of directors with total grant date estimated fair value of $1.3 million computed using the Black-Scholes option
pricing model. The weighted-average grant date fair value of the options granted during year ended December 31, 2014 was $3.14
per share.
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 agreed to integrate 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 agreed to reimburse Texas Instruments $500,000 of non-recurring engineering development costs based
on shipments of the NN1001. Under the terms of the NN1001 Agreement, we also agreed to reimburse 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 years ended December 31, 2015 and 2014, approximately $20,000 and $93,000, respectively of non-recurring engineering
expense related to the NN1001 Agreement is included in research and development in the consolidated statements of operations. Through
December 31, 2015, all payments under the NN1001 Agreement have been made.
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 agreed to 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 agreed to 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 also agreed to 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 shipping to customers in 2015. As of December 31, 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 ST Microelectronics International N.V pursuant to which
ST Microelectronics agreed to integrate Neonode’s intellectual property into an ASIC. The NN1003 ASIC only can be sold by
ST Microelectronics exclusively to licensees of Neonode. Under the terms of the NN1003 Agreement, we agreed to reimburse ST Microelectronics
up to $885,000 of non-recurring engineering costs as follows:
Under the terms of the NN1003 Agreement, we also agreed to reimburse ST
Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As of December 31, 2016, we
had paid and aggregate of $635,000 under the NN1003 Agreement.
Our subsidiary Neonode Korea Ltd. entered into a lease
agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea in January, 2015. The annual payment for this space equates
to approximately $8,000 per year. We can terminate the lease with 2 months written notice.
A summary of future minimum payments under
non-cancellable operating lease commitments as of December 31, 2016 is as follows (in thousands):
Between the second and the fourth quarters of 2016, we
entered into six leases for component production equipment. Under the terms of five of the lease agreements we are obligated to
purchase the equipment at the end of the original 3-5 year lease terms for 5-10% of the original purchase price of the equipment.
In accordance with relevant accounting guidance the leases are classified as capital leases. The lease payments and depreciation
periods began between June and November 2016 when the equipment went into service. The implicit interest rate of the leases is
currently approximately 3% per annum. One of the leases is a hire-purchase agreement where the equipment is required to be paid
off after 5 years. In accordance with relevant accounting guidance the lease is classified as a capital lease. The lease payments
and depreciation period began on July 1, 2016 when the equipment went into service. The implicit interest rate of the lease is
currently approximately 3% per annum.
The following is a schedule of minimum future rentals
on the non-cancelable capital leases as of December 31, 2016 (in thousands):
Our Company has one reportable segment, which is comprised
of the touch technology licensing and sensor module business.
The following table presents net revenues by geographic
region for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
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 subsidiaries, 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. As of December 31, 2016, we had federal, state and foreign net operating losses of $56.0
million, $22.3 million and $0.5 million, respectively. The federal loss carryforward begins to expire in 2028, the California
loss carryforward begins to expire in 2030 and the foreign loss carryforward is indefinite.
We participate in a number of individual defined
contribution pension plans for our employees in Sweden. We contribute five percent (5%) of the employee’s annual salary to
these pension plans. For the Swedish Management we contribute up to fifteen percent (15%) of the employee’s annual salary.
Contributions relating to these defined contribution plans for the years ended December 31, 2016, 2015 and 2014 were $398,000,
$306,000 and $249,000, respectively. We match U.S. employee contributions to a 401(k) retirement plan up to a maximum of six percent
(6%) of an employee’s annual salary. Contributions relating to the matching 401(k) contributions for the years ended December
31, 2016, 2015 and 2014 were $33,000, $89,000 and $81,000, respectively. In Taiwan, we contribute six percent (6%) of the employee’s
annual salary to a pension fund which agrees with Taiwan’s newly made Labor Pension Act. Contributions relating to the Taiwanese
pension fund for the year ended December 31, 2016 and 2015 were $10,000 and $10,000, respectively.
Potential common stock equivalents of approximately 5.1
million, 13,000 and 0.3 million outstanding stock warrants, 11,000, 11,000 and 11,000 shares issuable upon conversion of preferred
stock, 4,000, 7,000 and 24,000 stock options are excluded from the diluted earnings per share calculation for the years ended December
31, 2016, 2015 and 2014, respectively, due to their anti-dilutive effect.