NEONODE, INC, 10-K filed on 15 Mar 17
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2016
Mar. 8, 2017
Jun. 30, 2016
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Neonode, Inc 
 
 
Entity Central Index Key
0000087050 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 54,766,962 
Entity Common Stock, Shares Outstanding
 
48,844,503 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash
$ 3,476 
$ 3,082 
Accounts receivable, net
1,548 
1,346 
Projects in process
   
158 
Inventory
696 
   
Prepaid expenses and other current assets
1,949 
747 
Total current assets
7,669 
5,333 
Investment in joint venture
   
Property and equipment, net
2,031 
594 
Total assets
9,703 
5,927 
Current liabilities:
 
 
Accounts payable
1,286 
965 
Accrued payroll and employee benefits
1,001 
932 
Accrued expenses
172 
382 
Deferred revenues
1,921 
1,475 
Current portion of capital lease obligations
228 
57 
Total current liabilities
4,608 
3,811 
Capital lease obligation, net of current portion
960 
283 
Total liabilities
5,568 
4,094 
Commitments and contingencies
   
   
Stockholders' equity
 
 
Series B Preferred stock, 54,425 shares authorized with par value of $0.001; 83 shares issued and outstanding at December 31, 2016 and 2015, respectively. (In the event of dissolution, each share of Series B Preferred stock has a liquidation preference equal to par value of $0.001 over the shares of common stock)
   
   
Common stock, 70,000,000 shares authorized at December 31, 2016 and 2015, respectively, with par value of $0.001; 48,844,503 and 43,805,586 shares issued and outstanding at December 31, 2016 and 2015, respectively
49 
44 
Additional paid-in capital
183,667 
175,504 
Accumulated other comprehensive (loss) income
(171)
46 
Accumulated deficit
(179,040)
(173,749)
Total Neonode Inc. stockholders' equity
4,505 
1,845 
Noncontrolling interests
(370)
(12)
Total stockholders' equity
4,135 
1,833 
Total liabilities and stockholders' equity
$ 9,703 
$ 5,927 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
Common stock, shares authorized
70,000,000 
70,000,000 
Common stock, par value
$ 0.001 
$ 0.001 
Common stock, shares issued
48,844,503 
43,805,586 
Common stock, shares outstanding
48,844,503 
43,805,586 
Series B Preferred Stock
 
 
Preferred stock, shares authorized
54,425 
54,425 
Preferred stock, par value
$ 0.001 
$ 0.001 
Preferred stock, shares issued
83 
83 
Preferred stock, shares outstanding
83 
83 
Preferred stock, liquidation preference
$ 0.001 
$ 0.001 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenue:
 
 
 
License fees
$ 8,350 
$ 7,045 
$ 3,156 
Sensor modules sales
149 
   
   
Non-recurring engineering
1,714 
4,070 
1,584 
Total revenues
10,213 
11,115 
4,740 
Cost of revenues:
 
 
 
Sensor module
54 
   
   
Non-recurring engineering
1,284 
3,780 
1,509 
Total cost of revenues
1,338 
3,780 
1,509 
Total gross margin
8,875 
7,335 
3,231 
Operating expenses:
 
 
 
Research and development
7,069 
6,279 
7,373 
Sales and marketing
2,857 
3,753 
3,250 
General and administrative
4,093 
4,999 
6,799 
Total operating expenses
14,019 
15,031 
17,422 
Operating loss
(5,144)
(7,696)
(14,191)
Other expense, net:
 
 
 
Interest expense
(47)
(18)
(14)
Other expense, net
(91)
(28)
(16)
Total other expense, net
(138)
(46)
(30)
Loss before provision for income taxes
(5,282)
(7,742)
(14,221)
Provision for income taxes
367 
93 
13 
Net loss including noncontrolling interests
(5,649)
(7,835)
(14,234)
Less: Net loss attributable to noncontrolling interests
358 
15 
   
Net loss attributable to Neonode Inc.
$ (5,291)
$ (7,820)
$ (14,234)
Loss per common share:
 
 
 
Basic and diluted loss per share
$ (0.12)
$ (0.19)
$ (0.36)
Basic and diluted - weighted average number of common shares outstanding
45,690 
41,202 
39,532 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statements of Comprehensive Loss [Abstract]
 
 
 
Net loss including noncontrolling interests
$ (5,649)
$ (7,835)
$ (14,234)
Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(217)
(103)
138 
Comprehensive loss
(5,866)
(7,938)
(14,096)
Less: Comprehensive loss attributable to noncontrolling interests
358 
15 
   
Comprehensive loss attributable to Neonode Inc.
$ (5,508)
$ (7,923)
$ (14,096)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands, except Share data
Total
Series B Preferred Stock
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Total Neonode Inc. Stockholders' Equity
Noncontrolling Interests
Balances at Dec. 31, 2013
$ 6,348 
    
$ 38 
$ 157,994 
$ 11 
$ (151,695)
$ 6,348 
    
Balances, shares at Dec. 31, 2013
 
83,000 
37,934,000 
 
 
 
 
 
Stock option compensation expense to employees, directors and vendors
1,729 
   
   
1,729 
   
   
1,729 
   
Proceeds from sale of common stock and pre-funded warrants, net of offering costs
9,253 
   
9,251 
   
   
9,253 
   
Proceeds from sale of common stock and pre-funded warrants, net of offering costs, shares
 
   
2,500,000 
 
 
 
 
 
Common stock issued upon exercise of common stock warrants
36 
   
   
36 
   
   
36 
   
Common stock issued upon exercise of common stock warrants, shares
 
   
21,000 
 
 
 
 
 
Foreign currency translation adjustment
138 
   
   
   
138 
   
138 
   
Net loss
(14,234)
   
   
   
   
(14,234)
(14,234)
   
Balances at Dec. 31, 2014
3,270 
   
40 
169,010 
149 
(165,929)
3,270 
   
Balances, shares at Dec. 31, 2014
 
83,000 
40,455,000 
 
 
 
 
 
Stock option compensation expense to employees, directors and vendors
1,075 
   
   
1,075 
   
   
1,075 
   
Proceeds from sale of common stock and pre-funded warrants, net of offering costs
5,422 
   
5,419 
   
   
5,422 
   
Proceeds from sale of common stock and pre-funded warrants, net of offering costs, shares
 
   
3,200,000 
 
 
 
 
 
Common stock issued upon exercise of common stock warrants
   
   
   
   
   
Common stock issued upon exercise of common stock warrants, shares
 
   
151,000 
 
 
 
 
 
Foreign currency translation adjustment
(103)
   
   
   
(103)
   
(103)
   
Noncontrolling interests Pronode initial contribution
   
   
   
   
   
   
Net loss
(7,835)
   
   
   
   
(7,820)
(7,820)
(15)
Balances at Dec. 31, 2015
1,833 
   
44 
175,504 
46 
(173,749)
1,845 
(12)
Balances, shares at Dec. 31, 2015
 
83,000 
43,806,000 
 
 
 
 
 
Stock option compensation expense to employees, directors and vendors
255 
 
 
255 
 
 
255 
 
Proceeds from sale of common stock and pre-funded warrants, net of offering costs
7,913 
 
7,908 
 
 
7,913 
 
Proceeds from sale of common stock and pre-funded warrants, net of offering costs, shares
 
 
5,027,000 
 
 
 
 
 
Common stock issued upon exercise of common stock warrants
 
 
   
 
 
 
 
 
Common stock issued upon exercise of common stock warrants, shares
 
 
12,000 
 
 
 
 
 
Foreign currency translation adjustment
(217)
 
 
 
(217)
 
(217)
 
Net loss
(5,649)
 
 
 
 
(5,291)
(5,291)
(358)
Balances at Dec. 31, 2016
$ 4,135 
    
$ 49 
$ 183,667 
$ (171)
$ (179,040)
$ 4,505 
$ (370)
Balances, shares at Dec. 31, 2016
 
83,000 
48,845,000 
 
 
 
 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
 
 
 
Net loss (including noncontrolling interests)
$ (5,649)
$ (7,835)
$ (14,234)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Stock-based compensation expense
255 
1,075 
1,729 
Bad debt expense
   
   
167 
Depreciation and amortization
360 
187 
202 
Loss on disposal of property and equipment
91 
28 
16 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(204)
(239)
(304)
Projects in process
158 
38 
530 
Inventory
(737)
   
   
Prepaid expenses and other current assets
(1,316)
(263)
(60)
Accounts payable and accrued expenses
343 
871 
363 
Deferred revenues
447 
(1,925)
(233)
Net cash used in operating activities
(6,252)
(8,063)
(11,824)
Cash flows from investing activities:
 
 
 
Purchase of property and equipment
(987)
(198)
(115)
Investment in joint venture
(3)
   
   
Proceeds from sale of property and equipment
   
Net cash used in investing activities
(985)
(198)
(108)
Cash flow from financing activities:
 
 
 
Proceeds from exercise of warrants
   
   
36 
Proceeds from issuance of common stock and pre-funded warrants, net of offering costs
7,913 
5,422 
9,253 
Contributions from noncontrolling interests
   
   
Principal payments on capital lease obligations
(116)
(57)
(34)
Net cash provided by financing activities
7,797 
5,368 
9,255 
Effect of exchange rate changes on cash
(166)
(154)
(9)
Net change in cash
394 
(3,047)
(2,686)
Cash at beginning of year
3,082 
6,129 
8,815 
Cash at end of year
3,476 
3,082 
6,129 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
48 
18 
14 
Cash paid for income taxes
367 
93 
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Purchase of equipment with capital lease obligation
$ 983 
    
$ 530 
Nature of the Business and Operations
Nature of the Business and Operations
1. Nature of the Business and Operations

Background and Organization

Neonode Inc. (“we”, “us”, “our”, or the “Company”) was incorporated in the State of Delaware in 1997 as the parent of Neonode AB, a company founded in February 2004 and incorporated in Sweden. On December 29, 2008, we entered into a share exchange agreement with AB Cypressen nr 9683 (renamed Neonode Technologies AB), a Swedish engineering company, and Neonode Technologies AB became our wholly owned subsidiary. In 2013, we established additional wholly owned subsidiaries: Neonode Japan Inc. (Japan); Neno User Interface Solutions AB (Sweden); NEON Technology Inc. (U.S.); and Neonode Americas Inc. (U.S.). In 2014, we established one additional wholly owned subsidiary: Neonode Korea Ltd. (South Korea). In 2015, we established one additional wholly owned subsidiary: Neonode Taiwan Ltd. (Taiwan). In 2015, we established Pronode Technologies AB, a majority-owned subsidiary of Neonode Technologies AB. In 2016, we entered into a joint venture, named Neoeye AB, between SMART EYE AB and our subsidiary Neonode Technologies AB.

Operations

Neonode Inc., collectively with its subsidiaries is referred to as “Neonode”, develops and licenses user interfaces and optical touch technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed the Neonode technology into devices that they produce and sell. In 2016, Neonode started to manufacture and sell standardized embedded sensors that incorporate Neonode technology.

Reclassifications

Accrued payroll and employee benefits as of December 31, 2015 is now reported under its own caption, separate from accrued expenses, in the accompanying consolidated balance sheet, in order to conform to the current period presentation.

Liquidity

We incurred net losses of approximately $5.3 million, $7.8 million and $14.2 million for the years ended December 31, 2016, 2015 and 2014, respectively, and had an accumulated deficit of approximately $179.0 million as of December 31, 2016. In addition, we used cash in operating activities of approximately $6.3 million, $8.1 million and $11.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.

In June 2014, we filed a shelf registration statement with the SEC that became effective on June 12, 2014. As of December 31, 2016, there were 1,800,000 shares remaining for issuance under this existing shelf registration statement. This shelf registration statement will expire on June 12, 2017.

We may from time to time issue shares of our common stock under an effective shelf registration statement in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in a prospectus supplement and any other offering materials, at the time of the offering.

We intend to file a new shelf registration statement with the SEC concurrent with the filing of this Annual Report. Upon its effectiveness, this new shelf registration statement will allow us to offer and sell common stock in one or more offerings with an aggregate offering price of up to $20 million. 

On October 13, 2015, we issued 3,200,000 shares of our common stock from our shelf registration statement to investors in connection with an equity financing transaction. We sold the stock at $1.90 per share and raised approximately $6.1 million gross and received approximately $5.4 million in cash, net of direct offering costs including underwriting discounts and legal, audit and other regulatory costs of approximately $0.7 million. 

In August 2016, we entered into a Securities Purchase Agreement with institutional and accredited investors as part of a private placement pursuant to which we issued a total of 8,627,352 shares of common stock, as described below, and warrants for an aggregate purchase price of $7.9 million in net proceeds. The total number of shares included (i) an aggregate of 427,352 shares at $1.17 per share to Thomas Eriksson, Chief Executive Officer of Neonode, and Remo Behdasht, SVP AirBar Devices at Neonode for gross proceeds of approximately $500,000, (ii) an aggregate of 4,600,000 shares at a price of $1.00 per share to outside investors for gross proceeds of $4,600,000, and (iii) up to 3,600,000 shares issuable upon exercise of warrants (the “Pre-Funded Warrants”) by outside investors for which we received $3,564,000 pre-funded in proceeds and will receive up to $36,000 in proceeds upon future cash exercises. 

Under the terms of the August 2016 Securities Purchase Agreement, we issued warrants (the “Purchase Warrants”) to all investors in the private placement to purchase up to a total of 4,313,676 shares of common stock at an exercise price of $1.12 per share. The Purchase Warrants became exercisable February 17, 2017 and will expire February 17, 2022. None of the Purchase Warrants have been exercised as of March 10, 2017. If the warrants are fully exercised, we will receive approximately $4.8 million in proceeds.

The consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business. Management evaluated the significance of the Company’s operating loss and determined that the Company’s current operating plan and sources of capital would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.

We expect our revenues from license fees, non-recurring engineering fees and AirBar sales will enable us to reduce our operating losses in 2017. We have received purchase orders from our distributors for AirBar and entered into an agreement with an OEM customer for our sensor modules. In addition, we have improved the overall cost efficiency of our operations, as a result of the transition from providing our customers a full custom design solution to providing standardized sensor modules which require limited to no custom design work. We intend to continue to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating loss.

As described above, upon the exercise of the Purchase Warrants issued in August 2016, we will receive up to approximately $4.8 million in proceeds. These Purchase Warrants are presently exercisable and are “in-the-money.” As also described above, concurrent with the filing of this Annual Report, we intend to file a new shelf registration statement with the SEC concurrent with the filing of this Annual Report. Upon its effectiveness, this new shelf registration statement will allow us to offer and sell common stock in one or more offerings with an aggregate offering price of up to $20 million. In the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

Summary of Significant Accounting Policies
Summary of Significant Accounting policies
2. Summary of Significant Accounting policies

 

Principles of Consolidation

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of Neonode Inc. and its wholly owned subsidiaries, as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies AB. The remaining 49% of Pronode Technologies AB is owned by Propoint AB, located in Gothenburg, Sweden. Pronode Technologies AB was organized to sell engineering services within the automotive markets. All inter-company accounts and transactions have been eliminated in consolidation.

 

Neonode consolidates entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights, and variable interest entities (“VIEs”) in which Neonode is the primary beneficiary.

 

In June 2016, we entered into a Joint Venture (“JV”) with a Swedish based eye-tracking company SMART EYE AB to develop multi-chip modules for the consumer and automotive markets. The name of this JV is Neoeye AB (“Neoeye”). 

 

We use the equity method of accounting to record our investments in the common stock of each entity in which Neonode has the ability to exercise significant influence, but does not own a majority equity interest. Under the equity method, our investment is originally included in equity interests at cost, and is adjusted to recognize our share of net earnings or losses of the investee, in our consolidated balance sheets; our share of net income (loss) is reported in our consolidated statements of operations according to our equity ownership in each entity.

 

The consolidated statements of operations, comprehensive loss and cash flows for the year ended December 31, 2014 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden) and Neonode Korea Ltd. (South Korea).

 

The consolidated balance sheets at December 31, 2016 and 2015 and the consolidated statements of operations, comprehensive loss and cash flows for the years then ended include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), as well as Pronode Technologies AB (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB.

 

Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires making estimates and assumptions that affect, at the date of the financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates. Significant estimates include, but are not limited to, provisions for uncollectible receivables and sales returns, warranty liabilities, the achievement of substantive milestones and vendor-specific objective evidence (“VSOE”) of fair value for purposes of revenue recognition (or deferral of revenue), net realizable value of inventory, recoverability of capitalized project costs and long-lived assets, the valuation allowance related to our deferred tax assets, and the fair value of options and warrants issued for stock-based compensation.

 

Cash

 

We have not had any liquid investments other than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original maturities of three months of less to be cash equivalents.

 

Concentration of Cash Balance Risks

 

Cash balances are maintained at various banks in the United States, Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions in the United States the U.S. Federal Deposit Insurance Corporation, provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts. The Japanese government provides insurance coverage up to 10,000,000 Yen per customer. The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount of insurance provided.

 

Accounts Receivable and Allowance for Doubtful Accounts  

 

Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $149,000 and $167,000 as of December 31, 2016 and 2015, respectively.

 

Projects in Process

 

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. There were no costs capitalized in projects in process as of December 31, 2016. Costs capitalized in projects in process were $158,000 as of December 31, 2015.

 

Inventory

 

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”) and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of December 31, 2016, the Company’s inventory consists primarily of components that will be used in the manufacturing of our first sensor module, AirBar. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

 

Raw materials, work-in-process, and finished goods at December 31 are as follows:

 

    December 31,  
    2016  
Raw materials   $ 522  
Work-in-Process     42  
Finished goods     132  
Ending inventory   $ 696  

 

Investment in JV

 

We have invested $3,000, a 50% interest in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through December 31, 2016.

 

Neoeye, as an unconsolidated equity investee, will recognize revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured, which is generally upon the receipt of the license proceeds. Neoeye may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones have been met.

 

We review our investment in Neoeye to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near term prospects of Neoeye. If a decline in value is deemed to be other than temporary, we would recognize an impairment loss.

 

Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows:

 

Estimated useful lives
     
Computer equipment   3 years
Furniture and fixtures   5 years
Equipment   7 years

 

Equipment purchased under a capital lease is depreciated over the term of the lease, if that lease term is shorter than the estimated useful life.

 

Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.

 

Long-Lived Assets

 

We assess any impairment by estimating the future cash flow from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of December 31, 2016, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

 

Foreign Currency Translation and Transaction Gains and Losses

 

The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese Yen, South Korean Won or the Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Gains or (losses) resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations and were $74,000, $62,000 and ($37,000) during the years ended December 31, 2016, 2015 and 2014, respectively. Foreign currency translation gains or (losses) were ($217,000), ($103,000) and $138,000 during the years ended December 31, 2016, 2015 and 2014, respectively.

 

Concentration of Credit and Business Risks

 

Our customers are located in United States, Europe and Asia.

 

As of December 31, 2016, three customers represented approximately 59% of our consolidated accounts receivable.

 

As of December 31, 2015, three customers represented approximately 78% of our consolidated accounts receivable.

 

Customers who accounted for 10% or more of our net revenues during the year ended December 31, 2016 are as follows.

 

  Hewlett-Packard Company – 38%
  Amazon – 11%
  Autoliv – 11%

 

Customers who accounted for 10% or more of our net revenues during the year ended December 31, 2015 are as follows.

 

  Hewlett-Packard Company – 25%
  Autoliv – 21%
  Amazon – 14%

 

Customers who accounted for 10% or more of our net revenues during the year ended December 31, 2014 are as follows.

 

  Hewlett-Packard Company – 24%
  KOBO Inc. – 10%
  Leap Frog Enterprises Inc. – 11%
  Sony Corporation – 10%

 

The Company conducts business in the United States, Europe and Asia. At December 31, 2016, the Company maintained approximately $2,189,000, $1,872,000 and $74,000 of its net assets (liabilities) in the United States, Europe and Asia, respectively. At December 31, 2015, the Company maintained approximately $2,533,000, ($909,000) and $209,000 of its net assets (liabilities) in the United States, Europe and Asia, respectively. 

 

Revenue Recognition

 

Licensing Revenues:

 

We derive revenue from the licensing of internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP and royalties payable following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support. We follow U.S. GAAP for revenue recognition as per unit royalty products are distributed or licensed by our customers. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of technology; (2) the customer distributes or licenses the products; (3) the customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. Our customers report to us the quantities of products distributed or licensed by them after the end of the reporting period stipulated in the contract, generally 30 to 45 days after the end of the month or quarter. We recognize licensing revenue in the period in which royalty reports are received, rather than the period in which the products are distributed or to which the license relates.

 

Explicit return rights are not offered to customers. There have been no returns through December 31, 2016.

 

Engineering Services:

 

We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue.  

 

Generally, we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers.  Engineering services are performed under a signed Statement of Work (“SOW”) with a customer. The deliverables and payment terms stipulated under the SOW provide guidance on the project revenue recognition.

 

Revenues from contracts that are short-term in nature and related costs that are difficult to estimate are accounted for under the completed contract method.

 

Revenues from contracts with substantive defined milestones that we have determined are reasonable, relevant to all the deliverables and payment terms in the SOW that are commensurate with the efforts required to achieve the milestones are recognized under the milestone recognition method.

 

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the year ended December 31, 2015, $165,000 was recorded as cost of sales due to expected losses related to two SOW projects. In the years ended December 31, 2016 and 2014, no losses related to SOW projects were recorded.

 

Optical Sensor Modules Revenues:

 

We derive revenue from the sales of sensor modules hardware products sold directly to our OEM and Tier 1 supplier customers who embed our hardware into their products and from sales of branded consumer products that incorporate our sensor modules sold to distributors or directly to end users. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. We enter into sales agreements that generally provide customers with limited rights of return and warranty provisions. U.S. GAAP allows companies to make reasonable aggregations and approximations of returns data with regard to returns. Our returns and warranty experience to date has enabled us to make reasonable returns estimates, which are further supported by the fact that our product sales involve homogenous transactions.

 

Revenue is recognized when all of the following criteria have been met:

 

  Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.
  Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.
  The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
  Collectibility is reasonably assured. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

 

In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. As our business and offerings are expected to evolve over time, our pricing practices may be required to be modified accordingly, which could result in changes in selling prices.

 

We make sales to distributors and revenue from distributors is recognized based on a sell-through basis using sales and inventory information provided by these distributors. Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred revenues in the consolidated balance sheet. When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known, we recognize previously deferred revenues as sales and cost of sales. Distributors participate in various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.

 

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns as of December 31, 2016 was $0.1 million and was recorded as a reduction of our accounts receivable and revenue. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.

 

Product Warranty

 

The following table summarizes the activity related to the product warranty liability (in thousands):

 

    Year ended  
    December 31,
2016
    December 31,
2015
 
Balance at beginning of period   $ -     $       -  
Provisions for warranty issued     11       -  
Balance at end of period   $ 11     $ -  

 

The Company accrues for warranty costs as part of its cost of sales of sensor modules based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 to 36 months from the customer receipt of the product.

 

Deferred Revenues

 

We defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of December 31, 2016 and 2015, we have $1.8 million and $1.1 million, respectively, of deferred license fee revenue related to prepayments for future license fees from four and two customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of December 31, 2016, we had $0.1 million of deferred revenue from our AirBar sales. As of December 31, 2015, there was no deferred revenue from AirBar sales. As of December 31, 2016 there were no deferred engineering development fees and a total of $0.4 million of deferred engineering development fee from one customer as of December 31, 2015.

 

Advertising

 

Advertising costs are expensed as incurred. We will classify any reseller marketing allowances related to AirBar in general as sales expense unless we can define an identifiable benefit to us from the reseller marketing allowance. Advertising costs amounted to approximately $299,000, $328,000 and $172,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

 

Research and Development

 

Research and development (“R&D”) costs are expensed as incurred. R&D costs consist mainly of personnel related costs in addition to some external consultancy costs such as testing, certifying and measurements.

 

Stock-Based Compensation Expense

 

We measure the cost of employee services received in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award on the grant date, and recognize the value as compensation expense over the period the employee is required to provide services in exchange for the award, usually the vesting period, net of estimated forfeitures.

 

We account for equity instruments issued to non-employees at their estimated fair value. The measurement date for the estimated fair value for the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached, or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the estimated fair value of the equity instruments is primarily recognized over the term of the consulting agreement. The estimated fair value of the stock-based compensation is periodically re-measured and income or expense is recognized during the vesting term.

 

When determining stock-based compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.

 

 

Noncontrolling Interests

 

The Company recognizes noncontrolling interests as equity in the consolidated financial statements separate from the parent company’s equity. Noncontrolling interests’ partners have less than 50% share of voting rights at any one of the subsidiary level companies. The amount of net income (loss) attributable to noncontrolling interests is included in consolidated net income (loss) on the face of the consolidated statements of operations. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Additionally, operating losses are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest partner.

 

The Company provides either in the consolidated statements of stockholders’ equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:

 

  (1) Net income or loss
  (2) Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners.
  (3) Each component of other comprehensive income or loss

 

Income Taxes

 

We recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based on the “more likely than not” criteria of the accounting guidance.

 

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of December 31, 2016 and 2015. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes payable for the current period.

 

We follow U.S. GAAP related to uncertain tax positions, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions. As a result, we did not recognize a liability for unrecognized tax benefits. As of December 31, 2016 and 2015, we had no unrecognized tax benefits.

 

Net Loss per Share

 

Net loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding during the years ended December 31, 2016, 2015 and 2014. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for years ended December 31, 2016, 2015 and 2014 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 14).

 

Other Comprehensive Income (Loss)

 

Our comprehensive loss includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity in the consolidated balance sheets, as accumulated other comprehensive income (loss).

 

Cash Flow Information

 

Cash flows in foreign currencies have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average exchange rate for the consolidated statements of operations was as follows:

 

    Years ended December 31,  
    2016     2015     2014  
Swedish Krona     8.55       8.43       6.86  
Japanese Yen     108.75       121.03       105.84  
South Korean Won     1,157.14       1,130.22       1,050.63  
Taiwan Dollar     32.22       31.73       -  

 

Exchange rate for the consolidated balance sheets was as follows:

 

    Years ended December 31,  
    2016     2015  
Swedish Krona     9.07       8.42  
Japanese Yen     116.97       120.36  
South Korean Won     1,205.11       1,174.67  
Taiwan Dollar     32.28       32.84  

 

Fair Value of Financial Instruments

 

We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.

 

New Accounting Pronouncements

  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. We have not yet selected a transition method and are currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The amendments in this update provide guidance in U.S. GAAP about management's responsibilities to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity's management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Management's evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity's ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity's ability to continue as a going concern (before consideration of management's plans); (2) management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations; and (3) management's plans that alleviated substantial doubt about the entity's ability to continue as a going concern or management's plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. The amendments in this update are effective for interim and annual reporting periods ending after December 15, 2016 and early application is permitted. We adopted this pronouncement effective December 31, 2016 and have included disclosure in Note 1 to our consolidated financial statements based upon ASU No. 2014-15.

 

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330)” (“ASU 2015-11”). The amendments in ASU 2015-11 require that an entity measure inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update more closely align the measurement of inventory in accounting principles generally accepted in the United States of America with the measurement of inventory in International Financial Reporting Standards. ASU 2015-11 is effective for annual and interim periods beginning on or after December 15, 2016. The amendments in this update should be applied prospectively with early application permitted as of the beginning of the interim or annual reporting period. The Company adopted the provisions of ASU 2015-11 effective September 1, 2016 and the adoption did not have a material impact on our consolidated financial statements.

 

In November 2015, FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. ASU 2015-17 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. The Company elected not to early adopt ASU 2015-17 and is evaluating the effect of the adoption of this ASU to its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. We have not yet selected a transition method and are currently assessing the impact of adoption of ASU No. 2016-02 will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 is effective for years beginning after December 15, 2016. The Company is currently evaluating the impact of this ASU to its consolidated financial statements. 

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluating the impact of this ASU to its consolidated financial statements. 

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments”, (“ASU 2016-13”). The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.

Prepaid Expenses and Other Current Assets
Prepaid Expenses and Other Current Assets
3.Prepaid Expenses and Other Current Assets

 

Prepaid expense and other current assets consist of the following (in thousands):

 

  As of December 31, 
  2016  2015 
       
Prepaid insurance $125  $119 
Prepaid rent  46   52 
VAT receivable  247   337 
Prepaid inventory  715   - 
Advances to suppliers  596   - 
Other  220   239 
Total prepaid expenses and other current assets $1,949  $747
Property and Equipment
Property and Equipment
4.Property and Equipment

 

Property and equipment consist of the following (in thousands):

 

  As of December 31, 
  2016  2015 
       
Computers, software, furniture and fixtures $930  $637 
Equipment under capital lease  1,661   428 
Less accumulated depreciation and amortization  (560)  (471)
Property and equipment, net $2,031  $594 

 

Depreciation and amortization expense was $360,000, $187,000 and $202,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

Accrued Expenses
Accrued Expenses
5.Accrued Expenses

 

Accrued expenses consist of the following (in thousands):

 


  As of December 31, 
  2016  2015 
       
Accrued returns and warranty $11  $- 
Accrued consulting fees and other  161   382 
Total accrued expenses $172  $382
Fair Value Measurements
Fair Value Measurements
6.Fair Value Measurements

 

Accounting guidance defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. The accounting guidance does not mandate any new fair value measurements and is applicable to assets and liabilities that are required to be recorded at fair value under other accounting pronouncements.

 

There were no assets or liabilities recorded at fair value on a recurring basis in 2016 and 2015.

 

The three levels of the fair value hierarchy are described as follows:

 

Level 1: Applies to assets or liabilities for which there are quoted prices (unadjusted) in active markets for identical assets and liabilities. We had no Level 1 assets or liabilities.

 

Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices that are included in Level 1 observable, either directly or indirectly. We had no Level 2 assets or liabilities.

 

Level 3: Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. We had no Level 3 assets or liabilities.

Deferred Revenue
Deferred Revenue
7.Deferred Revenue

 

We defer the license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of December 31, 2016 and 2015, we have $1.8 million and $1.1 million, respectively, of deferred license fee revenue related to prepayments for future license fees from four and two customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of December 31, 2016, we had $0.1 million of deferred revenue from our AirBar sales. As of December 31, 2015, there was no deferred revenue from AirBar sales. As of December 31, 2016 there were no deferred engineering development fees and a total of $0.4 million of deferred engineering development fee from one customer as of December 31, 2015.

Stockholders' Equity
Stockholders' Equity
8. Stockholders’ Equity

 

Common Stock

 

Securities Purchase Agreement

 

In August 2016, Neonode entered into the Securities Purchase Agreement with institutional and accredited investors as part of a private placement pursuant to which Neonode agreed to issue a total of 8,627,352 shares of Neonode common stock, as described below, and warrants for an aggregate purchase price of $7.9 million in net proceeds. The total number of shares includes (i) an aggregate of 427,352 Employee Investor Shares at $1.17 per share for gross proceeds of approximately $500,000, (ii) an aggregate of 4,600,000 Outside Investor Shares at a price of $1.00 per share for gross proceeds of $4,600,000, and (iii) up to 3,600,000 Pre-Funded Warrant Shares issuable upon exercise of the Pre-Funded Warrants for which Neonode received $3,564,000 pre-funded in gross proceeds. The Pre-Funded Warrants were issued to certain outside investors whose purchase of shares of Neonode common stock would make them the beneficial owners of more than 9.99% of the outstanding common stock of Neonode. Each of the Pre-Funded Warrants were pre-funded upon closing of the private placement at $0.99 per Pre-Funded Warrant Share and have an exercise price of $0.01 per Pre-Funded Warrant Share. The Pre-Funded Warrants are immediately exercisable upon issuance and will not expire prior to exercise.

 

Warrants and Other Common Stock Activity

 

In addition to the Pre-Funded Warrants described above, under the terms of the Securities Purchase Agreement, Neonode issued the Purchase Warrants to all investors in the private placement to purchase up to a total of 4,313,676 shares of Neonode common stock at an exercise price of $1.12 per share. The Purchase Warrants will expire five and one-half years from issuance and are non-exercisable for the first six months. The terms of the Purchase Warrants require that exercise may only be for cash and not on a cashless basis unless, after a period of six months from closing of the private placement.  

 

During the year ended December 31, 2016, a warrant holder exercised warrants to purchase 80,000 shares of common stock using the cashless exercise provisions allowed in the warrant and received 11,565 shares of our common stock.

 

During the year ended December 31, 2015, we issued 3,200,000 shares of our common stock to investors in connection with an equity financing transaction. These shares of common stock were a portion of the 5,000,000 shares previously registered in 2014 under a shelf registration statement. We issued the stock at $1.90 per share and raised approximately $6.1 million gross and received approximately $5.4 million in cash, net of direct offering costs including underwriting discounts and legal, audit and other regulatory costs of approximately $0.7 million. Per Bystedt (Chairman of our Board of Directors), Thomas Eriksson (our Chief Executive Officer and a member of our Board of Directors), and Mats Dahlin (a member of our Board of Directors) purchased an aggregate of 157,893 shares of common stock in the offering at the public offering price per share for an aggregate purchase price of approximately $300,000.

 

During the year ended December 31, 2015, warrant holders exercised warrants to purchase 280,000 shares of common stock using the cashless net exercise provision allowed in the warrant and received 150,234 shares of our common stock.

 

During the year ended December 31, 2014, we sold 2,500,000 shares of our common stock at a price of $4.00 per share to an accredited institutional investor for an aggregate purchase price of $10,000,000 in gross proceeds and net proceeds of approximately $9.3 million after expenses and fees, including a $600,000 placement agent fee. 

 

In addition, we issued a warrant to purchase up to an aggregate of 2,500,000 shares of our common stock at an exercise price of $5.09 per share that expired on November 15, 2015. In addition, we issued to the placement agent a warrant to acquire up to an aggregate of 75,000 shares of our common stock that also expired on November 15, 2015. 

 

During the year ended December 31, 2014, warrant holders exercised warrants to purchase 17,000 shares of common stock using the cashless net exercise provision allowed in the warrant and received 10,053 shares of our common stock. In addition, warrant holders exercised warrants to purchase 11,500 shares of common stock at an exercise price of $3.13 per share for total cash proceeds of approximately $36,000.

 

A summary of all warrant activity is set forth below:

 

Outstanding and exercisable   Warrants     Weighted Average Exercise Price     Weighted Average 
Remaining Contractual Life
 
January 1, 2014     828,573       2.39       2.06  
Issued     2,575,000       5.09       -  
Expired/forfeited     (40,000 )     3.98       -  
Exercised     (28,500 )     2.85       -  
December 31, 2014     3,335,073       4.45       0.93  
Issued     -       -       -  
Expired/forfeited     (2,591,000 )     5.06       -  
Exercised     (280,000 )     1.30       -  
December 31, 2015     464,073       3.02       0.19  
Issued (Prefunded)     3,600,000       0.01       -  
Issued (Purchase)     4,313,676       1.12          
Expired/forfeited     (384,073 )     3.13       -  
Exercised     (80,000 )     2.00       -  
Outstanding and exercisable, December 31, 2016     7,913,676     $ 0.62       5.13  

 

Outstanding Warrants to Purchase Common Stock as of December 31, 2016:
                     
Description   Issue Date   Exercise
Price
    Shares     Expiration
Date
                         
August 2016 Prefunded Warrants   08/16/16   $ 1.00       3,600,000     02/16/22
August 2016 Purchase Warrants   08/17/16   $ 1.12       4,313,676     02/17/22
Total Warrants Outstanding                 7,913,676      

 

Preferred Stock

 

The terms of our Series B Preferred stock are as follows:

 

Dividends and Distributions

 

The holders of shares of Series B Preferred stock are entitled to participate with the holders of our common stock with respect to any dividends declared on the common stock in proportion to the number of shares of common stock issuable upon conversion of the shares of Series B Preferred stock held by them.

 

Liquidation Preference

 

In the event of any liquidation, dissolution, or winding up of our operations, either voluntary or involuntary, subject to the rights of the Series B Preferred stock and Senior Preferred stock, shall be entitled to receive, after any distribution to the holders of senior preferred stock and prior to and in preference to any distribution to the holders of common stock, $0.001 for each share of Series B Preferred stock then outstanding.

 

Voting

 

The holders of shares of Series B Preferred stock have one vote for each share of Series B Preferred stock held by them.

 

Conversion

 

Initially, each share of Series B Preferred stock was convertible into one share of our common stock. On March 31, 2009, our stockholders approved a resolution to increase the authorized share capital, and to increase the conversion ratio to 132.07 shares of our common stock for each share of Series B Preferred stock.  

  

Conversion of Preferred Stock Issued to Common Stock

 

The following table summarizes the amounts as of December 31, 2016:

 

    Shares of Preferred Stock Not Exchanged as of December 31, 2016     Conversion Ratio     Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged at December 31, 2016  
                         
Series B Preferred Stock     83       132.07       10,962  
Stock-Based Compensation
Stock-Based Compensation
9. Stock-Based Compensation

 

We have adopted equity incentive plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors. Except for 265,000 options issued to certain Swedish employees during 2015, all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants was based only on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

 

Stock Options

 

During the year ended 2015, our shareholders approved the Neonode Inc. 2015 Stock Incentive Plan (the “2015 Plan”) which replaces our 2006 Equity Incentive Plan (the “2006 Plan”). Under the 2015 Plan, 2,100,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2015 Plan are set by our compensation committee at its discretion. During the year ended December 31, 2016, 25,000 stock options were granted under the 2015 Plan.

 

Accordingly, as of December 31, 2016, we had two equity incentive plans:

 

  The 2006 Equity Incentive Plan (the “2006 Plan”).  
  The 2015 Equity Incentive Plan (the “2015 Plan”).  

 

We also had one non-employee director stock option plan as of December 31, 2016:

 

  The 2001 Non-Employee Director Stock Option Plan (the “Director Plan”), which expired for new awards in March 2011.

 

The following table summarizes information with respect to all options to purchase shares of common stock outstanding under the 2006 Plan, the 2015 Plan and the Director Plan at December 31, 2016:

 

Options Outstanding   Options Exercisable  
Range of Exercise Price   Number Outstanding at 12/31/16     Weighted Average Remaining Contractual Life (years)     Weighted Average Exercise Price     Number Exercisable at 12/31/16     Weighted Average Exercise Price  
                               
$ 1.44 -  $ 3.50     200,000       5.30     $ 2.85       147,083     $ 2.78  
$ 3.51 -   $ 5.00     1,426,000       2.85     $ 4.23       1,426,000     $ 4.23  
$ 5.01 -   $ 6.50     130,000       3.63     $ 5.98       129,166     $ 5.98  
$ 6.51 -   $ 8.21     90,000       0.02     $ 8.21       90,000     $ 8.21  
      1,846,000       3.03     $ 4.39       1,792,249     $ 4.43  

 

A summary of the combined activity under all of the stock option plans is set forth below:

 

    Options Outstanding  
                Weighted-        
                Average        
          Weighted-     Remaining        
          Average     Contractual     Aggregate  
    Number of     Exercise     Life     Intrinsic  
    Shares     Price     (in years)     Value  
Options outstanding – January 1, 2014     1,600,583     $ 5.22                  
Options granted     405,200       6.31                  
Options exercised     -       -                  
Options cancelled or expired     (296,383 )     5.46                  
Options outstanding – December 31, 2014     1,709,400       4.92                  
Options granted     605,000       3.57                  
Options exercised     -       -                  
Options cancelled or expired     (130,283 )     6.03                  
Options outstanding – December 31, 2015     2,184,117       4.48                  
Options granted     25,000       1.44                  
Options exercised     -       -                  
Options cancelled or expired     (363,117 )     4.73                  
Options outstanding – December 31, 2016     1,846,000     $ 4.39       3.03     $ 10,000  
Options exercisable and expected to vest – December 31, 2016     1,846,000     $ 4.39       3.03     $ 10,000  

 

The assumptions used to value stock options granted to directors, employees and consultants during the years ended December 31, 2016, 2015 and 2014 are as follows:

 

    For the year ended  
    December 31, 2016  
       
Annual dividend yield     -  
Expected life (years)     3.5  
Risk-free interest rate     0.83 %
Expected volatility     65.46 %

 

    For the year ended  
    December 31, 2015  
       
Annual dividend yield     -  
Expected life (years)     2.97  
Risk-free interest rate     0.47% - 1.41 %
Expected volatility      60.07% - 72.33 %

 

    For the year ended  
    December 31, 2014  
       
Annual dividend yield     -  
Expected life (years)     3.5  
Risk-free interest rate      0.28% - 1.47 %
Expected volatility       60.68% - 108.75 %

 

During the years ended December 31, 2016, 2015 and 2014, we recorded $0.3 million, $1.1 million and $1.7 million, 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.

 

Options granted under the Director Plan vest over a one to four-year period, expire five to seven years after the date of grant and have exercise prices reflecting market value of the shares of our common stock on the date of grant. 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.

 

 During the year ended December 31, 2016, we granted options to purchase 25,000 shares of our common stock to employees with total grant date estimated fair value of $17,000 computed using the Black-Scholes option pricing model. The weighted-average grant date fair value of the options granted during year ended December 31, 2016 was $0.67 per share.

 

During the year ended December 31, 2015, we granted options to purchase 515,000 shares of our common stock to employees and an option to purchase 90,000 shares of our common stock to four members of our board of directors with total grant date estimated fair value of $0.8 million computed using the Black-Scholes option pricing model. The weighted-average grant date fair value of the options granted during year ended December 31, 2015 was $1.24 per share.

 

During the year ended December 31, 2014, we granted options to purchase 395,200 shares of our common stock to employees and an option to purchase 10,000 shares of our common stock to a former member of our board of directors with total grant date estimated fair value of $1.3 million computed using the Black-Scholes option pricing model. The weighted-average grant date fair value of the options granted during year ended December 31, 2014 was $3.14 per share.

 

Stock-Based Compensation

 

The stock-based compensation expense for the years ended December 31, 2016, 2015 and 2014 reflects the estimated fair value of the vested portion of options granted to directors, employees and non-employees.

 

(In thousands)

    Years ended  
    December 31,  
    2016     2015     2014  
                   
Research and development   $ 48     $ 484     $ 510  
Sales and marketing     150       296       353  
General and administrative     57       295       866  
Stock-based compensation expense   $ 255     $ 1,075     $ 1,729  

 

(In thousands)

    Remaining unrecognized expense at 
December 31, 2016
 
Stock-based compensation   $ 84  

 

The remaining unrecognized expense related to stock options will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period which approximates 1.1 years.

 

The estimated fair value of stock-based awards is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior, as well as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change in the future, which would affect fair values of stock options granted in such future periods, and could cause volatility in the total amount of the stock-based compensation expense reported in future periods.

Commitments and Contingencies
Commitments and Contingencies
10. Commitments and Contingencies

 

Indemnities and Guarantees

 

Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of December 31, 2016 and 2015.

 

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, 2016 and 2015.

 

Non-Recurring Engineering Development Costs

 

On February 4, 2011, we entered into an Analog Device Development Agreement with an effective date of January 24, 2010 (the “NN1001 Agreement”) with Texas Instruments pursuant to which Texas Instruments agreed to integrate Neonode’s intellectual property into an Application Specific Integrated Circuit (“ASIC”). The NN1001 ASIC only can be sold by Texas Instruments exclusively to licensees of Neonode. Under the terms of the NN1001 Agreement, we agreed to reimburse Texas Instruments $500,000 of non-recurring engineering development costs based on shipments of the NN1001. Under the terms of the NN1001 Agreement, we also agreed to reimburse Texas Instruments a non-recurring engineering fee of $0.08 per unit for each of the first one million units sold and $0.05 for the next eight million units sold. During the years ended December 31, 2015 and 2014, approximately $20,000 and $93,000, respectively of non-recurring engineering expense related to the NN1001 Agreement is included in research and development in the consolidated statements of operations. Through December 31, 2015, all payments under the NN1001 Agreement have been made.

 

On April 25, 2013, we entered into an additional Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments pursuant to which Texas Instruments agreed to integrate Neonode’s intellectual property into an ASIC. The NN1002 ASIC only can be sold by Texas Instruments exclusively to licensees of Neonode. Under the terms of the NN1002 Agreement, we agreed to reimburse Texas Instruments up to $500,000 of non-recurring engineering costs based on shipments of the NN1002. Under the terms of the NN1002 Agreement, we also agreed to reimburse Texas Instruments a non-recurring engineering fee of $0.25 per unit for each of the first two million units sold. The NN1002 began shipping to customers in 2015. As of December 31, 2016, we had made no payments under the NN1002 Agreement.

 

On December 4, 2014, we entered into an additional Analog Device Development Agreement (the “NN1003 Agreement”) with ST Microelectronics International N.V pursuant to which ST Microelectronics agreed to integrate Neonode’s intellectual property into an ASIC. The NN1003 ASIC only can be sold by ST Microelectronics exclusively to licensees of Neonode. Under the terms of the NN1003 Agreement, we agreed to reimburse ST Microelectronics up to $885,000 of non-recurring engineering costs as follows:

 

  $235,000 at the feasibility review and contract signature (paid on January 20, 2015)

  $300,000 on completion of tape-out (paid on October 31, 2015)

  $300,000 on completion on product validation ($100,000 paid and $200,000 accrued as of December 31, 2016)

 

Under the terms of the NN1003 Agreement, we also agreed to reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As of December 31, 2016, we had paid and aggregate of $635,000 under the NN1003 Agreement.

 

Operating Leases

 

We lease office space located at 2880 Zanker Road, San Jose, California. The annual payment for this space equates to approximately $15,000. This lease was effective on August 22, 2016 and can be terminated with one month’s notice.

 

Our subsidiary Neonode Technologies AB leases 7,007 square feet of office space located at Storgatan 23C, Stockholm, Sweden. The annual payment for this space is approximately $400,000 per year including property tax (excluding VAT). This lease is valid through November 30, 2017. The lease can be extended on a yearly basis.

 

Neonode Technologies AB’s majority-owned subsidiary Pronode Technologies AB leases 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka, Sweden. The annual payment for this space equates to approximately $88,000 per year. The lease is valid through December 9, 2017.

 

Our subsidiary Neonode Japan K.K. leases office space located at 405 Elpulimento Shinjuku, 6-7-1, Shinjuku-ku, Tokyo. The annual payment for this space equates to approximately $24,000 per year. The lease can be terminated with one month’s notice.

 

Our subsidiary Neonode Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea in January, 2015. The annual payment for this space equates to approximately $8,000 per year. We can terminate the lease with 2 months written notice.

 

Our subsidiary Neonode Taiwan Ltd. entered into a lease agreement located at Rm. 2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan. The annual payment for this space equates to approximately $13,000 per year. The lease is renewed every three months unless termination is notified.

 

For the years ended December 31, 2016, 2015 and 2014, we recorded approximately $852,000, $641,000 and $633,000, 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, 2016 is as follows (in thousands):

 

Years ending December 31,   Total  
2017   $ 450  
2018     -  
2019     -  
    $ 450  

 

Equipment Subject to Capital Lease

 

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 6 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 3-5 year lease terms for 5-10% of the original purchase price of the equipment. In accordance with relevant accounting guidance the leases are classified as capital leases. The lease payments and depreciation periods began between June and November 2016 when the equipment went into service. The implicit interest rate of the leases is currently approximately 3% per annum. One of the leases is a hire-purchase agreement where the equipment is required to be paid off after 5 years. In accordance with relevant accounting guidance the lease is classified as a capital lease. The lease payments and depreciation period began on July 1, 2016 when the equipment went into service. The implicit interest rate of the lease is currently approximately 3% per annum.

 

The following is a schedule of minimum future rentals on the non-cancelable capital leases as of December 31, 2016 (in thousands):

 

Year ending December 31,   Total  
2017   $ 262  
2018     261  
2019     258  
2020     265  
2021     241  
Total minimum payments required:     1,287  
Less amount representing interest:     (99 )
Present value of net minimum lease payments:     1,188  
Less current portion     (228 )
    $ 960  

 

Equipment under capital lease   $ 1,661  
Less: accumulated depreciation     (225 )
Net book value   $ 1,436  
Segment Information
Segment Information
11.Segment Information

 

Our Company has one reportable segment, which is comprised of the touch technology licensing and sensor module business.

 

The following table presents net revenues by geographic region for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):

 

  2016 
  Amount  Percentage 
Net revenues from customers in the U.S. $5,806   57%
Net revenue from customers in Europe  2,434   24%
Net revenues from customers in Asia  1,973   19%
Total $10,213   100%

 

  2015 
  Amount  Percentage 
Net revenues from customers in the U.S. $6,177   56%
Net revenues from customers in Europe  2,987   27%
Net revenues from customers in Asia  1,951   17%
Total $11,115   100%

 

  2014 
  Amount  Percentage 
Net revenues from customers in the U.S. $2,833   60%
Net revenues from customers in Europe  228   5%
Net revenues from customers in Asia  1,679   35%
Total $4,740   100%
Income Taxes
Income Taxes
12. Income Taxes

 

Loss before income taxes was distributed geographically for the years ended December 31, as follows (in thousands):

 

    2016     2015     2014  
Domestic   $ (4,459 )   $ (7,783 )   $ (13,993 )
Foreign     (823 )     41       (228 )
                         
Total   $ (5,282 )   $ (7,742 )   $ (14,221 )

 

The provision for income taxes is as follows for the years ended December 31 (in thousands):

 

    2016     2015     2014  
Current                  
Federal   $ -     $ -     $ -  
State     2       2       3  
Foreign     365       91       10  
Change in deferred                        
Federal     (1,604 )     (2,466 )     (4,213 )
Federal valuation allowance     1,604       2,466       4,213  
State     (197 )     (252 )     (460 )
State valuation allowance     197       252       460  
Foreign     (161 )     6       64  
Foreign valuation allowance     161       (6 )     (64 )
                         
Total current   $ 367     $ 93     $ 13  

 

 

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:

    2016     2015     2014  
Amounts at statutory tax rates     34 %     34 %     34 %
Foreign losses taxed at different rates     (3 )%     -       (1 )%
Foreign withholding tax     (4 )%     -       -  
Stock-based compensation     -       (1 )%     (2 )%
Other     -       (1 )%     (1 )%
Total     27 %     32 %     30 %
Valuation allowance     (35 )%     (33 )%     (31 )%
Effective tax rate     (8 )%     (1 )%     (1 )%

 

Significant components of the deferred tax asset balances at December 31 are as follows (in thousands):

 

    2016     2015  
Deferred tax assets:            
Accruals   $ 126     $ 1,109  
Stock compensation     1,466       1,352  
Net operating losses     20,015       17,190  
Basis difference in fixed assets     13       7  
Total deferred tax assets   $ 21,620     $ 19,658  
Valuation allowance     (21,620 )     (19,658 )
                 
Total net deferred tax assets   $ -     $ -  

 

Valuation allowances are recorded to offset certain deferred tax assets due to management’s uncertainty of realizing the benefits of these items. Management applies a full valuation allowance for the accumulated losses of Neonode Inc., and its subsidiaries, since it is not determinable using the “more likely than not” criteria that there will be any future benefit of our deferred tax assets. This is mainly due to our history of operating losses. As of December 31, 2016, we had federal, state and foreign net operating losses of $56.0 million, $22.3 million and $0.5 million, respectively. The federal loss carryforward begins to expire in 2028, the California loss carryforward begins to expire in 2030 and the foreign loss carryforward is indefinite. 

 

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, 2016, we had not completed the determination of the amount to be limited under the provision.

 

As of December 31, 2016, we did not recognize $547,000 and $28,000 of federal and state deferred tax assets relating to excess tax benefits for stock-based compensation deductions. Unrecognized deferred tax benefits will be accounted for as a credit to additional paid-in capital when realized through a reduction in income taxes payable.

 

We follow the provisions of accounting guidance which includes a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions. There were no unrecognized tax benefits for the years ended December 31, 2016, 2015 and 2014.

 

 

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, 2016, 2015 and 2014 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, 2016 and 2015, we had no accrued interest and penalties related to uncertain tax matters.

 

As of December 31, 2016, 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 2015 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.

Employee Benefit Plans
Employee Benefit Plans
13.Employee Benefit Plans

 

We participate in a number of individual defined contribution pension plans for our employees in Sweden. We contribute five percent (5%) of the employee’s annual salary to these pension plans. For the Swedish Management we contribute up to fifteen percent (15%) of the employee’s annual salary. Contributions relating to these defined contribution plans for the years ended December 31, 2016, 2015 and 2014 were $398,000, $306,000 and $249,000, respectively. We match U.S. employee contributions to a 401(k) retirement plan up to a maximum of six percent (6%) of an employee’s annual salary. Contributions relating to the matching 401(k) contributions for the years ended December 31, 2016, 2015 and 2014 were $33,000, $89,000 and $81,000, respectively. In Taiwan, we contribute six percent (6%) of the employee’s annual salary to a pension fund which agrees with Taiwan’s newly made Labor Pension Act. Contributions relating to the Taiwanese pension fund for the year ended December 31, 2016 and 2015 were $10,000 and $10,000, respectively.

Net Loss Per Share
Net Loss Per Share
14.Net Loss per Share

 

Basic net loss per common share for the years ended December 31, 2016, 2015 and 2014 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 5.1 million, 13,000 and 0.3 million outstanding stock warrants, 11,000, 11,000 and 11,000 shares issuable upon conversion of preferred stock, 4,000, 7,000 and 24,000 stock options are excluded from the diluted earnings per share calculation for the years ended December 31, 2016, 2015 and 2014, respectively, due to their anti-dilutive effect.

 

(In thousands, except per share amounts) Years ended December 31, 
  2016  2015  2014 
BASIC AND DILUTED         
Weighted average number of common shares outstanding  45,690   41,202   39,532 
             
Net loss attributable to Neonode Inc. $(5,291) $(7,820) $(14,234)
             
Net loss per share basic and diluted $(0.12) $(0.19) $(0.36)
Quarterly Financial Information
Quarterly Financial Information
15.Quarterly Financial Information

 

  For the Quarter Ended 
  March 31,  June 30,  September 30,  December 31, 
  (unaudited, in thousands except per share amounts) 
2016            
Net Revenues $3,132  $2,574  $1,639  $2,868 
Cost of revenues  595   385   33   325 
Gross margin  2,537   2,189   1,606   2,543 
Net loss attributable to Neonode Inc.  (1,367)  (1,331)  (2,162)  (431)
Net loss per basic and diluted common share $(0.03) $(0.03) $(0.05) $(0.01)
                 
2015                
Net Revenues $2,263  $2,776  $3,113  $2,963 
Cost of revenues  338   737   909   1,796 
Gross margin  1,925   2,039   2,204   1,167 
Net loss attributable to Neonode Inc.  (2,072)  (1,792)  (1,368)  (2,588)
Net loss per basic and diluted common share $(0.05) $(0.04) $(0.03) $(0.06)
                 
2014                
Net Revenues $1,014  $865  $1,126  $1,735 
Cost of revenues  166   452   422   469 
Gross margin  848   413   704   1,266 
Net loss attributable to Neonode Inc.  (4,008)  (3,874)  (3,245)  (3,107)
Net loss per basic and diluted common share $(0.11) $(0.10) $(0.08) $(0.08)

 

Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with the per share amounts for the year.

Schedule II - Valuation and Qualifying Accounts
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

(All dollar amounts expressed in thousands of U.S. dollars)

 

  Balance at
Beginning of Year
   Charged to Costs and Expenses   Charged to Other Accounts   Deductions   Balance at
End of Year
 
Year ended December 31, 2016               
Allowance for doubtful accounts $167  $-  $-  $(18) $149 
Deferred tax asset valuation allowance $19,658  $-  $1,962  $-  $21,620 
Year ended December 31, 2015                    
Allowance for doubtful accounts $167  $-  $-  $-  $167 
Deferred tax asset valuation allowance $16,946  $-  $2,712  $-  $19,658 
Year ended December 31, 2014                    
Allowance for doubtful accounts     $167  $-  $-  $167 
Deferred tax asset valuation allowance $12,335  $-  $4,611  $-  $16,946 
Summary of Significant Accounting Policies (Policies)

Principles of Consolidation

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of Neonode Inc. and its wholly owned subsidiaries, as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies AB. The remaining 49% of Pronode Technologies AB is owned by Propoint AB, located in Gothenburg, Sweden. Pronode Technologies AB was organized to sell engineering services within the automotive markets. All inter-company accounts and transactions have been eliminated in consolidation.

 

Neonode consolidates entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights, and variable interest entities (“VIEs”) in which Neonode is the primary beneficiary.

 

In June 2016, we entered into a Joint Venture (“JV”) with a Swedish based eye-tracking company SMART EYE AB to develop multi-chip modules for the consumer and automotive markets. The name of this JV is Neoeye AB (“Neoeye”). 

 

We use the equity method of accounting to record our investments in the common stock of each entity in which Neonode has the ability to exercise significant influence, but does not own a majority equity interest. Under the equity method, our investment is originally included in equity interests at cost, and is adjusted to recognize our share of net earnings or losses of the investee, in our consolidated balance sheets; our share of net income (loss) is reported in our consolidated statements of operations according to our equity ownership in each entity.

 

The consolidated statements of operations, comprehensive loss and cash flows for the year ended December 31, 2014 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden) and Neonode Korea Ltd. (South Korea).

 

The consolidated balance sheets at December 31, 2016 and 2015 and the consolidated statements of operations, comprehensive loss and cash flows for the years then ended include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), as well as Pronode Technologies AB (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB.

Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires making estimates and assumptions that affect, at the date of the financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates. Significant estimates include, but are not limited to, provisions for uncollectible receivables and sales returns, warranty liabilities, the achievement of substantive milestones and vendor-specific objective evidence (“VSOE”) of fair value for purposes of revenue recognition (or deferral of revenue), net realizable value of inventory, recoverability of capitalized project costs and long-lived assets, the valuation allowance related to our deferred tax assets, and the fair value of options and warrants issued for stock-based compensation.

Cash

 

We have not had any liquid investments other than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original maturities of three months of less to be cash equivalents.

Concentration of Cash Balance Risks

 

Cash balances are maintained at various banks in the United States, Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions in the United States the U.S. Federal Deposit Insurance Corporation, provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts. The Japanese government provides insurance coverage up to 10,000,000 Yen per customer. The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount of insurance provided.

Accounts Receivable and Allowance for Doubtful Accounts  

 

Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $149,000 and $167,000 as of December 31, 2016 and 2015, respectively.

Projects in Process

 

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. There were no costs capitalized in projects in process as of December 31, 2016. Costs capitalized in projects in process were $158,000 as of December 31, 2015.

Inventory

 

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”) and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of December 31, 2016, the Company’s inventory consists primarily of components that will be used in the manufacturing of our first sensor module, AirBar. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

 

Raw materials, work-in-process, and finished goods at December 31 are as follows:

 

  December 31, 
  2016 
Raw materials $522 
Work-in-Process  42 
Finished goods  132 
Ending inventory $696

Investment in JV

 

We have invested $3,000, a 50% interest in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through December 31, 2016.

 

Neoeye, as an unconsolidated equity investee, will recognize revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured, which is generally upon the receipt of the license proceeds. Neoeye may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones have been met.

 

We review our investment in Neoeye to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near term prospects of Neoeye. If a decline in value is deemed to be other than temporary, we would recognize an impairment loss.

Property and Equipment

 

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows:

 

Estimated useful lives
   
Computer equipment 3 years
Furniture and fixtures 5 years
Equipment 7 years

 

Equipment purchased under a capital lease is depreciated over the term of the lease, if that lease term is shorter than the estimated useful life.

 

Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.

Long-Lived Assets

 

We assess any impairment by estimating the future cash flow from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of December 31, 2016, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

Foreign Currency Translation and Transaction Gains and Losses

 

The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese Yen, South Korean Won or the Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Gains or (losses) resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations and were $74,000, $62,000 and ($37,000) during the years ended December 31, 2016, 2015 and 2014, respectively. Foreign currency translation gains or (losses) were ($217,000), ($103,000) and $138,000 during the years ended December 31, 2016, 2015 and 2014, respectively.

Concentration of Credit and Business Risks

 

Our customers are located in United States, Europe and Asia.

 

As of December 31, 2016, three customers represented approximately 59% of our consolidated accounts receivable.

 

As of December 31, 2015, three customers represented approximately 78% of our consolidated accounts receivable.

 

Customers who accounted for 10% or more of our net revenues during the year ended December 31, 2016 are as follows.

 

 Hewlett-Packard Company – 38%
 Amazon – 11%
 Autoliv – 11%

 

Customers who accounted for 10% or more of our net revenues during the year ended December 31, 2015 are as follows.

 

 Hewlett-Packard Company – 25%
 Autoliv – 21%
 Amazon – 14%

 

Customers who accounted for 10% or more of our net revenues during the year ended December 31, 2014 are as follows.

 

 Hewlett-Packard Company – 24%
 KOBO Inc. – 10%
 Leap Frog Enterprises Inc. – 11%
 Sony Corporation – 10%

 

The Company conducts business in the United States, Europe and Asia. At December 31, 2016, the Company maintained approximately $2,189,000, $1,872,000 and $74,000 of its net assets (liabilities) in the United States, Europe and Asia, respectively. At December 31, 2015, the Company maintained approximately $2,533,000, ($909,000) and $209,000 of its net assets (liabilities) in the United States, Europe and Asia, respectively.

Revenue Recognition

 

Licensing Revenues:

 

We derive revenue from the licensing of internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP and royalties payable following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support. We follow U.S. GAAP for revenue recognition as per unit royalty products are distributed or licensed by our customers. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of technology; (2) the customer distributes or licenses the products; (3) the customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. Our customers report to us the quantities of products distributed or licensed by them after the end of the reporting period stipulated in the contract, generally 30 to 45 days after the end of the month or quarter. We recognize licensing revenue in the period in which royalty reports are received, rather than the period in which the products are distributed or to which the license relates.

 

Explicit return rights are not offered to customers. There have been no returns through December 31, 2016.

 

Engineering Services:

 

We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue.  

 

Generally, we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers.  Engineering services are performed under a signed Statement of Work (“SOW”) with a customer. The deliverables and payment terms stipulated under the SOW provide guidance on the project revenue recognition.

  

Revenues from contracts that are short-term in nature and related costs that are difficult to estimate are accounted for under the completed contract method.

 

Revenues from contracts with substantive defined milestones that we have determined are reasonable, relevant to all the deliverables and payment terms in the SOW that are commensurate with the efforts required to achieve the milestones are recognized under the milestone recognition method.

 

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the year ended December 31, 2015, $165,000 was recorded as cost of sales due to expected losses related to two SOW projects. In the years ended December 31, 2016 and 2014 no losses related to SOW projects were recorded.

 

Optical Sensor Modules Revenues:

 

We derive revenue from the sales of sensor modules hardware products sold directly to our OEM and Tier 1 supplier customers who embed our hardware into their products and from sales of branded consumer products that incorporate our sensor modules sold to distributors or directly to end users. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. We enter into sales agreements that generally provide customers with limited rights of return and warranty provisions. U.S. GAAP allows companies to make reasonable aggregations and approximations of returns data with regard to returns. Our returns and warranty experience to date has enabled us to make reasonable returns estimates, which are further supported by the fact that our product sales involve homogenous transactions.

 

Revenue is recognized when all of the following criteria have been met:

 

 Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.
 Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.
 The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
 Collectibility is reasonably assured. We assess collectibility based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

 

In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. As our business and offerings are expected to evolve over time, our pricing practices may be required to be modified accordingly, which could result in changes in selling prices.

 

We make sales to distributors and revenue from distributors is recognized based on a sell-through basis using sales and inventory information provided by these distributors. Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred revenues in the consolidated balance sheet. When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known, we recognize previously deferred revenues as sales and cost of sales. Distributors participate in various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.

 

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns as of December 31, 2016 was $0.1 million and was recorded as a reduction of our accounts receivable and revenue. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.

Product Warranty

 

The following table summarizes the activity related to the product warranty liability (in thousands):

 

  Year ended 
  December 31,
2016
  December 31,
2015
 
Balance at beginning of period $-  $      - 
Provisions for warranty issued  11   - 
Balance at end of period $11  $- 

 

The Company accrues for warranty costs as part of its cost of sales of sensor modules based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 to 36 months from the customer receipt of the product.

Deferred Revenues

 

We defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of December 31, 2016 and 2015, we have $1.8 million and $1.1 million, respectively, of deferred license fee revenue related to prepayments for future license fees from four and two customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of December 31, 2016, we had $0.1 million of deferred revenue from our AirBar sales. As of December 31, 2015, there was no deferred revenue from AirBar sales. As of December 31, 2016 there were no deferred engineering development fees and a total of $0.4 million of deferred engineering development fee from one customer as of December 31, 2015.

Advertising

 

Advertising costs are expensed as incurred. We will classify any reseller marketing allowances related to AirBar in general as sales expense unless we can define an identifiable benefit to us from the reseller marketing allowance. Advertising costs amounted to approximately $299,000, $328,000 and $172,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

Research and Development

 

Research and development (“R&D”) costs are expensed as incurred. R&D costs consist mainly of personnel related costs in addition to some external consultancy costs such as testing, certifying and measurements.

Stock-Based Compensation Expense

 

We measure the cost of employee services received in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award on the grant date, and recognize the value as compensation expense over the period the employee is required to provide services in exchange for the award, usually the vesting period, net of estimated forfeitures.

 

We account for equity instruments issued to non-employees at their estimated fair value. The measurement date for the estimated fair value for the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached, or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the estimated fair value of the equity instruments is primarily recognized over the term of the consulting agreement. The estimated fair value of the stock-based compensation is periodically re-measured and income or expense is recognized during the vesting term.

 

When determining stock-based compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.

Noncontrolling Interests

 

The Company recognizes noncontrolling interests as equity in the consolidated financial statements separate from the parent company’s equity. Noncontrolling interests’ partners have less than 50% share of voting rights at any one of the subsidiary level companies. The amount of net income (loss) attributable to noncontrolling interests is included in consolidated net income (loss) on the face of the consolidated statements of operations. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Additionally, operating losses are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest partner.

 

The Company provides either in the consolidated statements of stockholders’ equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:

 

 (1)Net income or loss
 (2)Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners.
 (3)Each component of other comprehensive income or loss

Income Taxes

 

We recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based on the “more likely than not” criteria of the accounting guidance.

 

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of December 31, 2016 and 2015. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes payable for the current period.

 

We follow U.S. GAAP related to uncertain tax positions, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions. As a result, we did not recognize a liability for unrecognized tax benefits. As of December 31, 2016 and 2015, we had no unrecognized tax benefits.

Net Loss per Share

 

Net loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding during the years ended December 31, 2016, 2015 and 2014. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for years ended December 31, 2016, 2015 and 2014 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 14).

Other Comprehensive Income (Loss)

 

Our comprehensive loss includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity in the consolidated balance sheets, as accumulated other comprehensive income (loss).

Cash Flow Information

 

Cash flows in foreign currencies have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average exchange rate for the consolidated statements of operations was as follows:

 

  Years ended December 31, 
  2016  2015  2014 
Swedish Krona  8.55   8.43   6.86 
Japanese Yen  108.75   121.03   105.84 
South Korean Won  1,157.14   1,130.22   1,050.63 
Taiwan Dollar  32.22   31.73   - 

 

Exchange rate for the consolidated balance sheets was as follows:

 

  Years ended December 31, 
  2016  2015 
Swedish Krona  9.07   8.42 
Japanese Yen  116.97   120.36 
South Korean Won  1,205.11   1,174.67 
Taiwan Dollar  32.28   32.84

Fair Value of Financial Instruments

 

We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.

New Accounting Pronouncements

  

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. We have not yet selected a transition method and are currently assessing the impact the adoption of ASU 2014-09 will have on our consolidated financial statements and disclosures.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. The amendments in this update provide guidance in U.S. GAAP about management's responsibilities to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The main provision of the amendments are for an entity's management, in connection with the preparation of financial statements, to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. Management's evaluation should be based on relevant conditions and events that are known or reasonably knowable at the date the consolidated financial statements are issued. When management identifies conditions or events that raise substantial doubt about an entity's ability to continue as a going concern, the entity should disclose information that enables users of the consolidated financial statements to understand all of the following: (1) principal conditions or events that raised substantial doubt about the entity's ability to continue as a going concern (before consideration of management's plans); (2) management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations; and (3) management's plans that alleviated substantial doubt about the entity's ability to continue as a going concern or management's plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity's ability to continue as a going concern. The amendments in this update are effective for interim and annual reporting periods ending after December 15, 2016 and early application is permitted. We adopted this pronouncement effective December 31, 2016 and have included disclosure in Note 1 to our consolidated financial statements based upon ASU No. 2014-15.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330)” (“ASU 2015-11”). The amendments in ASU 2015-11 require that an entity measure inventory within the scope at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The amendments in this update more closely align the measurement of inventory in accounting principles generally accepted in the United States of America with the measurement of inventory in International Financial Reporting Standards. ASU 2015-11 is effective for annual and interim periods beginning on or after December 15, 2016. The amendments in this update should be applied prospectively with early application permitted as of the beginning of the interim or annual reporting period. The Company adopted the provisions of ASU 2015-11 effective September 1, 2016 and the adoption did not have a material impact on our consolidated financial statements.

 

In November 2015, FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. ASU 2015-17 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. The Company elected not to early adopt ASU 2015-17 and is evaluating the effect of the adoption of this ASU to its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. We have not yet selected a transition method and are currently assessing the impact of adoption of ASU No. 2016-02 will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 is effective for years beginning after December 15, 2016. The Company is currently evaluating the impact of this ASU to its consolidated financial statements. 

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 will be effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. The Company is currently evaluating the impact of this ASU to its consolidated financial statements. 

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments”, (“ASU 2016-13”). The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.

Summary of Significant Accounting Policies (Tables)

  December 31, 
  2016 
Raw materials $522 
Work-in-Process  42 
Finished goods  132 
Ending inventory $696
Estimated useful lives
   
Computer equipment 3 years
Furniture and fixtures 5 years
Equipment 7 years

  Year ended 
  December 31,
2016
  December 31,
2015
 
Balance at beginning of period $-  $      - 
Provisions for warranty issued  11   - 
Balance at end of period $11  $-

  Years ended December 31, 
  2016  2015  2014 
Swedish Krona  8.55   8.43   6.86 
Japanese Yen  108.75   121.03   105.84 
South Korean Won  1,157.14   1,130.22   1,050.63 
Taiwan Dollar  32.22   31.73   -

  Years ended December 31, 
  2016  2015 
Swedish Krona  9.07   8.42 
Japanese Yen  116.97   120.36 
South Korean Won  1,205.11   1,174.67 
Taiwan Dollar  32.28   32.84
Prepaid Expenses and Other Current Assets (Tables)
Schedule of prepaid expense and other current assets
  As of December 31, 
  2016  2015 
       
Prepaid insurance $125  $119 
Prepaid rent  46   52 
VAT receivable  247   337 
Prepaid inventory  715   - 
Advances to suppliers  596   - 
Other  220   239 
Total prepaid expenses and other current assets $1,949  $747
Property and Equipment (Tables)
Schedule of property and equipment

  As of December 31, 
  2016  2015 
       
Computers, software, furniture and fixtures $930  $637 
Equipment under capital lease  1,661   428 
Less accumulated depreciation and amortization  (560)  (471)
Property and equipment, net $2,031  $594
Accrued Expenses (Tables)
Schedule of accrued expenses

  As of December 31, 
  2016  2015 
       
Accrued returns and warranty $11  $- 
Accrued consulting fees and other  161   382 
Total accrued expenses $172  $382
Stockholders' Equity (Tables)
Outstanding and exercisable Warrants  Weighted Average Exercise Price  Weighted Average 
Remaining Contractual Life
 
January 1, 2014  828,573   2.39   2.06 
Issued  2,575,000   5.09   - 
Expired/forfeited  (40,000)  3.98   - 
Exercised  (28,500)  2.85   - 
December 31, 2014  3,335,073   4.45   0.93 
Issued  -   -   - 
Expired/forfeited  (2,591,000)  5.06   - 
Exercised  (280,000)  1.30   - 
December 31, 2015  464,073   3.02   0.19 
Issued (Prefunded)  3,600,000   0.01   - 
Issued (Purchase)  4,313,676   1.12     
Expired/forfeited  (384,073)  3.13   - 
Exercised  (80,000)  2.00   - 
Outstanding and exercisable, December 31, 2016  7,913,676  $0.62   5.13 
  
Shares of Preferred Stock
Not Exchanged as of
December 31, 2016
  Conversion Ratio  
Shares of Common Stock
after Conversion of all
Outstanding Shares of
Preferred Stock Not yet
Exchanged at
December 31, 2016
 
             
Series B Preferred Stock  83   132.07   10,962 
Description Issue Date Exercise
Price
  Shares  Expiration
Date
             
August 2016 Prefunded Warrants 08/16/16 $1.00   3,600,000  02/16/22
August 2016 Purchase Warrants 08/17/16 $1.12   4,313,676  02/17/22
Total Warrants Outstanding        7,913,676   
Stock-Based Compensation (Tables)

 

Options Outstanding Options Exercisable 
Range of Exercise Price Number Outstanding at 12/31/16  Weighted Average Remaining Contractual Life (years)