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 and licenses user interfaces and optical touch technology
to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed the Neonode technology into devices that
they produce and sell. In the fourth quarter of 2016, Neonode started to manufacture and sell AirBar. In December 2017, we
began selling embedded sensors modules that incorporate Neonode technology.
Liquidity
We incurred net losses of approximately
$3.1 million and $4.7 million for the years ended December 31, 2018 and 2017, respectively, and had an accumulated deficit of approximately
$185.2 million as of December 31, 2018. In addition, we used cash in operating activities of approximately $2.9 million and $5.6
million for the years ended December 31, 2018 and 2017, 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 a purchase price of $4.6 million in net proceeds. 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 Chief Executive Officer, Hakan Persson, and Chief
Financial Officer, Lars Lindqvist. The Neonode directors and members of management and employees individually purchased an aggregate
of approximately $2 millions of common stock as part of the private placement. In addition, existing major shareholder,
Peter Lindell, also purchased shares. Mr. Lindell and Mr. Rosberg are now each a beneficial owner of approximately 18% of
Neonode common stock as a result of the private placement.
August 2017 Private Placement
In August 2017, we entered into a Securities
Purchase Agreement with accredited investors as part of a private placement pursuant to which we issued a total of 975,000 shares
of common stock at $10.00 per share, and warrants, for of an aggregate purchase price of $9.75 million in gross proceeds. We received
approximately $9.1 million in net proceeds. Under the terms of the 2017 Securities Purchase Agreement, we also issued warrants
(the “2017 Warrants”) to investors in the private placement to purchase up to a total of 325,
000
shares of common stock at an exercise price of $20.00 per share. The 2017 Warrants became exercisable on August 8, 2018 and will
expire on August 8, 2020. If the 2017 Warrants are fully exercised, we will receive approximately $6.5 million in proceeds. There
are no registration rights associated with the securities to be issued and sold pursuant to the 2017 Securities Purchase Agreement.
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 module, non-recurring engineering fees and AirBar sales will enable us to reduce our operating losses in 2019. In addition,
we have improved the overall cost efficiency of our operations, as a result of the transition from providing our customers a full
custom design solution to providing standardized sensor modules which require limited custom design work. We intend to continue
to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful
in meeting its revenue targets and reducing its operating loss.
In the future, we may require sources of
capital in addition to cash on hand to continue operations and to implement our strategy. If our operations do not become cash
flow positive, we may be forced to seek equity investments or debt arrangements. No assurances can be given that we will be successful
in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available on acceptable terms,
or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results
of operations and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible
into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities
could impose restrictive covenants that could impair our ability to engage in certain business transactions.
2.
|
Summary of Significant Accounting policies
|
Principles of
Consolidation
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
and include the accounts of Neonode Inc. and its wholly owned subsidiaries, as well as Pronode Technologies AB, a 51% majority
owned subsidiary of Neonode Technologies AB. The remaining 49% of Pronode Technologies AB is owned by Propoint AB, located in Gothenburg,
Sweden. Pronode Technologies AB was organized to sell engineering services within the automotive markets. All inter-company accounts
and transactions have been eliminated in consolidation.
Neonode consolidates entities in which we
have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the
voting rights, and variable interest entities (“VIEs”) in which Neonode is the primary beneficiary.
The consolidated balance sheets at December
31, 2018 and 2017 and the consolidated statements of operations, comprehensive loss and cash flows for the years ended 2018 and
2017 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 assumptions that affect, at the date of the financial statements, the
reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue
and expenses. Actual results could differ from these estimates.
Significant estimates include, but are
not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining
the standalone selling price of performance obligations, variable consideration, and other obligations such as product returns
and refunds, and product warranties; provisions for uncollectible receivables; net realizable value of inventory; recoverability
of capitalized project costs and long-lived assets; the valuation allowance related to our deferred tax assets; and the fair value
of options
issued for stock-based compensation.
Cash
We have not had any liquid investments other
than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original maturities
of three months of less to be cash equivalents.
Concentration of Cash Balance Risks
Cash balances are maintained at various
banks in the
U.S., Japan, Korea, Taiwan and Sweden.
For deposits held with financial institutions in the U.S. the U.S. Federal Deposit Insurance Corporation, provides basic deposit
coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 100,000 Euro per customer
and covers deposits in all types of accounts. The Japanese government provides insurance coverage up to 10,000,000 Yen per customer.
The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance
Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial
institutions may exceed the amount of insurance provided.
Accounts Receivable and Allowance
for Doubtful Accounts
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 $149,000 as of December 31, 2018 and 2017.
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
$1,000 as of December 31, 2017. There were no costs capitalized in projects in process as of December 31, 2018.
Inventory
Inventory is stated at the lower of cost
or net realizable value, using the first-in, first-out method (“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.
During the fourth quarter of 2017, after
a comprehensive evaluation of our AirBar business we recorded a $1.1 million write-down, included in our cost of goods sold, to
reduce our AirBar specific component and finished goods inventory to estimated net realizable value and to revalue the purchase
price from the initial order of one component by $0.12 each. The component was originally valued at an average price basis but
due to slow selling inventory, we revalued at a higher specific price. The total price adjustment related to this component included
in cost of sales was approximately $0.1 million. In addition, we recorded a $0.1 million write-down related to this component repricing
which is included in our Research and Development expense. We also recorded a $0.5 million write-off related to production development
units, included in inventory, which is included in our Research and Development expense.
As of December 31, 2018, 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:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
246
|
|
|
|
164
|
|
Work-in-Process
|
|
|
220
|
|
|
|
231
|
|
Finished goods
|
|
|
753
|
|
|
|
759
|
|
Ending inventory
|
|
$
|
1,219
|
|
|
|
1,154
|
|
Investment in JV
We have invested $3,000, a 50% interest
in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us
the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to
exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such
as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting
is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our
share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also
be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the
JV. There have been no operations of Neoeye through December 31, 2018.
We review our investment in Neoeye to determine
whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider
in our determination are the financial condition, operating performance and near-term prospects of Neoeye. If a decline in
value is deemed to be other than temporary, we would recognize an impairment loss.
Property and Equipment
Property and equipment are stated at cost,
net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based
upon estimated useful lives of the assets as follows:
Estimated useful lives
|
|
|
|
Computer equipment
|
|
3 years
|
Furniture and fixtures
|
|
5 years
|
Equipment
|
|
7 years
|
Equipment purchased under a capital lease
is depreciated over the term of the lease, if that lease term is shorter than the estimated useful life.
Upon retirement or sale of property and
equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected
in the consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.
Long-Lived Assets
We assess any impairment by estimating the
future cash flow from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future
cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment
of these assets. As of December 31, 2018, 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 $(58,000) and $(84,000) during
the years ended December 31, 2018 and 2017, respectively. Foreign currency translation gains or (losses) were $(357,000) and $72,000
during the years ended December 31, 2018 and 2017, respectively.
Concentration of Credit and Business
Risks
Our customers are located in United States,
Europe and Asia.
As of December 31, 2018, four customers
represented approximately 67% of our consolidated accounts receivable.
As of December 31, 2017, two customers represented
approximately 69% of our consolidated accounts receivable.
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%
|
Customers who accounted for 10% or more
of our net revenues during the year ended December 31, 2017 are as follows.
|
●
|
Hewlett-Packard Company – 28%
|
|
●
|
Canon – 17%
|
|
●
|
Bosch – 10%
|
The Company conducts business in the United
States, Europe and Asia. 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. At December 31, 2017, the Company maintained approximately $2,373,000,
$5,418,000 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.
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.
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, 2018.
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, 2018 and 2017, 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 (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, 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, 2018 and 2017. 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, 2018 and 2017 (dollars in thousands):
|
|
Year ended
December 31, 2018
|
|
|
Year ended
December 31, 2017
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Net license revenues from automotive
|
|
$
|
1,627
|
|
|
|
19
|
%
|
|
$
|
2,148
|
|
|
|
21
|
%
|
Net license revenues from consumer electronics
|
|
|
6,327
|
|
|
|
74
|
%
|
|
|
6,536
|
|
|
|
64
|
%
|
Net revenues from sensor modules
|
|
|
227
|
|
|
|
3
|
%
|
|
|
814
|
|
|
|
8
|
%
|
Net revenues from non-recurring engineering
|
|
|
357
|
|
|
|
4
|
%
|
|
|
743
|
|
|
|
7
|
%
|
|
|
$
|
8,538
|
|
|
|
100
|
%
|
|
$
|
10,241
|
|
|
|
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 and deferred revenues as of December 31, 2018 and 2017 (dollars in thousands):
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Accounts receivable and unbilled revenue
|
|
$
|
1,830
|
|
|
$
|
1,010
|
|
Deferred revenues
|
|
|
75
|
|
|
|
1,248
|
|
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.
The opening balance
of current accounts receivable, net of allowance for doubtful accounts, was $2.2 million as of January 1, 2018. As of December
31, 2018, and 2017, accounts receivable, net of allowance for doubtful accounts, were $1.8 million and $1.0 million, respectively,
and are included in current assets on our consolidated balance sheets. There are no long-term accounts receivable related
to contracts.
The opening balance
of deferred revenues was $0.9 million as of January 1, 2018. As of December 31, 2018, and December 31, 2017, deferred revenues
were $75,000 and $1.2 million, respectively, and are included in current liabilities on our consolidated balance sheets. There
are no long-term liabilities related to contracts.
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. The balance in the allowance for
doubtful accounts was $149,000 as of December 31, 2018 and 2017.
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):
|
|
Year ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Balance at beginning of period
|
|
$
|
35
|
|
|
$
|
11
|
|
Provisions for warranty issued
|
|
|
(18
|
)
|
|
|
24
|
|
Balance at end of period
|
|
$
|
17
|
|
|
$
|
35
|
|
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 by segment (in thousands)
|
|
Years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred license fees
|
|
$
|
-
|
|
|
$
|
1,089
|
|
Deferred AirBar revenues
|
|
|
59
|
|
|
|
137
|
|
Deferred sensor modules revenues
|
|
|
16
|
|
|
|
22
|
|
|
|
$
|
75
|
|
|
$
|
1,248
|
|
The opening balance
of deferred revenues after adjustment pursuant to ASC 606 was $0.9 million as of January 1, 2018.
Changes in deferred
revenues were as follows (in thousands):
|
|
December 31, 2018
|
|
|
|
Balances
excluding
revenue
standard
|
|
|
Impact of Revenue
Standard
|
|
|
As
Reported
|
|
Deferred revenues
|
|
$
|
213
|
|
|
$
|
(138
|
)
|
|
$
|
75
|
|
Contracted revenue
not yet recognized was $75,000 as of December 31, 2018; we expect to recognize approximately 100% of that revenue over the next
twelve months.
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 $120,000 and $602,000 for
the years ended December 31, 2018 and 2017, 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.
|
|
(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, 2018 and 2017. 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, 2018 and 2017, 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,
2018 and 2017. 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, 2018 and
2017 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 13).
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,
|
|
|
|
2018
|
|
|
2017
|
|
Swedish Krona
|
|
|
8.70
|
|
|
|
8.54
|
|
Japanese Yen
|
|
|
110.43
|
|
|
|
112.15
|
|
South Korean Won
|
|
|
1,100.50
|
|
|
|
1,128.65
|
|
Taiwan Dollar
|
|
|
30.15
|
|
|
|
30.41
|
|
Exchange rate for the consolidated balance
sheets was as follows:
|
|
Years ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Swedish Krona
|
|
|
8.87
|
|
|
|
8.21
|
|
Japanese Yen
|
|
|
109.69
|
|
|
|
112.65
|
|
South Korean Won
|
|
|
1,113.63
|
|
|
|
1,066.31
|
|
Taiwan Dollar
|
|
|
30.61
|
|
|
|
29.66
|
|
Fair Value of Financial Instruments
We disclose the estimated fair values for
all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable,
accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “
Revenues from Contracts with
Customers (Topic 606)
” (“ASU 2014-09”) to address the new revenue recognition accounting standard, ASC 606
– Revenues from Contracts with Customers. The new standard was effective January 1, 2018 for public entities. Under the new
standard, revenue is recognized upon transfer of control of goods or services to customers, and the amount of revenue recognized
should reflect the consideration expected to be received for the transfer of those goods or services to customers. Disclosures
are required to describe the nature, amount, timing, and uncertainty of revenue and cash flows that may arise from contracts with
customers. Beginning with the first quarter of 2018, our financial results reflect adoption of the standard. See the Revenue Recognition
section in this note (Note 2) for further discussion.
We adopted the new
standard on January 1, 2018. For cost and time efficiency purposes, we used the modified retrospective (“cumulative-effect”)
approach to implement the new revenue recognition standard. We elected to apply that approach only to contracts not substantially
complete at January 1, 2018.
We may from time to
time negotiate contract modifications to contracts with our customers. While using the cumulative-effect approach for our revenue
recognition implementation, we found that there was one contract that was modified before the beginning of the earliest reporting
period presented. We elected to not apply the practical expedient related to contract modification because that contract was the
only contract modified during the past several years, and we determined that the modified contract in substance represented a new
contract for a new product. Therefore, the original contract and contract modification were treated as separate contracts for purposes
of contract analysis.
Use of the cumulative-effect
approach required us to make an opening adjustment to equity rather than recast prior year financial data; therefore, comparability
of financial statements was impacted.
The most significant
impact of the standard going forward relates to our accounting for license fee revenues. In prior years, we recognized license
fee revenues after receipt of royalty reports from our customers; those royalty reports were often subject to reporting lags of
five days to three months. We have requested that our customers provide more timely license fee royalty reports (with a maximum
one-month lag), and we estimate any license fee revenue still subject to lag reporting. We use our royalty history with each customer
to most accurately estimate the remaining royalties not yet reported to us at the end of each reporting period.
There was no adjustment
related to AirBar and sensor modules; however, there will be a change in the timing of revenue recognition in the future. The timing
of revenue recognition related to our AirBar and sensor modules depends upon how each sale is transacted - either point-of-sale
or through distributors. Revenue recognition timing for AirBar modules sold point-of-sale (online sales and other direct sales
to consumers) remains unchanged; revenue is recognized when we provide the promised product to the customer. In prior years, we
did not recognize revenues related to our AirBar and sensor modules sold through distributors until those products were sold through
to end customers. For sales of AirBar and sensor modules through distributors, revenues are now recognized when our distributors
obtain control over our products; control passes to our distributors depending upon a number of factors.
Although we are entitled
to an optional exemption from disclosure of variable consideration related to AirBar and sensor modules under the new standard,
we plan to continue to disclose variable consideration related to sales of AirBar and sensor modules.
There was no cumulative
adjustment related to non-recurring engineering fees, because all outstanding engineering projects were completed as of December
31, 2017.
The following table
summarizes the impact of the new revenue standard on the Company’s condensed consolidated statement of operations for 2018
and consolidated balance sheet as of December 31, 2018:
|
|
2018
|
|
|
|
Balances
excluding
revenue
standard
|
|
|
Impact
of Revenue
Standard
|
|
|
As
Reported
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
License fees
|
|
$
|
7,889
|
|
|
$
|
65
|
|
|
$
|
7,954
|
|
Sensor modules
|
|
|
227
|
|
|
|
-
|
|
|
|
227
|
|
Non-recurring engineering
|
|
|
357
|
|
|
|
-
|
|
|
|
357
|
|
Total Revenues
|
|
$
|
8,473
|
|
|
$
|
65
|
|
|
$
|
8,538
|
|
|
|
2018
|
|
|
|
Balances
excluding
revenue
standard
|
|
|
Impact
of Revenue
Standard
|
|
|
As
Reported
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Accounts receivable and unbilled revenue, net
|
|
$
|
320
|
|
|
$
|
1,510
|
|
|
$
|
1,830
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
$
|
213
|
|
|
$
|
(138
|
)
|
|
$
|
75
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(186,870
|
)
|
|
$
|
1,648
|
|
|
$
|
(185,222
|
)
|
Adoption of the new
standard resulted in an increase in accounts receivable and unbilled revenue, due to an adjustment to equity to record license
fees that had not yet been reported, as well as a reduction of deferred revenues, due to an adjustment to equity to apply license
fee prepayments to revenues.
Adoption of the new
revenue recognition standard had no impact on cash provided by or used in operating, financing, or investing activities on our
condensed consolidated statements of cash flows.
We implemented internal
controls effective January 1, 2018 to ensure that we properly evaluate our contracts and review assumptions we make for revenue
estimates, and we assessed the impact of the new accounting standard related to revenue recognition on our consolidated financial
statements to facilitate our adoption of the new standard on January 1, 2018.
In February 2016, the FASB issued ASU No.
2016-02, “
Leases (Topic 842)
” (“ASU 2016-02”). Under ASU 2016-02, lessees will be required recognize
the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a
lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset,
which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of
the earliest comparative period presented in the financial statements.
The effective date of the new lease standard
(ASC 842) is January 1, 2019, and we adopted the new standard on that date. Our lease standard implementation plan has been reviewed
and approved by executive management. We are using the required modified retrospective approach, which allows us to make any necessary
transition adjustments at January 1, 2019. We elected the optional transition method, which allows us to continue to use disclosures
required by the prior standard during 2019, the year of adoption. There are 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 will allow us to not reassess existing leases.
We currently have a limited number of leased
capital assets, all of which will be 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 and will continue to be reported on our consolidated
balance sheets under the new standard. We also have a small number of leases which are currently classified as operating leases;
we analyzed those leases, and will include two material operating leases on our consolidated balance sheets beginning January
1, 2019. We do not anticipate 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 do not need to make systems changes
to comply with the new standard. We plan to continue to track leased assets outside of our accounting systems. We do not expect
material changes in financial ratios, leasing practices, or tax reporting.
In June 2016, the FASB issued ASU No. 2016-13,
“
Financial Instruments-Credit Losses (Topic 326)
”-Measurement of Credit Losses on Financial Instruments”,
(“ASU 2016-13”), supplemented by ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments
– Credit Losses”, (“ASU 2018-19”). 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 ASU 2018-19 will become effective for fiscal years beginning after December 15, 2019, with early adoption
permitted. We are currently evaluating the impact ASU 2016-13 and ASU 2018-19 will have on our consolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09,
“
Codification Improvements (Topic 740, among others)
”, (“ASU 2018-09”), and in March 2018, the FASB
issued ASU No. 2018-05, “
Income Taxes (Topic 740)
”, (“ASU 2018-05”). The updates were issued to
address the income tax accounting and SEC reporting implications of the Tax Act. The new legislation contained several key tax
provisions that affected us, including the one-time mandatory transition tax on accumulated foreign earnings and a reduction of
the corporate income tax rate from 35% to 21% effective January 1, 2018, among other changes.
In October 2016, the FASB issued ASU No.
2016-16, “
Intra-Entity Transfers of Assets Other Than Inventory
.” This ASU requires entities to recognize the
income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities,
this ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within
those annual reporting periods. We adopted ASU 2016-16 in the first quarter ended March 31, 2018. The impact of adoption of this
standard is immaterial to the 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
168
|
|
|
$
|
136
|
|
Prepaid rent
|
|
|
41
|
|
|
|
68
|
|
VAT receivable
|
|
|
176
|
|
|
|
336
|
|
Prepaid inventory
|
|
|
120
|
|
|
|
494
|
|
Advances to suppliers
|
|
|
155
|
|
|
|
545
|
|
Other
|
|
|
230
|
|
|
|
257
|
|
Total prepaid expenses and other current assets
|
|
$
|
890
|
|
|
$
|
1,836
|
|
4.
|
Property and Equipment
|
Property and equipment consist of the following
(in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Computers, software, furniture and fixtures
|
|
$
|
1,407
|
|
|
$
|
1,313
|
|
Equipment under capital lease
|
|
|
3,525
|
|
|
|
3,590
|
|
Less accumulated depreciation and amortization
|
|
|
(2,448
|
)
|
|
|
(1,576
|
)
|
Property and equipment, net
|
|
$
|
2,484
|
|
|
$
|
3,327
|
|
Depreciation and amortization expense was
$1.0 million for each of the years ended December 31, 2018 and 2017, respectively.
Accrued expenses consist of the following
(in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued returns and warranty
|
|
$
|
17
|
|
|
$
|
35
|
|
Accrued consulting fees and other
|
|
|
248
|
|
|
|
142
|
|
Total accrued expenses
|
|
$
|
265
|
|
|
$
|
177
|
|
6.
|
Fair Value Measurements
|
Accounting guidance defines fair value,
establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. The accounting
guidance does not mandate any new fair value measurements and is applicable to assets and liabilities that are required to be recorded
at fair value under other accounting pronouncements.
There were no assets
or liabilities recorded at fair value on a recurring basis in 2018 and 2017.
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.
Common Stock
On
September 27, 2018, the Company filed the certificate of first amendment to its restated certificate of incorporate with the state
of Delaware to effect the reverse stock split, effective October 1, 2018. The Company also filed a certificate of second 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 shareholders 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
condensed consolidated financial statements. All shares and per share information in this Form 10-K has 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 November 23, 2018, a holder of 1 share
of Series B Preferred stock converted into 132 shares of our common stock.
On December 28, 2018, a Securities Purchase
Agreement was entered into 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.
In August 2017, a Securities
Purchase Agreement was entered into with accredited investors, as part of a private placement pursuant to which a total of 975,000
shares of common stock were issued. See Note 1 for more information.
Warrants and Other Common Stock Activity
During the years ended December 31, 2018
and 2017, there were no warrants exercised.
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, 2017
|
|
|
791,368
|
|
|
$
|
6.19
|
|
|
|
5.13
|
|
Issued
|
|
|
325,000
|
|
|
|
20.00
|
|
|
|
-
|
|
December 31, 2017
|
|
|
1,116,368
|
|
|
$
|
10.18
|
|
|
|
3.68
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired/forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable, December 31, 2018
|
|
|
1,116,368
|
|
|
$
|
10.18
|
|
|
|
2.68
|
|
Outstanding Warrants to Purchase Common Stock as of December 31, 2018:
Description
|
|
Issue Date
|
|
Exercise
Price
|
|
|
Shares
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
|
August 2016 Prefunded Warrants (1)
|
|
08/16/16
|
|
$
|
10.00
|
|
|
|
360,000
|
|
|
02/16/22
|
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
|
|
|
|
|
|
|
|
|
1,116,368
|
|
|
|
|
(1)
|
Under the terms of the prefunded warrants, the warrant holder prepaid $9.90 of the original $10.00 warrant per share exercise
price at the time of issuance of the warrant. The remaining $0.10 exercise price is required to be paid in full prior to the issuance
of any common stock under the terms of the prefunded warrant agreement.
|
As a result of the December 2018
private placements and previous warrants, we have issued or reserved 27,305 more than our available shares of authorized
common stock, even though a total of 333,334 warrants cannot be legally exercised. We automatically come into compliance on
April 26, 2019, when 44,300 stock options are expired because their original issuance terms is reached, and we anticipate
proposing an increase in our authorized common stock at our 2019 Annual Meeting of Stockholders. The estimated fair value of warrants that would be reclassified as a result of the insufficient
authorized shares was determined to be insignificant.
Preferred Stock
The terms of our Series B Preferred stock
are as follows:
Dividends and Distributions
The holders of shares of Series B Preferred
stock are entitled to participate with the holders of our common stock with respect to any dividends declared on the common stock
in proportion to the number of shares of common stock issuable upon conversion of the shares of Series B Preferred stock held by
them.
Liquidation Preference
In the event of any liquidation, dissolution,
or winding up of our operations, either voluntary or involuntary, subject to the rights of the Series B Preferred stock and Senior
Preferred stock, shall be entitled to receive, after any distribution to the holders of senior preferred stock and prior to and
in preference to any distribution to the holders of common stock, $0.001 for each share of Series B Preferred stock then outstanding.
Voting
The holders of shares of Series B Preferred
stock have one vote for each share of Series B Preferred stock held by them.
Conversion
Initially, each share of Series B Preferred
stock was convertible into one share of our common stock. On March 31, 2009, our stockholders approved a resolution to increase
the authorized share capital, and to increase the conversion ratio to 132.07 shares of our common stock for each share of Series
B Preferred stock.
Conversion of Preferred Stock Issued
to Common Stock
The following table summarizes the amounts
as of December 31, 2018:
|
|
Shares of Preferred Stock Not Exchanged as of December 31, 2018
|
|
|
Conversion Ratio
|
|
|
Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
82
|
|
|
|
132.07
|
|
|
|
10,830
|
|
8.
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Stock-Based Compensation
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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 2015, our shareholders
approved the Neonode Inc. 2015 Stock Incentive Plan (the “2015 Plan”) which replaces our 2006 Equity Incentive Plan
(the “2006 Plan”). Under the 2015 Plan, 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. During the year ended December 31,
2018, 30,000 stock options were granted under the 2015 Plan.
Accordingly, as of December 31, 2018, 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,
2018:
Options Outstanding
|
|
Range of Exercise Price
|
|
Number Outstanding and exercisable at 12/31/18
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0 - $ 15.00
|
|
|
32,500
|
|
|
|
2.46
|
|
|
$
|
14.95
|
|
$ 15.01 - $ 42.50
|
|
|
55,300
|
|
|
|
0.76
|
|
|
$
|
40.62
|
|
$ 42.51 - $ 62.10
|
|
|
12,000
|
|
|
|
1.60
|
|
|
$
|
59.60
|
|
|
|
|
99,800
|
|
|
|
1.41
|
|
|
$
|
34.55
|
|
A summary of the combined activity under
all of the stock option plans is set forth below:
There were 30,000 stock options granted
during the years ended December 31, 2018. No stock options were granted in 2017. 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, 2018
and 2017, we recorded $29,000 and $72,000, 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 expense
related to stock options as of December 31, 2018.
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, 2018 and 2017.
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, 2018 and 2017.
On February 4, 2011, we entered into an
Analog Device Development Agreement with an effective date of January 24, 2010 (the “NN1001 Agreement”) with Texas
Instruments pursuant to which Texas Instruments agreed to integrate our intellectual property into an Application Specific Integrated
Circuit (“ASIC”). The NN1001 ASIC only can be sold by Texas Instruments exclusively to our licensees. Under the terms
of the NN1001 Agreement, we agreed to reimburse Texas Instruments $500,000 of non-recurring engineering development costs based
on shipments of the NN1001. Under the terms of the NN1001 Agreement, we also agreed to reimburse Texas Instruments a non-recurring
engineering fee of $0.08 per unit for each of the first one million units sold and $0.05 for the next eight million units sold.
Through December 31, 2015, all payments under the NN1001 Agreement have been made.
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, 2018, we had made no payments to TI under the NN1002 Agreement.
On December 4, 2014, we entered into an
Analog Device Development Agreement (the “NN1003 Agreement”) with STMicroelectronics International N.V. (“STMicro”)
pursuant to which STMicro agreed to integrate our intellectual property into an ASIC. The NN1003 ASIC only can be sold by STMicro
exclusively to our licensees. Under the terms of the NN1003 Agreement, we agreed to reimburse STMicro up to $835,000 of non-recurring
engineering costs. As of December 31, 2018, we paid a total of $835,000 under the NN1003 agreement.
On August 22, 2016, we entered into a lease
of office space located at 2880 Zanker Road, San Jose, CA 95134. The lease is renewed monthly.
On October 1, 2016 we entered into a lease
of office space located at 405 Elpulimento Shinjuku, 6-7-1, Shinjuku-ku, Tokyo, Japan. The lease is valid through September 30,
2020 and can be terminated with two months’ written notice before the termination date.
On July 1, 2014, Neonode Technologies AB
entered into a lease for 7,007 square feet of office space located at Storgatan 23C, Stockholm, Sweden. The lease is extended on
a yearly basis unless written notice three months prior to expiration date.
On December 1, 2015, Pronode Technologies
AB entered into a lease agreement for 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka, Sweden. The lease
is valid through December 9, 2020 and can be terminated with nine months’ written notice before the termination date.
In January 2015, our subsidiary Neonode
Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea. The lease may be cancelled
with 2 months’ notice.
On December 1, 2015, Neonode Taiwan Ltd.
entered into a lease agreement located at Rm. 2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan. The lease
is renewed monthly.
For the years ended December 31, 2018 and
2017, we recorded approximately $687,000 and $681,000, respectively, for rent expense.
We believe our existing facilities are in
good condition and suitable for the conduct of our business.
A summary of future minimum payments under
non-cancellable operating lease commitments as of December 31, 2018 is as follows (in thousands):
In April 2014, we entered into a lease for
certain specialized milling equipment. Under the terms of the lease agreement we are obligated to purchase the equipment at the
end of the original six-year lease term for 10% of the original purchase price of the equipment. In accordance with relevant accounting
guidance the lease is classified as a capital lease. The lease payments and depreciation period began on July 1, 2014 when the
equipment went into service. The implicit interest rate of the lease is 4% per annum.
Between the second and the fourth quarters
of 2016, we entered into six leases for component production equipment. Under the terms of five of the lease agreements we are
obligated to purchase the equipment at the end of the original three to five-year lease terms for 5-10% of the original purchase
price of the equipment. In accordance with relevant accounting guidance the leases are classified as capital leases. The lease
payments and depreciation periods began between June and November 2016 when the equipment went into service. The implicit interest
rate of these leases is approximately 3% per annum. One of the leases is a hire-purchase agreement where the equipment is required
to be paid off after five years. In accordance with relevant accounting guidance the lease is classified as a capital lease. The
lease payments and depreciation period began on July 1, 2016 when the equipment went into service. The implicit interest rate of
the lease is approximately 3% per annum.
In 2017, we entered into a lease for component
production equipment. Under the terms of the lease agreement the lease will be renewed with one year at the time at the end of
the original four-year lease term. In accordance with relevant accounting guidance the lease is classified as a capital lease.
The lease payments and depreciation periods began in May 2017 when the equipment went into service. The implicit interest rate
of this lease is approximately 1.5% per annum.
In 2018, we entered into an additional lease
for component production equipment. Under the terms of the lease agreement the lease will be renewed with one year at the time
at the end of the original four-year lease term. In accordance with relevant accounting guidance the lease is classified as a capital
lease. The lease payments and depreciation periods began in August 2018 when the equipment went into service. The implicit interest
rate of this lease is approximately 1.5% per annum.
The following is a schedule of minimum future
rentals on the non-cancelable capital leases as of December 31, 2018 (in thousands):
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 net revenues by geographic region for the years
ended December 31, 2018, and 2017 (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:
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, 2018, we had federal, state and foreign net operating losses of $59.7
million, $20.0 million and $4.7 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, 2018, 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, 2018 and 2017.
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,
2018 and 2017 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, 2018 and 2017, we had no accrued
interest and penalties related to uncertain tax matters.
As of December 31, 2018, 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 2017 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, 2018 and 2017 were $413,000
and $368,000, 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, 2018 and 2017 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, 2018 and 2017 were $4,000 and $4,000, respectively.
Basic net loss per common share for the
years ended December 31, 2018 and 2017 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
350,000 and 415,000 outstanding stock warrants, 11,000 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, 2018 and 2017, respectively,
due to their anti-dilutive effect.