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 months ended March 31, 2017
are not necessarily indicative of results for a full fiscal year or any other period.
The
accompanying condensed consolidated financial statements for the three months ended March 31, 2017 and 2016 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, 2016.
Operations
Neonode
Inc. (collectively with its subsidiaries, is referred to in this Form 10-Q Report as “Neonode”, “we”,
“us”, “our”, “registrant”, or “Company”) develops optical touch and gesture solutions
for human interaction with devices. In 2010 we began licensing our technology to Original Equipment Manufacturers (“OEMs”)
and Tier 1 suppliers who in-turn embed our technology into products they develop, manufacture and sell. Since 2010, our customers
have sold approximately 45 million devices under our licensing agreements that use our technology. In 2016, we augmented our licensing
business and started to manufacture and sell standardized embedded sensors that incorporate our technology to OEMs, Tier 1 Suppliers,
distributors and our branded products sold directly to consumers.
Reclassifications
Revenues and cost of sales for the period
ended March 31, 2016 are now reported as license fees, sensor module sales and non-recurring engineering instead of net revenues
in the accompanying condensed consolidated statement of operations, in order to conform to current period presentation.
Liquidity
We have incurred significant operating
losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $0.9 million
and $1.4 million for the three months ended March 31, 2017 and 2016, respectively, and had an accumulated deficit of approximately
$179.9 million and $179.0 million as of March 31, 2017 and December 31, 2016, respectively. In addition, operating activities used
cash of approximately $1.6 million for the three months ended March 31, 2017 and operating activities provided cash of approximately
$21,000 for the three months ended March 31, 2016.
In March 2017, we filed a $20 million
shelf registration statement with the SEC that became effective on March 24, 2017. 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 March
24, 2020.
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. As of March 31, 2017 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.
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 May 5, 2017. If the warrants are fully exercised, we will receive approximately
$4.8 million in proceeds.
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.
The condensed 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.
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.” 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
condensed 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. 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 condensed consolidated balance
sheets; our share of net income (loss) is reported in our condensed consolidated statements of operations according to our equity
ownership in each entity.
The
condensed consolidated balance sheets at March 31, 2017 and December 31, 2016 and the condensed consolidated statements of operations,
comprehensive loss and cash flows for the three months ended March 31, 2017 and 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), 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 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 March 31, 2017 and December 31, 2016, 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 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 $159,000 as of March 31, 2017. There were no costs capitalized
in projects in process as of December 31, 2016.
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 March 31, 2017 and 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 are as follows (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
806
|
|
|
$
|
522
|
|
Work-in-Process
|
|
|
168
|
|
|
|
42
|
|
Finished goods
|
|
|
570
|
|
|
|
132
|
|
Ending inventory
|
|
$
|
1,544
|
|
|
$
|
696
|
|
Investment
in JV
We
have invested $3,000, for 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 March 31, 2017.
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 March 31, 2017, 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 gains (losses)
were $7,000 and $(35,000) during the three months ended March 31, 2017 and 2016, respectively. Gains resulting from foreign currency
transactions are included in general and administrative expenses in the accompanying condensed consolidated statements of operations
and were $20,000 and $13,000 during the three months ended March 31, 2017 and 2016, respectively.
Concentration
of Credit and Business Risks
Our
customers are located in U.S., Europe and Asia.
As
of March 31, 2017, three customers represented approximately 72% of the Company’s accounts
receivable.
As
of December 31, 2016, three customers represented approximately 59% of the Company’s accounts receivable.
Customers
who accounted for 10% or more of our net revenues during the three months ended March 31, 2017 are as follows:
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●
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Hewlett Packard Company – 31%
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●
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Canon – 17%
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|
|
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●
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Amazon – 12%
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|
|
|
●
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Robert Bosch – 11%
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Customers
who accounted for 10% or more of our net revenues during the three months ended March 31, 2016 are as follows:
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●
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Hewlett
Packard Company – 40%
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|
|
|
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●
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Amazon
– 18%
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|
|
|
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●
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Autoliv
Development AB – 12%
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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 March 31, 2017.
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 March 31, 2017 and 2016,
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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●
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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.
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●
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Collectability
is reasonably assured. We assess collectability 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 is recorded as a reduction of our accounts receivable and revenue and was insignificant as of March 31, 2017 and December
31, 2016. 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):
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Balance at beginning of period
|
|
$
|
11
|
|
|
$
|
-
|
|
Provisions for warranty issued
|
|
|
1
|
|
|
|
11
|
|
Balance at end of period
|
|
$
|
12
|
|
|
$
|
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 March 31, 2017 and December 31, 2016, we have $1.3 million and $1.8 million,
respectively, of deferred license fee revenue related to prepayments for future license fees from four customers, respectively.
We defer AirBar revenues until distributors sell the AirBar to their end customers. As of March 31, 2017 and December 31, 2016
we had $0.1 million of deferred revenue from our AirBar sales. As of March 31, 2017 we had $0.1 million of deferred engineering
development fees from two customers. As of December 31, 2016 there were no deferred engineering development fees.
Advertising
Advertising
costs are expensed as incurred. Advertising costs for the three months ended March 31, 2017 and 2016 amounted to approximately
$147,000 and $80,000, 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 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’ 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.
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(3)
|
Each
component of other comprehensive income or loss.
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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 March 31, 2017 and December 31,
2016. 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 March 31, 2017 and December 31, 2016, 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 months ended March 31, 2017 and 2016. 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 months ended March 31, 2017 and 2016 exclude the potential common stock equivalents, as the effect would be
anti-dilutive (See Note 7).
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’ equity in the condensed consolidated balance sheets
as accumulated other comprehensive 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:
|
|
Three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Swedish Krona
|
|
|
8.92
|
|
|
|
8.45
|
|
Japanese Yen
|
|
|
113.71
|
|
|
|
115.36
|
|
South Korean Won
|
|
|
1,150.18
|
|
|
|
1,193.75
|
|
Taiwan Dollar
|
|
|
31.05
|
|
|
|
33.06
|
|
Exchange
rate for the consolidated balance sheets was as follows:
|
|
Periods Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Swedish Krona
|
|
|
8.94
|
|
|
|
9.07
|
|
Japanese Yen
|
|
|
111.75
|
|
|
|
116.97
|
|
South Korean Won
|
|
|
1,116.94
|
|
|
|
1,205.11
|
|
Taiwan Dollar
|
|
|
30.35
|
|
|
|
32.28
|
|
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 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. The Company adopted ASU 2015-17 for the quarter ended March 31, 2017.
We adopted this guidance at the beginning of our first quarter of fiscal year 2017, and determined there is no impact on our condensed
consolidated financial statements and disclosures.
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. The Company adopted ASU
2016-07 in the quarter ended March 31, 2017. We adopted this guidance at the beginning of our first quarter of fiscal year 2017,
and determined there is no impact on our condensed consolidated financial statements and disclosures.
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.
The Company adopted ASU 2016-09 in the first quarter ended March 31, 2017. We adopted this guidance at the beginning of our first
quarter of fiscal year 2017, and determined there is no impact on our condensed consolidated financial statements and disclosures.
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. Stockholders’ Equity
Common Stock
During the three months ended March
31, 2017, there were no activities that affected common stock.
Preferred Stock
We have one class of preferred stock
outstanding. There were no activities that affected preferred stock during the three months ended March 31, 2017.
Conversion of Preferred Stock Issued to Common Stock
The following table summarizes the amounts
as of March 31, 2017.
|
|
Shares of Preferred
Stock Not
Exchanged
as of
March 31,
2017
|
|
|
Conversion Ratio
|
|
|
Shares of
Common
Stock after
Conversion
of all Outstanding
Shares of
Preferred
Stock
Not yet
Exchanged
at
March 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock
|
|
|
83
|
|
|
|
132.07
|
|
|
|
10,962
|
|
4.
Stock-Based Compensation
The
stock-based compensation expense for the three months ended March 31, 2017 and 2016 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
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
-
|
|
|
$
|
43
|
|
Sales and marketing
|
|
|
14
|
|
|
|
62
|
|
General and administrative
|
|
|
6
|
|
|
|
9
|
|
Total stock-based compensation expense
|
|
$
|
20
|
|
|
$
|
114
|
|
|
|
Remaining unrecognized
expense at
March 31,
2017
|
|
Stock-based compensation
|
|
$
|
64
|
|
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 0.9 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 March 31, 2017 we had two equity incentive plans:
|
●
|
The
2006 Equity Incentive Plan; and
|
|
|
|
|
●
|
The
2015 Stock Incentive Plan
|
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, 2017
|
|
|
1,846,000
|
|
|
$
|
4.39
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(90,000
|
)
|
|
|
8.21
|
|
Outstanding at March 31, 2017
|
|
|
1,756,000
|
|
|
$
|
4.20
|
|
The
aggregate intrinsic value of the 1,756,000 stock options that are outstanding, vested and expected to vest as of March 31, 2017
was approximately $4,000.
For
the three months ended March 31, 2017 and 2016, we recorded $20,000 and $0.1 million, 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 three months ended March 31, 2017, we did not grant any options to purchase shares of our common stock to employees or members
of our board of directors.
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.
Warrants
As of March 31, 2017 and December 31, 2016,
there were 7,913,676 warrants to purchase common stock outstanding. There was no activity during the three months ended March
31, 2017.
5.
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 March 31, 2017 and December 31, 2016.
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 March 31, 2017 and December 31, 2016.
Non-Recurring
Engineering Development Costs
On April 25, 2013, we entered into an
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 shipping to customers in 2015. As of March 31, 2017, we had made no payments
under the NN1002 Agreement.
On December 4, 2014, we entered into an Analog Device Development Agreement (the “NN1003 Agreement”)
with ST Microelectronics International N.V pursuant to which ST Microelectronics will 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 will reimburse ST Microelectronics up to $835,000 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 March 31, 2017)
|
Under the terms of the NN1003 Agreement,
we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As
of March 31, 2017, we had paid $635,000 under the NN1003 Agreement.
6.
Segment Information
We have one reportable segment, which
is comprised of the touch technology licensing and sensor module business. All of our sales for the three months ended March 31,
2017 and 2016 were to customers located in the U.S., Europe and Asia. Of our total assets, 29% and 43% were held in the U.S. as
of March 31, 2017 and December 31, 2016, respectively, and 69% and 55% were held in Sweden, respectively.
The following table presents net revenues
by geographic region for the three months ended March 31, 2017 and 2016 (in thousands):
|
|
Three months ended
March 31,
2017
|
|
|
Three months ended
March 31,
2016
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Net revenues from customers in the Americas
|
|
$
|
1,167
|
|
|
|
50
|
%
|
|
$
|
2,005
|
|
|
|
64
|
%
|
Net revenues from customers in Asia
|
|
|
834
|
|
|
|
36
|
%
|
|
|
560
|
|
|
|
18
|
%
|
Net revenues from customers in Europe
|
|
|
331
|
|
|
|
14
|
%
|
|
|
567
|
|
|
|
18
|
%
|
|
|
$
|
2,332
|
|
|
|
100
|
%
|
|
$
|
3,132
|
|
|
|
100
|
%
|
7.
Net Loss per Share
Basic
net loss per common share for the three months ended March 31, 2017 and 2016 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 3,000 and 1,000 outstanding stock options and 4.9 million and 0 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 three months ended March 31, 2017 and 2016, respectively, due to their anti-dilutive effect.
(in thousands, except per share amounts)
|
|
Three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
BASIC AND DILUTED
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
48,845
|
|
|
|
43,810
|
|
Net loss attributable to Neonode Inc.
|
|
$
|
(873
|
)
|
|
$
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
8.
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.