The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
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) (sold December 27, 2018); NEON Technology Inc. (U.S.) (dissolved November 19, 2018); and Neonode
Americas Inc. (U.S.) (dissolved November 19, 2018). 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 optical touch and gesture control solutions for human
interaction with devices (“HMI”) and remote sensing solutions for driver monitoring and cabin monitoring features
in automotive and other applications.
Neonode’s main business model is to license
the technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 system suppliers who embed the technology into
systems and products they develop, manufacture and sell.
In addition, Neonode designs and manufactures
sensor modules that incorporate our zForce AIR technology and sells the embedded sensors to OEMs, Original Design Manufacturers
(“ODMs”) and Tier 1 suppliers for use in their systems and products. Neonode began shipping sensor modules in October
2017.
Neonode also manufactures and sells through distributors, a
Neonode branded AirBar product that incorporates one of the sensor modules.
Liquidity
We incurred net losses of approximately
$5.3 million and $3.1 million for the years ended December 31, 2019 and 2018, respectively, and had an accumulated deficit of approximately
$190.5 million as of December 31, 2019. In addition, we used cash in operating activities of approximately $3.5 million and $2.9
million for the years ended December 31, 2019 and 2018, respectively.
In March 2017, we filed a $20 million shelf
registration statement with the SEC that became effective on March 24, 2017. Subject to the availability of sufficient shares of
authorized common stock, 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.
December 2018 Private Placement
On December 28, 2018, we entered into a
Securities Purchase Agreement with foreign investors as part of a non-brokered private placement pursuant to which we issued a
total of 2,940,767 shares of common stock at $1.60 per share for net proceeds of $4.6 million. The common stock issued in the
private placement is not registered for resale and we are not required under the Securities Purchase Agreement to register the
issued stock for resale. The purchasers in the private placement included Neonode directors, Ulf Rosberg and Andreas Bunge, and
members of management and certain employees of the Company, including the former Chief Executive Officer, Hakan Persson, and the
former Chief Financial Officer, Lars Lindqvist. The Neonode directors and members of management and employees individually purchased
an aggregate of approximately $2 million of common stock as part of the private placement. In addition, major shareholder
and now director, Peter Lindell, also purchased shares. Mr. Lindell and Mr. Rosberg are each a beneficial owner of approximately
18% of Neonode common stock.
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,
sensor modules, non-recurring engineering fees and AirBar sales will enable us to reduce our operating losses in coming years.
In addition, we intend to continue to implement various measures to improve our operational efficiencies. No assurances can be
given that management will be successful in meeting its revenue targets and reducing its operating loss.
In the future, we may require sources of
capital in addition to cash on hand to continue operations and to implement our strategy. 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 it has a controlling
financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights.
The consolidated balance sheets at December 31, 2019 and 2018
and the consolidated statements of operations, comprehensive loss, stockholders equity and cash flows for the years ended 2019
and 2018 include our accounts and those of our wholly owned subsidiaries as well as Pronode Technologies AB.
Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires making estimates and judgments 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 and judgments.
Significant estimates and judgments include, but are not limited
to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone selling
price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and
other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining
the net realizable value of inventory; recoverability of capitalized project costs and long-lived asset; for leases, determining
whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing
rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets;
and the fair value of options issued for stock-based compensation.
Cash and Cash Equivalents
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
Accounts receivable is 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. 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 $85,000 and $149,000 as of December 31, 2019 and 2018, 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. Costs capitalized in projects in process were
$8,000 as of December 31, 2019. There were no costs capitalized in projects in process as of December 31, 2018.
Inventory
Inventory is stated at the lower of cost and net realizable
value, using the first-in, first-out (“FIFO”) valuation method. 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.
Due to the low sell-through of our AirBar
products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials.
Management has further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location
it is stored. The AirBar inventory reserve was $0.8 million and $1.0 million for the years ended December 31, 2019 and 2018, respectively.
In order to protect our manufacturing partners from losses in
relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee. Since the sale of AirBars
has been lower than expected, a major part of the inventory at the partner remained unused when the due date of the bank guarantee
neared and Neonode therefore agreed that the partner should keep inventory for the production of 20,000 AirBars and the rest be
purchased by us. The inventory value of these purchases has been fully reserved.
As of December 31, 2019, the Company’s
inventory consists primarily of components that will be used in the manufacturing of our sensor modules. 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):
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
396
|
|
|
$
|
246
|
|
|
Work-in-process
|
|
|
186
|
|
|
|
220
|
|
|
Finished goods
|
|
|
448
|
|
|
|
753
|
|
|
Ending inventory
|
|
$
|
1,030
|
|
|
$
|
1,219
|
|
Investment in Joint Venture
We invested $3,000 for a 50% interest in Neoeye AB. 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. We are not required to guarantee any obligations of the joint venture. There have been no operations
of Neoeye through December 31, 2019.
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 finance 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.
Right-of-Use Assets
A right-of-use asset represents a lessee’s right to use
a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases for buildings.
Right-of-use assets
are measured initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial
direct costs, such as commissions paid to obtain a lease.
Right-of-use assets
are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent,
and any initial direct costs not yet expensed.
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, 2019, 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 (losses) resulting from foreign currency transactions are included in general and administrative
expenses in the accompanying consolidated statements of operations and were $105,000 and $(58,000) during the years ended December
31, 2019 and 2018, respectively. Foreign currency translation gains or (losses) were $(183,000) and $(357,000) during the years
ended December 31, 2019 and 2018, respectively.
Concentration of Credit and Business
Risks
Our customers are located in United States,
Europe and Asia.
As of December 31, 2019, three customers
represented approximately 72% of our consolidated accounts receivable and unbilled revenues.
As of December 31, 2018, four customers represented approximately
67% of our consolidated accounts receivable and unbilled revenues.
Customers who accounted for 10% or more
of our net revenues during the year ended December 31, 2019 are as follows.
|
|
●
|
Hewlett-Packard Company – 38%
|
|
|
|
|
|
|
●
|
Epson – 16%
|
|
|
|
|
|
|
●
|
Alpine – 15%
|
Customers who accounted for 10% or more
of our net revenues during the year ended December 31, 2018 are as follows.
|
|
●
|
Hewlett-Packard Company – 35%
|
|
|
|
|
|
|
●
|
Epson – 14%
|
|
|
|
|
|
|
●
|
Canon – 12%
|
The Company conducts business in the United
States, Europe and Asia. At December 31, 2019, the Company maintained approximately $2,637,000, $1,148,000 and $62,000 of its net
assets in the United States, Europe and Asia, respectively. At December 31, 2018, the Company maintained approximately $2,537,000,
$7,187,000 and $72,000 of its net assets in the United States, Europe and Asia, respectively.
Revenue Recognition
We recognize revenue when control of products
is transferred to our customers, and when services are completed and accepted by our customers; the amount of revenue we recognize
reflects the consideration we expect to receive for those products or services. Our contracts with customers may include combinations
of products and services, for example, a contract that includes products and related engineering services. We structure our contracts
such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly
defined in each contract.
License fees for products and sales of AirBar and sensor
modules are on a per-unit basis; therefore, we generally satisfy performance obligations as units are shipped to our customers.
Non-recurring engineering service performance obligations are satisfied as work is performed and accepted by our customers.
We recognize revenue net of allowances for
returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat all product
shipping and handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods, therefore
we treat all shipping and handling charges as expenses.
Licensing Revenues:
We earn revenue from licensing our 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 to us 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.
For technology license arrangements that
do not require significant modification or customization of the underlying technology, we recognize technology license revenue
when the license is made available to the customer and the customer has a right to use that license. At the end of each reporting
period, we record unbilled license fees, using prior royalty revenue data by customer to make accurate estimates of those royalties.
Explicit return rights are not offered to
customers. There have been no returns through December 31, 2019.
Engineering Services:
For technology license or sensor module
contracts that require modification or customization of the underlying technology to adapt that technology to customer use, we
determine whether the technology license or sensor module, and engineering consulting services represent separate performance
obligations. We perform our analysis on a contract-by-contract basis. If there are separate performance obligations, we determine
the standalone selling price (“SSP”) of each separate performance obligation to properly recognize revenue as each
performance obligation is satisfied. We provide engineering consulting services to our customers under a signed Statement of Work
(“SOW”). Deliverables and payment terms are specified in each SOW. We generally charge an hourly rate for engineering
services, and we recognize revenue as engineering services specified in contracts are completed and accepted by our customers.
Any upfront payments we receive for future non-recurring engineering services are recorded as unearned revenue until that revenue
is earned.
We believe that recognizing non-recurring
engineering services revenues as progress towards completion of engineering services and customer acceptance of those services
occurs best reflects the economics of those transactions, because engineering services as tracked in our systems correspond directly
with the value to our customers of our performance completed to date. Hours performed for each engineering project are tracked
and reflect progress made on each project and are charged at a consistent hourly rate.
Revenues from engineering services contracts
that are short-term in nature are recorded when those services are complete and accepted by customers.
Revenues from engineering services contracts
with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required to produce
such deliverables are recognized as they are completed and accepted by customers.
Estimated losses on all SOW projects are
recognized in full as soon as they become evident. In the years ended December 31, 2019 and 2018, no losses related to SOW projects
were recorded.
Optical Sensor Modules Revenues:
We earn revenue from sales of sensor modules
hardware products 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 through distributors or directly to end users. These distributors are
generally given business terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate
in various cooperative marketing programs. Our sales agreements generally provide customers with limited rights of return and warranty
provisions.
The timing of revenue recognition related
to AirBar modules depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue
for AirBar modules sold point-of-sale when we provide the promised product to the customer.
Because we generally use distributors to
provide AirBar and sensor modules to our customers, however, we analyze the terms of distributor agreements to determine when control
passes from us to our distributors. For sales of AirBar and sensor modules sold through distributors, revenues are recognized when
our distributors obtain control over our products. Control passes to our distributors when we have a present right to payment for
products sold to distributors, the distributors have legal title to and physical possession of products purchased from us, and
the distributors have significant risks and rewards of ownership of products purchased.
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.
Under U.S. GAAP, companies may make reasonable
aggregations and approximations of returns data to accurately estimate returns. Our AirBar returns and warranty experience to date
has enabled us to make reasonable returns estimates, which are supported by the fact that our product sales involve homogenous
transactions. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant
as of December 31, 2019 and 2018. 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.
The following table presents disaggregated
revenues by market for the years ended December 31, 2019 and 2018 (dollars in thousands):
|
|
|
Year ended
December 31, 2019
|
|
|
Year ended
December 31, 2018
|
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Net license revenues from automotive
|
|
$
|
1,839
|
|
|
|
28
|
%
|
|
$
|
1,627
|
|
|
|
19
|
%
|
|
Net license revenues from consumer electronics
|
|
|
4,127
|
|
|
|
62
|
%
|
|
|
6,327
|
|
|
|
74
|
%
|
|
Net revenues from sensor modules
|
|
|
560
|
|
|
|
8
|
%
|
|
|
227
|
|
|
|
3
|
%
|
|
Net revenues from non-recurring engineering
|
|
|
120
|
|
|
|
2
|
%
|
|
|
357
|
|
|
|
4
|
%
|
|
|
|
$
|
6,646
|
|
|
|
100
|
%
|
|
$
|
8,538
|
|
|
|
100
|
%
|
Significant Judgments
Our contracts with customers may include
promises to transfer multiple products and services to a customer, particularly when one of our customers contracts with us for
a product and related engineering services fees for customizing that product for our customer. Determining whether products and
services are considered distinct performance obligations that should be accounted for separately may require significant judgment.
Judgment may also be required to determine the SSP for each distinct performance obligation identified, although we generally structure
our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently
have no outstanding contracts with multiple performance obligations; however, we recently negotiated a contract that may include
multiple performance obligations in the future.
Judgment is also required to determine when
control of products passes from us to our distributors, as well as the amounts of product that may be returned to us. Our products
are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability
when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional
information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant
reversal of any incremental revenue would occur.
Finally, judgment is required to determine
the amount of unbilled license fees at the end of each reporting period.
Contract Balances
Timing of revenue recognition may differ
from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments
from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from
our customers.
The following table presents accounts receivable, unbilled revenues
and deferred revenues as of December 31, 2019 and 2018 (dollars in thousands):
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
Accounts receivable and unbilled revenues
|
|
$
|
1,324
|
|
|
$
|
1,830
|
|
|
Deferred revenues
|
|
|
67
|
|
|
|
75
|
|
The timing of revenue recognition, billings
and cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits
or deferred revenue (contract liabilities) on the consolidated balance sheets. Generally, billing occurs subsequent to revenue
recognition, resulting in contract assets; contract assets are generally classified as current. The Company sometimes receives
advances or deposits from its customers before revenue is recognized, which are reported as contract liabilities and are generally
classified as current. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis
at the end of each reporting period.
We do not anticipate impairment of our contract
asset related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance in that
asset account. We will continue to monitor the timeliness of receipts from those customers, however, to assess whether the contract
asset has been impaired.
The allowance for doubtful accounts reflects our best estimate
of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical
experience, and other currently available evidence.
Payment terms and conditions vary by the
type of contract; however, payments generally occur 30-60 days after invoicing for license fees and sensor modules to our resellers
and distributors. Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not include
a significant financing component. Our intent is to provide our customers with consistent invoicing terms for the convenience of
our customers, not to receive financing from our customers.
Costs to Obtain Contracts
We record the incremental costs of obtaining
a contract with a customer as an asset, if we expect the benefit of those costs to cover a period greater than one year. We currently
have no incremental costs that must be capitalized.
We expense as incurred costs of obtaining
a contract when the amortization period of those costs would have been less than or equal to one year.
Product Warranty
The following table summarizes the activity
related to the product warranty liability (in thousands):
|
|
|
Years ended
|
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
|
Balance at beginning of period
|
|
$
|
17
|
|
|
$
|
35
|
|
|
Provisions for warranty issued
|
|
|
7
|
|
|
|
(18
|
)
|
|
Balance at end of period
|
|
$
|
24
|
|
|
$
|
17
|
|
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
Deferred revenues consist primarily of prepayments
for license fees, and other products or services for which we have been paid in advance, and earn the revenue when we transfer
control of the product or service. Deferred revenues may also include upfront payments for consulting services to be performed
in the future, such as non-recurring engineering services.
We defer license fees until we have met
all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer
has a right to use the license. Engineering development fee revenues are deferred until engineering services have been completed
and accepted by our customers.
The following table presents our deferred revenues by source
(in thousands);
|
|
|
As of
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred license revenues
|
|
$
|
28
|
|
|
$
|
-
|
|
|
Deferred NRE revenues
|
|
|
20
|
|
|
|
-
|
|
|
Deferred AirBar revenues
|
|
|
6
|
|
|
|
59
|
|
|
Deferred sensor modules revenues
|
|
|
13
|
|
|
|
16
|
|
|
|
|
$
|
67
|
|
|
$
|
75
|
|
Contracted revenue not yet recognized was $67,000 as of December
31, 2019; we expect to recognize approximately 100% of that revenue over the next twelve months. The Company recognized revenues
of approximately $75,000 and $1.2 million, for 2019 and 2018 respectively, related to contract liabilities outstanding at the beginning
of the year.
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 $82,000 and $120,000 for
the years ended December 31, 2019 and 2018, 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.
We account for equity instruments issued
to non-employees at their estimated fair value.
When determining stock-based compensation
expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option
pricing model.
Noncontrolling Interests
We recognize any noncontrolling interest,
also known as a minority interest, as a separate line item in equity in the consolidated financial statements. A noncontrolling
interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us. Generally, any
interest that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are
other factors, such as decision-making rights, that are considered as well. We include the amount of net income (loss) attributable
to noncontrolling interests in consolidated net income (loss) on the face of the consolidated statements of operations.
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; and
|
|
|
(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, 2019 and 2018. 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, 2019 and 2018, 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, 2019 and 2018. We
effected a 1-for-10 reverse stock split on October 1, 2018. All shares of common stock and potential common stock equivalents in
the calculations used to determine weighted average number of shares of common stock outstanding have been adjusted to reflect
the effects of the reverse stock split for all periods presented. 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, 2019 and 2018 exclude the potential common stock equivalents,
as the effect would be anti-dilutive (see Note 14).
Other Comprehensive Income (Loss)
Our 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 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 consolidated statements of operations was as follows:
|
|
|
Years ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Swedish Krona
|
|
|
9.46
|
|
|
|
8.70
|
|
|
Japanese Yen
|
|
|
109.01
|
|
|
|
110.43
|
|
|
South Korean Won
|
|
|
1,165.70
|
|
|
|
1,100.50
|
|
|
Taiwan Dollar
|
|
|
30.90
|
|
|
|
30.15
|
|
Exchange rate for the consolidated balance
sheets was as follows:
|
|
|
As of
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Swedish Krona
|
|
|
9.34
|
|
|
|
8.87
|
|
|
Japanese Yen
|
|
|
108.66
|
|
|
|
109.69
|
|
|
South Korean Won
|
|
|
1,154.56
|
|
|
|
1,113.63
|
|
|
Taiwan Dollar
|
|
|
30.00
|
|
|
|
30.61
|
|
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 February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02 (and several subsequent accounting
standards updates), lessees are required to recognize the following for all leases (with the exception of short-term leases) at
the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured
on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control
the use of, a specified asset for the lease term.
The effective date of the new lease standard (ASC 842) was January
1, 2019, and we adopted the new standard on that date. We used the required modified retrospective approach, which allowed us to
make any necessary transition adjustments at January 1, 2019. We elected the optional transition method, which allowed us to continue
to use disclosures required by the prior standard during 2019, the year of adoption. There were also several practical expedients
available to make the transition more efficient and cost-effective for companies. We elected the package of three practical expedients
available to us; doing so allowed us to not reassess existing leases.
We currently have a limited number of leased
capital assets, all of which were classified as finance leases under the new lease standard. We maintain a lease inventory for
those assets; they are currently reported on our consolidated balance sheets under the new standard. We analyzed our operating
leases, and included two material operating leases on our consolidated balance sheets beginning January 1, 2019 which resulted
in recording operating lease right-of-use assets and operating lease obligations of approximately $0.9 million. We did not have
any equity adjustment related to our implementation of the new standard, and we will continue to provide disclosures related to
leases. Because of the small number of assets we lease, we did not need to make systems changes to comply with the new standard.
We continue to track leased assets outside of our accounting systems. We did not experience material changes in financial ratios,
leasing practices, or tax reporting.
In September 2016, the FASB issued ASU No.
2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments”,
(“ASU 2016-13”), supplemented by ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, (“ASU 2019-04”), ASU 2019-05,
“Financial Instruments—Credit Losses (Topic 326)”, (“ASU 2019-05”), and ASU 2018-19, “Codification
Improvements to Topic 326, Financial Instruments – Credit Losses”, (“ASU 2018-19”), and ASU 2019-11,
“Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“ASU 2019-11”).
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 and the subsequent accounting
standards updates were scheduled to become effective for fiscal years beginning after December 15, 2020, with early adoption permitted.
On October 16, 2019, the FASB voted to delay implementation of the new credit losses standard for smaller reporting companies,
among other organizations, until fiscal years beginning after December 15, 2022. In the future, we will evaluate the impact ASU
2016-13, ASU 2019-04, ASU 2019-05 and ASU 2018-19 will have on our consolidated financial statements, specifically regarding our
trade receivables; however, we do not expect any significant impact from implementation of the new standard.
In December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Tax, which simplifies the accounting for income taxes.
ASU 2019-12 will become effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently
evaluating the impact ASU 2019-12 will have on our 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,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
223
|
|
|
$
|
168
|
|
|
Prepaid rent
|
|
|
4
|
|
|
|
41
|
|
|
VAT receivable
|
|
|
211
|
|
|
|
176
|
|
|
Prepaid inventory
|
|
|
-
|
|
|
|
120
|
|
|
Advances to suppliers
|
|
|
51
|
|
|
|
155
|
|
|
Other
|
|
|
226
|
|
|
|
230
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
715
|
|
|
$
|
890
|
|
|
4.
|
Property and Equipment
|
Property and equipment consist of the following
(in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Computers, software, furniture and fixtures
|
|
$
|
1,406
|
|
|
$
|
1,407
|
|
|
Equipment under capital lease
|
|
|
3,348
|
|
|
|
3,525
|
|
|
Less accumulated depreciation and amortization
|
|
|
(3,171
|
)
|
|
|
(2,448
|
)
|
|
Property and equipment, net
|
|
$
|
1,583
|
|
|
$
|
2,484
|
|
Depreciation and amortization expense was $0.9 million and $1.0
million for the years ended December 31, 2019 and 2018, respectively.
Accrued expenses consist of the following
(in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued returns and warranty
|
|
$
|
24
|
|
|
$
|
17
|
|
|
Accrued consulting fees and other
|
|
|
517
|
|
|
|
248
|
|
|
Total accrued expenses
|
|
$
|
541
|
|
|
$
|
265
|
|
|
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.
The three levels of
the fair value hierarchy are described as follows:
Level 1: Applies to assets or liabilities
for which there are observable quoted prices 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 included in Level 1. We had no Level 2 assets or liabilities.
Level 3: Applies to assets or liabilities
for which inputs are unobservable, and those inputs that are significant to the measurement of the fair value of the assets or
liabilities. We had no Level 3 assets or liabilities.
There were no assets
or liabilities recorded at fair value on a recurring basis in 2019 and 2018.
Common Stock
On September 27, 2018, the Company filed the certificate of
amendment to its restated certificate of incorporation with the state of Delaware to effect a reverse stock split, effective October
1, 2018. The Company also filed a certificate of amendment to its restated certificate of incorporation with the state of Delaware
to reduce the number of authorized shares of common stock from 100,000,000 to 10,000,000 shares. The filing did not affect the
number of authorized preferred stock of 1,000,000 shares.
As a result of the reverse stock split,
every ten shares of issued and outstanding common stock were converted into one share of common stock, without any change in the
par value per share. No fractional shares were issued, therefore stockholders entitled to receive a fractional share in connection
with the reverse stock split received a cash payment instead. There was no financial impact to the Company’s consolidated
financial statements. All shares and per share information in this Form 10-K have been retroactively adjusted for all periods presented
to reflect the reverse stock split, including reclassifying any amount equal to the reduction in par value of common stock to additional
paid-in capital.
On December 28, 2018, we entered into a
Securities Purchase Agreement with foreign investors, as part of a non-brokered private placement pursuant to which a total of
2,940,767 shares of common stock were issued. See Note 1 for more information.
Effective June 11,
2019, the Company further amended its restated certificate of incorporation to increase the number of authorized shares of common
stock to 15,000,000 shares.
Warrants and Other Common Stock Activity
During the year ended December 31, 2019, warrants to purchase
360,000 shares of common stock were exercised for proceeds of $36,000. No warrants were exercised during 2018.
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, 2018
|
|
|
1,116,368
|
|
|
$
|
10.18
|
|
|
|
3.68
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
December 31, 2018
|
|
|
1,116,368
|
|
|
$
|
10.18
|
|
|
|
2.68
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Expired/forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
(360,000
|
)
|
|
|
0.10
|
|
|
|
-
|
|
|
Outstanding and exercisable, December 31, 2019
|
|
|
756,368
|
|
|
$
|
14.98
|
|
|
|
1.47
|
|
Outstanding Warrants to Purchase Common
Stock as of December 31, 2019:
|
Description
|
|
Issue Date
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2016 Purchase Warrants
|
|
08/17/16
|
|
$
|
11.20
|
|
|
|
431,368
|
|
|
02/17/22
|
|
August 2017 Purchase Warrants
|
|
08/08/17
|
|
$
|
20.00
|
|
|
|
325,000
|
|
|
08/08/20
|
|
Total Warrants Outstanding
|
|
|
|
|
|
|
|
|
756,368
|
|
|
|
Preferred Stock
During the year ended December 31, 2019,
the only shares of our preferred stock issued and outstanding were Series B Preferred Stock. Effective July 1, 2019, as described
below, all outstanding shares of our Series B Preferred Stock were converted into shares of our common stock. The terms of our
Series B Preferred Stock were 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.
In November 2018, a holder of 1 share of
Series B Preferred stock converted into 132 shares of our common stock.
On April 10, 2019, a holder of 2 shares
of Series B Preferred stock converted into 264 shares of our common stock.
Effective July 1, 2019, the Company implemented a conversion
of all outstanding shares of Series B Preferred Stock into shares of common stock. Each share of Series B Preferred Stock was automatically
converted into 132.07 shares of common stock. No fractional shares were issued. In lieu of any fractional shares, the resulting
number of shares of common stock was rounded up to the nearest whole number. Accordingly, 80 shares of Series B Preferred Stock
were converted into 10,577 shares of common stock. As of December 31, 2019, there were no shares of series B Preferred Stock outstanding.
|
8.
|
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 certain
options granted to certain Swedish employees, 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 December 31, 2015,
our stockholders approved the Neonode Inc. 2015 Stock Incentive Plan (the “2015 Plan”) which replaced our 2006 Equity
Incentive Plan (the “2006 Plan”). Although no new awards can be made under the 2006 Plan, it is still operative for
previously granted awards. Under the 2015 Plan, 210,000 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.
Accordingly, as of December 31, 2019, we
had two equity incentive plans:
|
|
●
|
The 2006 Equity Incentive Plan (the “2006 Plan”).
|
|
|
●
|
The 2015 Equity Incentive Plan (the “2015 Plan”).
|
The following table summarizes information
with respect to all options to purchase shares of common stock outstanding under the 2006 Plan and the 2015 Plan at December 31,
2019:
|
Options Outstanding
|
|
Range of Exercise Price
|
|
Number Outstanding and exercisable at 12/31/19
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0 - $ 15.00
|
|
|
32,500
|
|
|
|
0.90
|
|
|
$
|
14.95
|
|
|
$ 15.01 - $ 30.40
|
|
|
8,000
|
|
|
|
0.33
|
|
|
$
|
30.40
|
|
|
$ 30.40 - $ 62.10
|
|
|
12,000
|
|
|
|
0.14
|
|
|
$
|
59.60
|
|
|
|
|
|
52,500
|
|
|
|
1.37
|
|
|
$
|
27.51
|
|
A summary of the combined activity under
all of the stock option plans is set forth below:
No stock options were granted during the year ended December
31, 2019. There were 30,000 stock options granted in 2018. The assumptions used to value stock options granted to directors, employees
and consultants during the year ended December 31, 2018 are as follows:
During the years ended December 31, 2019
and 2018, we recorded $0 and $29,000, respectively, of compensation expense related to the vesting of stock options. The estimated
fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the grant date of
the stock option.
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.
There is no remaining unrecognized compensation expense related
to stock options as of December 31, 2019.
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 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.
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 December 31, 2019 and 2018.
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 December 31, 2019 and 2018.
One of our manufacturing partners has previously
purchased material for the final assembly of AirBars. To protect the manufacturer from losses in relation to AirBar production,
we agreed to secure the value of the inventory in a bank guarantee. The initial guarantee was for $345,000 and valid until December
31, 2019. Since the sale of AirBars has been lower than expected, a major part of the inventory at the manufacturer remained unused
when the due date of the bank guarantee neared.
In November 2019, we agreed to purchase the excess AirBar inventory
for approximately $141,000 and in conjunction with this, the bank guarantee was decreased to $210,000 and is valid until December
31, 2020.
Management’s judgment is that the bank guarantee is a
contingent guarantee and management will record a liability when it is probable we will have to purchase the inventory. As of March
11, 2020, management’s judgment is that we will sell the remaining AirBars during 2020 and thereby purchase the components
and the assembly service from the manufacturing partner throughout the year. No liability has therefore been recorded for the period
ended December 31, 2019.
On May 6, 2019,
the Company assigned a portfolio of patents to Aequitas Technologies LCC. The portfolio contains two patent families comprising
nine U.S. patents, five non-U.S. patents and three pending U.S. patent applications. The assignment provides the Company the right
to share potential proceeds generated from a licensing and monetization program.
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 (“TI”)
pursuant to which TI agreed to integrate our intellectual property into an ASIC. Under the terms of the NN1002 Agreement, we agreed
to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold.
As of December 31, 2019, we had made no payments to TI under the NN1002 Agreement.
We have operating leases
for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms
of one year to three years, and our two primary operating leases include options to extend the leases for one to three years; those
operating leases also include options to terminate the leases within one year. Future renewal options that are not likely to be
executed as of the balance sheet date are excluded from right-of-use assets and related lease liabilities.
Our operating leases
represent building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility. Our corporate office lease
is automatically renewed at a cost increase of 2% on a yearly basis, unless we provide written notice nine months prior to expiration
date.
We report operating leased assets, as well as operating lease
current and noncurrent obligations on our consolidated balance sheets for the right to use those buildings in our business. Our
finance leases represent manufacturing equipment; we report the manufacturing equipment, as well as finance lease current and noncurrent
obligations on our consolidated balance sheets for our manufacturing equipment.
Generally, interest
rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates
implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by
using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate.
Supplemental cash flow
information related to leases was as follows (in thousands):
Supplemental
balance sheet information related to leases was as follows (in thousands):
A summary of future minimum payments under
non-cancellable operating lease commitments as of December 31, 2019 is as follows (in thousands):
The following is a schedule of minimum
future rentals on the non-cancelable finance leases as of December 31, 2019 (in thousands):
Minimum future lease
payments under capital and operating lease obligations as of December 31, 2018 were as follows:
Our Company has one reportable segment,
which is comprised of the touch technology licensing and sensor module business.
We report revenues from external customers based on the country
where the customer is located. The following table presents revenues by geographic region for the years ended December 31, 2019
and 2018 (dollars in thousands):
Loss before income taxes was distributed
geographically for the years ended December 31, as follows (in thousands):
The provision (benefit)
for income taxes is as follows for the years ended December 31 (in thousands):
The differences between our effective income
tax rate and the U.S. federal statutory federal income tax rate for the years ended December 31, are as follows:
Significant components of the deferred tax
asset balances at December 31 are as follows (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, 2019, we had federal, state and foreign net operating losses of $63.8
million, $20.0 million and $7.3 million, respectively. The federal loss carryforward begins to expire in 2028, and the California
loss carryforward begins to expire in 2030. The foreign loss carryforward, which is generated in Sweden, does not expire.
Utilization of the net operating loss and
tax credit carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382
of the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of the net operating
losses and tax credit carryforwards before utilization. As of December 31, 2019, we had not completed the determination of
the amount to be limited under the provision.
We follow the provisions of accounting guidance which includes
a two-step approach to recognizing, derecognizing and measuring uncertain tax positions. There were no unrecognized tax benefits
for the years ended December 31, 2019 and 2018.
We follow the policy to classify accrued interest and penalties
as part of the accrued tax liability in the provision for income taxes. For the years ended December 31, 2019 and 2018 we did not
recognize any interest or penalties related to unrecognized tax benefits.
Our continuing practice is to recognize
interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2019 and 2018, we had no accrued
interest and penalties related to uncertain tax matters.
As of December 31, 2019, we had no uncertain
tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.
We file income tax returns in the U.S.
federal jurisdiction, California, Sweden, Japan, South Korea, and Taiwan. The 2008 through 2018 tax years are open and may be
subject to potential examination in one or more jurisdictions. We are not currently under any federal, state or foreign income
tax examinations.
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, 2019 and 2018 were $395,000 and $413,000, 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, 2019 and 2018 were $6,000
and $6,000, respectively. In Taiwan, we contribute six percent (6%) of the employee’s annual salary to a pension fund which
agrees with Taiwan’s Labor Pension Act. Contributions relating to the Taiwanese pension fund for the years ended December
31, 2019 and 2018 were $3,000 and $4,000, respectively.
Basic net loss per common share for the
years ended December 31, 2019 and 2018 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 during the year. Diluted loss per common share is computed
by dividing net loss attributable to Neonode Inc. for the relevant period by the weighted average number of shares of common stock
and common stock equivalents outstanding during the year.
Potential common stock equivalents of approximately
0 and 350,000 outstanding stock warrants, 0 and 11,000 shares issuable upon conversion of preferred stock and 0 and 0 stock options
are excluded from the diluted earnings per share calculation for the years ended December 31, 2019 and 2018, respectively, due
to their anti-dilutive effect.