The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying
notes are an integral part of these condensed consolidated financial statements.
The accompanying
notes are an integral part of these condensed consolidated financial statements.
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, 2020 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, 2020 and 2019 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, 2019.
Operations
Neonode Inc., collectively
with its subsidiaries is referred to as “Neonode”, develops optical touch and gesture control solutions for human interaction
with devices and remote sensing solutions for driver monitoring and cabin monitoring features in automotive and other applications.
Our operations from January
1, 2020 focused on three different business areas, human machine interface (“HMI”) Solutions, HMI Products and Remote
Sensing Solutions. In HMI Solutions, Neonode offers customized optical touch and gesture control solutions for many different markets
and segments. In HMI Products, the Company provides innovative, plug-and-play sensor modules that enable touch on any surface,
in-air touch, and gesture control for a wide range of applications. In Remote Sensing Solutions, Neonode offers robust and cost-effective
driver and cabin monitoring solutions for vehicles based on the Company’s flexible, scalable and hardware-agnostic software
platform.
Liquidity
We incurred net losses
of approximately $1.0 million and $0.6 million for the three months ended March 31, 2020 and 2019, respectively, and had an accumulated
deficit of approximately $191.5 million and $190.5 million as of March 31, 2020 and December 31, 2019, respectively. In addition,
operating activities used cash of approximately $1.0 million and $0.5 million for the three months ended March 31, 2020 and 2019,
respectively.
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 potential capital would be sufficient to alleviate concerns about the Company’s ability to continue
as a going concern.
We expect our revenues
from our three business areas 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 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 2X Communication
AB, located in Gothenburg, Sweden. Pronode Technologies AB was organized to manufacture and sell our sensor modules. 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 condensed
consolidated balance sheets at March 31, 2020 and December 31, 2019 and the condensed consolidated statements of operations,
comprehensive loss, stockholders’ equity and cash flows for the three months ended March 31, 2020 and 2019 include our
accounts and those of our wholly owned subsidiaries as well as Pronode Technologies AB.
Estimates and Judgments
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 assets; 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 as of March 31, 2020 and December
31, 2019, 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 $57,000 and $8,000 as of March 31, 2020 and December 31, 2019, respectively.
Inventory
Inventory is stated
at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net
realizable value is the estimated selling price 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 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.
To protect our manufacturing
partner from losses in relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee covering
the production of 20,000 AirBars. Excess inventory was purchased from our manufacturing partner in 2019 and has been fully reserved.
In total, the AirBar reserve
was $0.8 million as of March 31, 2020 and December 31, 2019.
The Company’s inventory
consists primarily of components that will be used in the manufacturing of our sensor modules. We classify inventory for reporting
purposes as 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,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
384
|
|
|
$
|
396
|
|
Work-in-Process
|
|
|
172
|
|
|
|
186
|
|
Finished goods
|
|
|
424
|
|
|
|
448
|
|
Ending inventory
|
|
$
|
980
|
|
|
$
|
1,030
|
|
Investment in Joint Venture
We invested $3,000,
a 50% interest in Neoeye AB. We account for our investment using the equity method of accounting because 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 and there have been no operations of Neoeye through March 31, 2020.
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 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.
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 and finance leases for manufacturing equipment.
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 Asset Recoverability
We assess the recoverability
of long-lived assets by estimating the future cash flow from the associated assets 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, 2020, 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 $(87,000) and $(181,000) during
the three months ended March 31, 2020 and 2019, respectively. Gains (losses) resulting from foreign currency transactions are included
in general and administrative expenses in the accompanying condensed consolidated statements of operations and were $49,000 and
$171,000 during the three months ended March 31, 2020 and 2019, respectively.
Concentration of Credit and Business Risks
Our customers are located in U.S., Europe
and Asia.
As of March 31, 2020, four
customers represented approximately 80% of our consolidated accounts receivable and unbilled revenues.
As of December 31,
2019, three customers represented approximately 72% of our consolidated accounts receivable and unbilled revenues.
Customers who accounted
for 10% or more of our net revenues during the three months ended March 31, 2020 are as follows:
|
●
|
Hewlett Packard
Company – 36%
|
|
|
|
|
●
|
Alpine –
19%
|
|
|
|
|
●
|
Epson – 17%
|
Customers who accounted for 10% or more
of our net revenues during the three months ended March 31, 2019 are as follows:
|
●
|
Hewlett Packard
Company – 38%
|
|
|
|
|
●
|
Epson – 17%
|
|
|
|
|
●
|
Alpine –
12%
|
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.
Sales of license fees
and 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.
Revenues from our business areas derive from three different revenue
streams, license fees, non-recurring engineering fees and the sale of sensor modules.
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 March 31, 2020.
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 quarters ended March 31, 2020 and 2019, 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 (AirBar) that incorporate our sensor modules sold through distributors. 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 (online sales and other direct sales to customers) when we provide
the promised product to the customer.
Because we generally
use distributors to provide AirBar and sensor modules to our customers, 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 March 31, 2020 and 2019. 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 three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2019
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
HMI Solutions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from automotive
|
|
$
|
401
|
|
|
|
34
|
%
|
|
$
|
496
|
|
|
|
26
|
%
|
Net revenues from consumer electronics
|
|
|
781
|
|
|
|
66
|
%
|
|
|
1,446
|
|
|
|
74
|
%
|
|
|
$
|
1,182
|
|
|
|
100
|
%
|
|
$
|
1,942
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HMI Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues from automotive
|
|
$
|
8
|
|
|
|
7
|
%
|
|
$
|
1
|
|
|
|
1
|
%
|
Net revenues from medical
|
|
|
56
|
|
|
|
50
|
%
|
|
|
20
|
|
|
|
29
|
%
|
Net revenues from distributors and other
|
|
|
48
|
|
|
|
43
|
%
|
|
|
49
|
|
|
|
70
|
%
|
|
|
$
|
112
|
|
|
|
100
|
%
|
|
$
|
70
|
|
|
|
100
|
%
|
Significant Judgments
Our contracts with
customers may include promises to transfer multiple products and services to a customer, particularly when the contract is 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.
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
and deferred revenues as of March 31, 2020 and 2019 (in thousands):
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Accounts receivable and unbilled revenue
|
|
$
|
1,136
|
|
|
$
|
1,324
|
|
Deferred revenues
|
|
|
72
|
|
|
|
67
|
|
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 which 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. Our allowance for doubtful accounts
was approximately $85,000 as of March 31, 2020 and December 31, 2019.
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):
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Balance at beginning of period
|
|
$
|
24
|
|
|
$
|
17
|
|
Provisions for warranty issued
|
|
|
5
|
|
|
|
7
|
|
Balance at end of period
|
|
$
|
29
|
|
|
$
|
24
|
|
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. We defer AirBar and sensor modules revenues until distributors sell the products
to their end customers.
The following table
presents our deferred revenues (in thousands):
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Deferred revenues HMI Solutions
|
|
$
|
33
|
|
|
$
|
37
|
|
Deferred revenues HMI Products
|
|
|
39
|
|
|
|
30
|
|
|
|
$
|
72
|
|
|
$
|
67
|
|
During the three months
ended March 31, 2020, the Company recognized revenues of approximately $26,000 related to contract liabilities outstanding at
the beginning of the year.
Advertising
Advertising costs
are expensed as incurred. Advertising costs for the three months ended March 31, 2020 and 2019 amounted to approximately $7,000
and $19,000, respectively.
Research and Development
Research and development
(“R&D”) costs are expensed as incurred. R&D costs consist primarily of personnel related costs in addition
to 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
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; 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 March 31, 2020 and December 31, 2019. 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, 2020 and December 31, 2019, 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, 2020 and 2019, respectively. 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, 2020 and 2019 exclude the potential common stock equivalents, as the effect would be
anti-dilutive (see Note 8).
Other Comprehensive Income (Loss)
Our other comprehensive
income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses
are reflected as a separate component of stockholders’ equity in the condensed consolidated balance sheets.
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,
|
|
|
|
2020
|
|
|
2019
|
|
Swedish Krona
|
|
|
9.68
|
|
|
|
9.18
|
|
Japanese Yen
|
|
|
108.97
|
|
|
|
110.15
|
|
South Korean Won
|
|
|
1,192.79
|
|
|
|
1,125.77
|
|
Taiwan Dollar
|
|
|
30.12
|
|
|
|
30.83
|
|
Exchange rate for the consolidated balance
sheets was as follows:
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Swedish Krona
|
|
|
9.97
|
|
|
|
9.34
|
|
Japanese Yen
|
|
|
107.81
|
|
|
|
108.66
|
|
South Korean Won
|
|
|
1,218.24
|
|
|
|
1,154.56
|
|
Taiwan Dollar
|
|
|
30.26
|
|
|
|
30.00
|
|
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 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 subsequent accounting standards updates. 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 (and subsequent accounting
standards updates) 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.
Reclass of Presentation in our Condensed
Consolidated Statements of Operations
Since January 1, 2020,
we have allocated revenue to our new business areas, HMI Solutions, HMI Products and Remote Sensing Solutions rather than by our
revenue streams, license fees, sensor module sale and non-recurring engineering fees. The presentation in our condensed consolidated
statements of operations has therefore been changed accordingly. Revenues from HMI Solutions include license fees and non-recurring
engineering fees while HMI Products include sensor module sale and non-recurring engineering fees. We believe that future revenues
from Remote Sensing Solutions will include license fees and non-recurring engineering fees.
3. Stockholders’ Equity
Common Stock
During the three months
ended March 31, 2020, there were no activities that affected common stock.
Preferred Stock
We have one class of preferred stock. There were no activities
that affected preferred stock during the three months ended March 31, 2020.
Warrants
As of March 31, 2020 and
December 31, 2019, there were 756,368 warrants to purchase common stock outstanding.
4. Stock-Based Compensation
There was no stock-based
compensation expense for the three months ended March 31, 2020 and 2019 and there is no remaining unrecognized expense related
to stock options as of March 31, 2020.
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.
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, 2020, we had two equity incentive
plans:
|
●
|
The 2006 Equity Incentive Plan (the “2006 Plan”); and
|
|
|
|
|
●
|
The 2015 Stock Incentive Plan (the “2015 Plan”).
|
Both the 2006 Plan and the 2015 Plan have terminated
with respect to additional awards. However, shares issuable pursuant to previously awarded stock options may still be exercised
in accordance with their terms.
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, 2020
|
|
|
51,500
|
|
|
$
|
26.84
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2020
|
|
|
51,500
|
|
|
$
|
26.84
|
|
The aggregate intrinsic
value of the 51,500 stock options that are outstanding, vested and expected to vest as of March 31, 2020 was $0.
For the three months ended
March 31, 2020 and 2019, we recorded $0 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, 2020, 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.
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 because 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, 2020 and December 31, 2019.
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 regarding 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, 2020 and December 31, 2019.
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 May 5, 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 March 31, 2020.
Patent Assignment
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.
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 (“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 March 31, 2020, we had made no payments to TI under the NN1002 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, 2020 and 2019 were to customers located in the U.S., Europe and Asia. The Company reports revenues from external
customers based on the country where the customer is located.
The following table
presents net revenues by geographic area for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
Three months ended
March 31, 2020
|
|
|
Three months ended
March 31, 2019
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
United States
|
|
$
|
589
|
|
|
|
46
|
%
|
|
$
|
1,063
|
|
|
|
53
|
%
|
Japan
|
|
|
474
|
|
|
|
37
|
%
|
|
|
600
|
|
|
|
30
|
%
|
Germany
|
|
|
120
|
|
|
|
9
|
%
|
|
|
186
|
|
|
|
9
|
%
|
Switzerland
|
|
|
55
|
|
|
|
4
|
%
|
|
|
18
|
|
|
|
1
|
%
|
China
|
|
|
34
|
|
|
|
3
|
%
|
|
|
75
|
|
|
|
4
|
%
|
Taiwan
|
|
|
-
|
|
|
|
-
|
%
|
|
|
40
|
|
|
|
2
|
%
|
Other
|
|
|
22
|
|
|
|
1
|
%
|
|
|
30
|
|
|
|
1
|
%
|
|
|
$
|
1,294
|
|
|
|
100
|
%
|
|
$
|
2,012
|
|
|
|
100
|
%
|
The following table presents our total assets
by geographic region as of March 31, 2020 and December 31, 2019 (in thousands):
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
U.S.
|
|
$
|
2,008
|
|
|
$
|
2,898
|
|
Sweden
|
|
|
3,498
|
|
|
|
4,430
|
|
Asia
|
|
|
94
|
|
|
|
108
|
|
Total
|
|
$
|
5,600
|
|
|
$
|
7,436
|
|
7. Leases
We have operating
leases for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease
terms of three months to 2.5 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 three months prior to expiration date.
We report operating
leased assets, as well as operating lease current and noncurrent obligations on our 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 balance sheets.
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.
The components
of lease expense were as follows (in thousands):
|
|
Three Months Ended
March 31,
2020
|
|
|
Three Months Ended
March 31,
2019
|
|
Operating lease cost (1)
|
|
$
|
119
|
|
|
$
|
157
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
|
$
|
151
|
|
|
$
|
161
|
|
Interest on lease liabilities
|
|
|
7
|
|
|
|
10
|
|
Total finance lease cost
|
|
$
|
158
|
|
|
$
|
171
|
|
|
(1)
|
Includes short term lease costs of $24,000 and $34,000
for the three months ended March 31, 2020 and 2019, respectively.
|
Supplemental cash
flow information related to leases was as follows (in thousands):
|
|
Three Months Ended
March 31,
2020
|
|
|
Three Months Ended
March 31,
2019
|
|
Cash paid for amounts included in leases:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
(91
|
)
|
|
$
|
(111
|
)
|
Operating cash flows from finance leases
|
|
|
(7
|
)
|
|
|
(10
|
)
|
Financing cash flows from finance leases
|
|
|
(132
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
-
|
|
|
|
-
|
|
Supplemental balance
sheet information related to leases was as follows (in thousands):
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Operating leases
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
301
|
|
|
$
|
416
|
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease obligations
|
|
$
|
240
|
|
|
$
|
332
|
|
Operating lease liabilities, net of current portion
|
|
|
36
|
|
|
|
58
|
|
Total operating lease liabilities
|
|
$
|
276
|
|
|
$
|
390
|
|
|
|
|
|
|
|
|
|
|
Finance leases
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
3,136
|
|
|
$
|
3,348
|
|
Accumulated depreciation
|
|
|
(1,980
|
)
|
|
|
(1,956
|
)
|
Property and equipment, net
|
|
$
|
1,156
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
Current portion of finance lease obligations
|
|
$
|
520
|
|
|
$
|
568
|
|
Finance lease liabilities, net of current portion
|
|
|
360
|
|
|
|
508
|
|
Total finance lease liabilities
|
|
$
|
880
|
|
|
$
|
1,076
|
|
|
|
Three Months Ended
March 31,
2020
|
|
|
Three Months Ended
March 31,
2019
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
|
|
Operating leases
|
|
|
1.0 years
|
|
|
|
2.0 years
|
|
Finance leases
|
|
|
1.4 years
|
|
|
|
2.2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Discount Rate:
|
|
|
|
|
|
|
|
|
Operating leases (2)
|
|
|
5%
|
|
|
|
5%
|
|
Finance leases
|
|
|
2%
|
|
|
|
3%
|
|
|
(2)
|
Upon adoption of the new lease standard, discount rates
used for existing leases were established at January 1, 2019
|
A summary of future
minimum payments under non-cancellable operating lease commitments as of March 31, 2020 is as follows (in thousands):
Years ending December 31,
|
|
Total
|
|
2020 (remaining months)
|
|
$
|
228
|
|
2021
|
|
|
56
|
|
|
|
|
284
|
|
Less imputed interest
|
|
|
(8
|
)
|
Total lease liabilities
|
|
$
|
276
|
|
The following is a
schedule of minimum future rentals on the non-cancellable finance leases as of March 31, 2020 (in thousands):
Year ending December 31,
|
|
Total
|
|
2020 (remaining months)
|
|
$
|
415
|
|
2021
|
|
|
447
|
|
2022
|
|
|
34
|
|
Total minimum payments required:
|
|
|
896
|
|
Less amount representing interest:
|
|
|
(16
|
)
|
Present value of net minimum lease payments:
|
|
|
880
|
|
Less current portion
|
|
|
(520
|
)
|
|
|
$
|
360
|
|
8. Net Loss per Share
Basic net loss per
common share for the three months ended March 31, 2020 and 2019 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 0 and 0 outstanding stock options and 0 million and 0.3 million outstanding stock warrants under the
treasury stock method, and 0 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, 2020 and 2019, respectively, due to their anti-dilutive effect.
(in thousands, except per share amounts)
|
|
Three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
BASIC AND DILUTED
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
9,171
|
|
|
|
8,880
|
|
Net loss attributable to Neonode Inc.
|
|
$
|
(1,010
|
)
|
|
$
|
(573
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.07
|
)
|
9. Subsequent Events
We have evaluated
subsequent events through the filing date of this Form 10-Q, and determined that no subsequent events have occurred that would
require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as discussed
in the accompanying notes.
In December 2019, a novel
strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March
11, 2020, the World Health Organization declared COVID-19 a global pandemic. The extent of COVID-19’s effect on the Company's
operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic,
all of which are uncertain and difficult to predict considered the rapidly evolving landscape. The Company is currently analyzing
the potential impacts to all of its business areas. At this time, it is not possible to determine the magnitude of the overall
impact of COVID-19 on the Company. However, it could have a material adverse effect on the Company's business, condensed consolidated
balance sheets, liquidity, and condensed consolidated statements of operations, comprehensive income, stockholders’ equity,
and cash flows.