NEONODE, INC, 10-Q filed on 09 May 17
Document and Entity Information
3 Months Ended
Mar. 31, 2017
May 5, 2017
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-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Trading Symbol
NEON 
 
Entity Common Stock, Shares Outstanding
 
48,844,503 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash
$ 1,706 
$ 3,476 
Accounts receivable, net
1,007 
1,548 
Projects in process
159 
   
Inventory
1,544 
696 
Prepaid expenses and other current assets
2,007 
1,949 
Total current assets
6,423 
7,669 
Investment in joint venture
Property and equipment, net
2,008 
2,031 
Total assets
8,434 
9,703 
Current liabilities:
 
 
Accounts payable
1,355 
1,286 
Accrued payroll and employee benefits
1,018 
1,001 
Accrued expenses
139 
172 
Deferred revenues
1,580 
1,921 
Current portion of capital lease obligations
233 
228 
Total current liabilities
4,325 
4,608 
Capital lease obligations, net of current portion
916 
960 
Total liabilities
5,241 
5,568 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Series B Preferred stock, 54,425 shares authorized with par value $0.001 per share; 83 shares issued and outstanding at March 31, 2017 and December 31, 2016. (In the event of dissolution, each share of Series B Preferred stock has a liquidation preference equal to par value of $0.001 per share over the shares of common stock)
   
   
Common stock, 70,000,000 shares authorized with par value $0.001 per share; 48,844,503 and 48,844,503 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
49 
49 
Additional paid-in capital
183,687 
183,667 
Accumulated other comprehensive loss
(164)
(171)
Accumulated deficit
(179,913)
(179,040)
Total Neonode Inc. stockholders' equity
3,659 
4,505 
Noncontrolling interests
(466)
(370)
Total stockholders' equity
3,193 
4,135 
Total liabilities and stockholders' equity
$ 8,434 
$ 9,703 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 31, 2017
Dec. 31, 2016
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 
48,844,503 
Common stock, shares outstanding
48,844,503 
48,844,503 
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 
Condensed Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Revenue:
 
 
License fees
$ 2,121 
$ 2,468 
Sensor module sales
210 
   
Non-recurring engineering
664 
Total revenues
2,332 
3,132 
Cost of revenues:
 
 
Sensor module
101 
   
Non-recurring engineering
595 
Total cost of revenues
105 
595 
Total gross margin
2,227 
2,537 
Operating expenses:
 
 
Research and development
1,315 
1,949 
Sales and marketing
702 
816 
General and administrative
1,088 
1,060 
Total operating expenses
3,105 
3,825 
Operating loss
(878)
(1,288)
Other expense:
 
 
Interest expense
17 
Other expense, net
   
41 
Total other expense
17 
44 
Loss before provision for income taxes
(895)
(1,332)
Provision for income taxes
74 
67 
Net loss including noncontrolling interests
(969)
(1,399)
Less: Net loss attributable to noncontrolling interests
96 
32 
Net loss attributable to Neonode Inc.
$ (873)
$ (1,367)
Loss per common share:
 
 
Basic and diluted loss per share
$ (0.02)
$ (0.03)
Basic and diluted - weighted average number of common shares outstanding
48,845 
43,810 
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Statements of Comprehensive Loss [Abstract]
 
 
Net loss
$ (969)
$ (1,399)
Other comprehensive income (loss):
 
 
Foreign currency translation adjustments
(35)
Comprehensive loss
(962)
(1,434)
Less: Comprehensive loss attributable to noncontrolling interests
96 
32 
Comprehensive loss attributable to Neonode Inc.
$ (866)
$ (1,402)
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities:
 
 
Net loss (including noncontrolling interests)
$ (969)
$ (1,399)
Adjustments to reconcile net loss to net cash (used in) operating activities:
 
 
Stock-based compensation expense
20 
114 
Loss on disposal of property and equipment
   
41 
Depreciation and amortization
160 
57 
Changes in operating assets and liabilities:
 
 
Accounts receivable
542 
697 
Projects in process
(159)
36 
Inventory
(845)
   
Prepaid expenses and other current assets
(31)
(325)
Accounts payable and accrued expenses
18 
339 
Deferred revenues
(341)
461 
Net cash (used in) provided by operating activities
(1,605)
21 
Cash flows from investing activities:
 
 
Purchase of property and equipment
(104)
(156)
Net cash used in investing activities
(104)
(156)
Cash flows from financing activities:
 
 
Principal payments on capital lease obligation
(58)
(15)
Net cash used in financing activities
(58)
(15)
Effect of exchange rate changes on cash
(3)
Net decrease in cash
(1,770)
(142)
Cash at beginning of period
3,476 
3,082 
Cash at end of period
1,706 
2,940 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
Cash paid for interest
$ 17 
$ 3 
Interim Period Reporting
Interim Period Reporting

1. Interim Period Reporting

 

The accompanying unaudited interim condensed consolidated financial statements, include all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of results for a full fiscal year or any other period.

 

The accompanying condensed consolidated financial statements for the three months ended March 31, 2017 and 2016 have been prepared by us, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

Operations

 

Neonode Inc. (collectively with its subsidiaries, is referred to in this Form 10-Q Report as “Neonode”, “we”, “us”, “our”, “registrant”, or “Company”) develops optical touch and gesture solutions for human interaction with devices. In 2010 we began licensing our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who in-turn embed our technology into products they develop, manufacture and sell. Since 2010, our customers have sold approximately 45 million devices under our licensing agreements that use our technology. In 2016, we augmented our licensing business and started to manufacture and sell standardized embedded sensors that incorporate our technology to OEMs, Tier 1 Suppliers, distributors and our branded products sold directly to consumers.

 

Reclassifications

 

Revenues and cost of sales for the period ended March 31, 2016 are now reported as license fees, sensor module sales and non-recurring engineering instead of net revenues in the accompanying condensed consolidated statement of operations, in order to conform to current period presentation.

 

Liquidity

 

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $0.9 million and $1.4 million for the three months ended March 31, 2017 and 2016, respectively, and had an accumulated deficit of approximately $179.9 million and $179.0 million as of March 31, 2017 and December 31, 2016, respectively. In addition, operating activities used cash of approximately $1.6 million for the three months ended March 31, 2017 and operating activities provided cash of approximately $21,000 for the three months ended March 31, 2016.

 

In March 2017, we filed a $20 million shelf registration statement with the SEC that became effective on March 24, 2017. We may from time to time issue shares of our common stock under our shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in a prospectus supplement and any other offering materials, at the time of the offering. Our shelf registration statement will expire on March 24, 2020.

 

In June 2014, we filed a shelf registration statement with the SEC that became effective on June 12, 2014. We may from time to time issue shares of our common stock under our shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in a prospectus supplement and any other offering materials, at the time of the offering. As of March 31, 2017 there were 1,800,000 shares remaining for issuance under this existing shelf registration statement. This shelf registration statement will expire on June 12, 2017.

 

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

 

Under the terms of the August 2016 Securities Purchase Agreement, we issued warrants (the “Purchase Warrants”) to all investors in the private placement to purchase up to a total of 4,313,676 shares of common stock at an exercise price of $1.12 per share. The Purchase Warrants became exercisable February 17, 2017 and will expire February 17, 2022. None of the Purchase Warrants have been exercised as of May 5, 2017. If the warrants are fully exercised, we will receive approximately $4.8 million in proceeds.

 

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

 

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

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

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2.   Summary of Significant Accounting Policies

 

Principles of Consolidation

 

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

 

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

 

In June 2016, we entered into a Joint Venture (“JV”) with a Swedish based eye-tracking company SMART EYE AB. By combining our technologies, we plan to bring multi-chip modules to the market for the consumer and automotive markets that provide new opportunities for interaction with cars and devices. The name of the newly established JV is Neoeye AB (“Neoeye”). 

 

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

 

The condensed consolidated balance sheets at March 31, 2017 and December 31, 2016 and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three months ended March 31, 2017 and 2016 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), as well as Pronode Technologies AB (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB.

  

Estimates

 

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

 

Cash

 

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

 

Concentration of Cash Balance Risks

 

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

  

Accounts Receivable and Allowance for Doubtful Accounts  

 

Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $149,000 as of March 31, 2017 and December 31, 2016, respectively.

 

Projects in Process

 

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our condensed consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. Costs capitalized in projects in process were $159,000 as of March 31, 2017. There were no costs capitalized in projects in process as of December 31, 2016. 

 

Inventory

 

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”) and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of March 31, 2017 and December 31, 2016, the Company’s inventory consists primarily of components that will be used in the manufacturing of our first sensor module, AirBar. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

 

Raw materials, work-in-process, and finished goods are as follows (in thousands):

 

    March 31,     December 31,  
    2017     2016  
Raw materials   $ 806     $ 522  
Work-in-Process     168       42  
Finished goods     570       132  
Ending inventory   $ 1,544     $ 696  

 

Investment in JV

 

We have invested $3,000, for a 50% interest in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through March 31, 2017.

 

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

 

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

 

Property and Equipment

 

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

 

Estimated useful lives

 

  Computer equipment     3 years           
  Furniture and fixtures     5 years           
  Equipment     7 years           

 

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

 

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

 

Long-lived Assets

 

We assess any impairment by estimating the future cash flow from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of March 31, 2017, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

  

Foreign Currency Translation and Transaction Gains and Losses

 

The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese Yen, South Korean Won and Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted-average exchange rate during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Foreign currency translation gains (losses) were $7,000 and $(35,000) during the three months ended March 31, 2017 and 2016, respectively. Gains resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed consolidated statements of operations and were $20,000 and $13,000 during the three months ended March 31, 2017 and 2016, respectively.

 

Concentration of Credit and Business Risks

 

Our customers are located in U.S., Europe and Asia.

 

As of March 31, 2017, three customers represented approximately 72% of the Company’s accounts receivable. 

 

As of December 31, 2016, three customers represented approximately 59% of the Company’s accounts receivable. 

 

Customers who accounted for 10% or more of our net revenues during the three months ended March 31, 2017 are as follows:

 

  Hewlett Packard Company – 31%
     
  Canon – 17%
     
  Amazon – 12%
     
  Robert Bosch – 11%

 

Customers who accounted for 10% or more of our net revenues during the three months ended March 31, 2016 are as follows:

 

  Hewlett Packard Company – 40%
     
  Amazon – 18%
     
  Autoliv Development AB – 12%

 

Revenue Recognition

 

Licensing Revenues:

 

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

 

Explicit return rights are not offered to customers. There have been no returns through March 31, 2017.

 

Engineering Services:

 

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

 

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

 

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

 

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

 

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the quarters ended March 31, 2017 and 2016, no losses related to SOW projects were recorded.

 

Optical Sensor Modules Revenues:

 

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

 

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

 

  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.
     
  Collectability is reasonably assured. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

 

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

 

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

 

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant as of March 31, 2017 and December 31, 2016. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.

 

Product Warranty

 

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

 

    March 31,
2017
    December 31,
2016
 
Balance at beginning of period   $ 11     $ -  
Provisions for warranty issued     1       11  
Balance at end of period   $ 12     $ 11  

 

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

 

Deferred Revenues

 

We defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of March 31, 2017 and December 31, 2016, we have $1.3 million and $1.8 million, respectively, of deferred license fee revenue related to prepayments for future license fees from four customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of March 31, 2017 and December 31, 2016 we had $0.1 million of deferred revenue from our AirBar sales. As of March 31, 2017 we had $0.1 million of deferred engineering development fees from two customers. As of December 31, 2016 there were no deferred engineering development fees.

  

Advertising

 

Advertising costs are expensed as incurred. Advertising costs for the three months ended March 31, 2017 and 2016 amounted to approximately $147,000 and $80,000, respectively.

 

Research and Development

 

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

 

Stock-Based Compensation Expense

 

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

 

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

 

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

 

Noncontrolling Interests

 

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

 

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

 

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

  

Income Taxes

 

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

  

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of March 31, 2017 and December 31, 2016. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.

 

We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of March 31, 2017 and December 31, 2016, we had no unrecognized tax benefits.

  

Net Loss per Share

 

Net loss per share amounts has been computed based on the weighted average number of shares of common stock outstanding during the three months ended March 31, 2017 and 2016. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the three months ended March 31, 2017 and 2016 exclude the potential common stock equivalents, as the effect would be anti-dilutive (See Note 7).

 

Other Comprehensive Income (Loss)

 

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

 

Cash Flow Information

 

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

 

    Three months ended
March 31,
 
    2017     2016  
Swedish Krona     8.92       8.45  
Japanese Yen     113.71       115.36  
South Korean Won     1,150.18       1,193.75  
Taiwan Dollar     31.05       33.06  

 

Exchange rate for the consolidated balance sheets was as follows:

 

    Periods Ended  
    March 31,     December 31,  
    2017     2016  
Swedish Krona     8.94       9.07  
Japanese Yen     111.75       116.97  
South Korean Won     1,116.94       1,205.11  
Taiwan Dollar     30.35       32.28  

Fair Value of Financial Instruments

 

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

  

New Accounting Pronouncements

 

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

 

In November 2015, FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. The Company adopted ASU 2015-17 for the quarter ended March 31, 2017. We adopted this guidance at the beginning of our first quarter of fiscal year 2017, and determined there is no impact on our condensed consolidated financial statements and disclosures.

 

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

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The Company adopted ASU 2016-07 in the quarter ended March 31, 2017. We adopted this guidance at the beginning of our first quarter of fiscal year 2017, and determined there is no impact on our condensed consolidated financial statements and disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter ended March 31, 2017. We adopted this guidance at the beginning of our first quarter of fiscal year 2017, and determined there is no impact on our condensed consolidated financial statements and disclosures.

 

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

Stockholders' Equity
Stockholders' Equity

3. Stockholders’ Equity

 

Common Stock

 

During the three months ended March 31, 2017, there were no activities that affected common stock.

  

Preferred Stock

 

We have one class of preferred stock outstanding. There were no activities that affected preferred stock during the three months ended March 31, 2017.

 

Conversion of Preferred Stock Issued to Common Stock

 

The following table summarizes the amounts as of March 31, 2017. 

 

  Shares of Preferred
Stock Not
Exchanged
as of
March 31,
2017
  Conversion Ratio  Shares of
Common
Stock after
Conversion
of all Outstanding
Shares of
Preferred
Stock
Not yet
Exchanged
at
March 31,
2017
 
             
Series B Preferred stock  83   132.07   10,962 
Stock-Based Compensation
Stock-Based Compensation

4. Stock-Based Compensation

 

The stock-based compensation expense for the three months ended March 31, 2017 and 2016 reflects the estimated fair value of the vested portion of options granted to employees, directors and eligible consultants. Stock-based compensation expense in the accompanying condensed consolidated statements of operations is as follows (in thousands):

 

  Three months ended
March 31,
 
  2017  2016 
Research and development $-  $43 
Sales and marketing  14   62 
General and administrative  6   9 
Total stock-based compensation expense $20  $114 

 

  Remaining unrecognized 
expense at
March 31,
2017
 
Stock-based compensation $64 

 

The remaining unrecognized expense related to stock options will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period, which approximates 0.9 years.

 

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

 

Stock Options

 

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

  

As of March 31, 2017 we had two equity incentive plans:

 

 The 2006 Equity Incentive Plan; and
   
 The 2015 Stock Incentive Plan

 

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

 

  Number of Options Outstanding  Weighted Average Exercise Price 
Outstanding at January 1, 2017  1,846,000  $4.39 
Granted  -   - 
Forfeited  (90,000)  8.21 
Outstanding at March 31, 2017  1,756,000  $4.20 

 

The aggregate intrinsic value of the 1,756,000 stock options that are outstanding, vested and expected to vest as of March 31, 2017 was approximately $4,000.

 

For the three months ended March 31, 2017 and 2016, we recorded $20,000 and $0.1 million, respectively, of compensation expense related to the vesting of stock options. The fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the date of grant of the stock option.

 

During the three months ended March 31, 2017, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.

 

Stock options granted under the 2006 and 2015 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

   

Warrants

 

As of March 31, 2017 and December 31, 2016, there were 7,913,676 warrants to purchase common stock outstanding. There was no activity during the three months ended March 31, 2017.

Commitments and Contingencies
Commitments and Contingencies

5. Commitments and Contingencies

 

Indemnities and Guarantees

 

Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of March 31, 2017 and December 31, 2016.

 

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of March 31, 2017 and December 31, 2016.

 

Non-Recurring Engineering Development Costs

 

On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments pursuant to which Texas Instruments will integrate Neonode’s intellectual property into an ASIC. The NN1002 ASIC only can be sold by Texas Instruments exclusively to licensees of Neonode. Under the terms of the NN1002 Agreement, we will reimburse Texas Instruments up to $500,000 of non-recurring engineering costs based on shipments of the NN1002. Under the terms of the NN1002 Agreement we will reimburse Texas Instruments a non-recurring engineering fee of $0.25 per unit for each of the first two million units sold. The NN1002 began shipping to customers in 2015. As of March 31, 2017, we had made no payments under the NN1002 Agreement.

 

On December 4, 2014, we entered into an Analog Device Development Agreement (the “NN1003 Agreement”) with ST Microelectronics International N.V pursuant to which ST Microelectronics will integrate Neonode’s intellectual property into an ASIC. The NN1003 ASIC only can be sold by ST Microelectronics exclusively to licensees of Neonode. Under the terms of the NN1003 Agreement, we will reimburse ST Microelectronics up to $835,000 of non-recurring engineering costs as follows:

 

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

 

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

 

  $300,000 on completion on product validation ($100,000 paid and $200,000 accrued as of March 31, 2017)

 

Under the terms of the NN1003 Agreement, we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As of March 31, 2017, we had paid $635,000 under the NN1003 Agreement.

Segment Information
Segment Information

6. Segment Information

 

We have one reportable segment, which is comprised of the touch technology licensing and sensor module business. All of our sales for the three months ended March 31, 2017 and 2016 were to customers located in the U.S., Europe and Asia. Of our total assets, 29% and 43% were held in the U.S. as of March 31, 2017 and December 31, 2016, respectively, and 69% and 55% were held in Sweden, respectively.

 

The following table presents net revenues by geographic region for the three months ended March 31, 2017 and 2016 (in thousands):

 

  Three months ended 
March 31,
2017
  Three months ended 
March 31,
2016
 
  Amount  Percentage  Amount  Percentage 
Net revenues from customers in the Americas $1,167   50% $2,005   64%
Net revenues from customers in Asia  834   36%  560   18%
Net revenues from customers in Europe  331   14%  567   18%
  $2,332   100% $3,132   100%
Net Loss Per Share
Net Loss per Share

7. Net Loss per Share

 

Basic net loss per common share for the three months ended March 31, 2017 and 2016 was computed by dividing the net loss attributable to Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to Neonode Inc. by the weighted average number of shares of common stock and common stock equivalents outstanding.

 

Potential common stock equivalents of approximately 3,000 and 1,000 outstanding stock options and 4.9 million and 0 outstanding stock warrants under the treasury stock method, and 11,000 and 11,000 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share calculation for the three months ended March 31, 2017 and 2016, respectively, due to their anti-dilutive effect.

 

(in thousands, except per share amounts) Three months ended
March 31,
 
  2017  2016 
BASIC AND DILUTED      
Weighted average number of common shares outstanding  48,845   43,810 
Net loss attributable to Neonode Inc. $(873) $(1,367)
         
Net loss per share - basic and diluted $(0.02) $(0.03)
Subsequent Events
Subsequent Events

8. Subsequent Events 

 

We have evaluated subsequent events through the filing date of this Form 10-Q, and determined that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes.

Summary of Significant Accounting Policies (Policies)

Principles of Consolidation

 

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

 

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

 

In June 2016, we entered into a Joint Venture (“JV”) with a Swedish based eye-tracking company SMART EYE AB. By combining our technologies, we plan to bring multi-chip modules to the market for the consumer and automotive markets that provide new opportunities for interaction with cars and devices. The name of the newly established JV is Neoeye AB (“Neoeye”). 

 

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

 

The condensed consolidated balance sheets at March 31, 2017 and December 31, 2016 and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three months ended March 31, 2017 and 2016 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), as well as Pronode Technologies AB (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB.

Estimates

 

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

Cash

 

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

Concentration of Cash Balance Risks

 

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

Accounts Receivable and Allowance for Doubtful Accounts  

 

Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $149,000 as of March 31, 2017 and December 31, 2016, respectively.

Projects in Process

 

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our condensed consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. Costs capitalized in projects in process were $159,000 as of March 31, 2017. There were no costs capitalized in projects in process as of December 31, 2016.

Inventory

 

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”) and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of March 31, 2017 and December 31, 2016, the Company’s inventory consists primarily of components that will be used in the manufacturing of our first sensor module, AirBar. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

 

Raw materials, work-in-process, and finished goods are as follows (in thousands):

 

    March 31,     December 31,  
    2017     2016  
Raw materials   $ 806     $ 522  
Work-in-Process     168       42  
Finished goods     570       132  
Ending inventory   $ 1,544     $ 696  

Investment in JV

 

We have invested $3,000, for a 50% interest in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through March 31, 2017.

 

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

 

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

Property and Equipment

 

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

 

Estimated useful lives

 

 Computer equipment  3 years          
 Furniture and fixtures  5 years          
 Equipment  7 years          

 

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

 

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

Long-lived Assets

 

We assess any impairment by estimating the future cash flow from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of March 31, 2017, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

Foreign Currency Translation and Transaction Gains and Losses

 

The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese Yen, South Korean Won and Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted-average exchange rate during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Foreign currency translation gains (losses) were $7,000 and $(35,000) during the three months ended March 31, 2017 and 2016, respectively. Gains resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed consolidated statements of operations and were $20,000 and $13,000 during the three months ended March 31, 2017 and 2016, respectively.

Concentration of Credit and Business Risks

 

Our customers are located in U.S., Europe and Asia.

 

As of March 31, 2017, three customers represented approximately 72% of the Company’s accounts receivable. 

 

As of December 31, 2016, three customers represented approximately 59% of the Company’s accounts receivable. 

 

Customers who accounted for 10% or more of our net revenues during the three months ended March 31, 2017 are as follows:

 

 Hewlett Packard Company – 31%
   
 Canon – 17%
   
 Amazon – 12%
   
 Robert Bosch – 11%

 

Customers who accounted for 10% or more of our net revenues during the three months ended March 31, 2016 are as follows:

 

 Hewlett Packard Company – 40%
   
 Amazon – 18%
   
 Autoliv Development AB – 12%

Revenue Recognition

 

Licensing Revenues:

 

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

 

Explicit return rights are not offered to customers. There have been no returns through March 31, 2017.

 

Engineering Services:

 

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

 

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

 

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

 

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

 

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the quarters ended March 31, 2017 and 2016, no losses related to SOW projects were recorded.

 

Optical Sensor Modules Revenues:

 

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

 

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

 

  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.
     
  Collectability is reasonably assured. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

 

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

 

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

 

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant as of March 31, 2017 and December 31, 2016. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue could be adversely affected.

Product Warranty

 

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

 

  March 31,
2017
  December 31,
2016
 
Balance at beginning of period $11  $- 
Provisions for warranty issued  1   11 
Balance at end of period $12  $11 

 

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

Deferred Revenues

 

We defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of March 31, 2017 and December 31, 2016, we have $1.3 million and $1.8 million, respectively, of deferred license fee revenue related to prepayments for future license fees from four customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of March 31, 2017 and December 31, 2016 we had $0.1 million of deferred revenue from our AirBar sales. As of March 31, 2017 we had $0.1 million of deferred engineering development fees from two customers. As of December 31, 2016 there were no deferred engineering development fees.

Advertising

 

Advertising costs are expensed as incurred. Advertising costs for the three months ended March 31, 2017 and 2016 amounted to approximately $147,000 and $80,000, respectively.

Research and Development

 

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

Stock-Based Compensation Expense

 

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

 

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

 

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

Noncontrolling Interests

 

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

 

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

 

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

Income Taxes

 

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

 

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of March 31, 2017 and December 31, 2016. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.

 

We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of March 31, 2017 and December 31, 2016, we had no unrecognized tax benefits.

Net Loss per Share

 

Net loss per share amounts has been computed based on the weighted average number of shares of common stock outstanding during the three months ended March 31, 2017 and 2016. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the three months ended March 31, 2017 and 2016 exclude the potential common stock equivalents, as the effect would be anti-dilutive (See Note 8).

Other Comprehensive Income (Loss)

 

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

Cash Flow Information

 

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

 

    Three months ended
March 31,
 
    2017     2016  
Swedish Krona     8.92       8.45  
Japanese Yen     113.71       115.36  
South Korean Won     1,150.18       1,193.75  
Taiwan Dollar     31.05       33.06  

 

Exchange rate for the consolidated balance sheets was as follows:

 

    Periods Ended  
    March 31,     December 31,  
    2017     2016  
Swedish Krona     8.94       9.07  
Japanese Yen     111.75       116.97  
South Korean Won     1,116.94       1,205.11  
Taiwan Dollar     30.35       32.28  

Fair Value of Financial Instruments

 

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

New Accounting Pronouncements

 

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

In November 2015, FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, the ASU requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. The Company adopted ASU 2015-17 for the quarter ended March 31, 2017. We adopted this guidance at the beginning of our first quarter of fiscal year 2017, and determined there is no impact on our condensed consolidated financial statements and disclosures.

 

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

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The Company adopted ASU 2016-07 in the quarter ended March 31, 2017. We adopted this guidance at the beginning of our first quarter of fiscal year 2017, and determined there is no impact on our condensed consolidated financial statements and disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplified certain aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. The Company adopted ASU 2016-09 in the first quarter ended March 31, 2017. We adopted this guidance at the beginning of our first quarter of fiscal year 2017, and determined there is no impact on our condensed consolidated financial statements and disclosures.

 

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

Summary of Significant Accounting Policies (Tables)
  March 31,  December 31, 
  2017  2016 
Raw materials $806  $522 
Work-in-Process  168   42 
Finished goods  570   132 
Ending inventory $1,544  $696
 Computer equipment  3 years          
 Furniture and fixtures  5 years          
 Equipment  7 years          
  March 31,
2017
  December 31,
2016
 
Balance at beginning of period $11  $- 
Provisions for warranty issued  1   11 
Balance at end of period $12  $11 
  Three months ended
March 31,
 
  2017  2016 
Swedish Krona  8.92   8.45 
Japanese Yen  113.71   115.36 
South Korean Won  1,150.18   1,193.75 
Taiwan Dollar  31.05   33.06 
    Periods Ended  
    March 31,     December 31,  
    2017     2016  
Swedish Krona     8.94       9.07  
Japanese Yen     111.75       116.97  
South Korean Won     1,116.94       1,205.11  
Taiwan Dollar     30.35       32.28  
Stockholders' Equity (Tables)
Schedule of conversion of preferred stock issued to common stock

  Shares of Preferred
Stock Not
Exchanged
as of
March 31,
2017
  Conversion Ratio  Shares of
Common
Stock after
Conversion
of all Outstanding
Shares of
Preferred
Stock
Not yet
Exchanged
at
March 31,
2017
 
             
Series B Preferred stock  83   132.07   10,962 
Stock-Based Compensation (Tables)

  Three months ended
March 31,
 
  2017  2016 
Research and development $-  $43 
Sales and marketing  14   62 
General and administrative  6   9 
Total stock-based compensation expense $20  $114 

 

  Remaining unrecognized 
expense at
March 31,
2017
 
Stock-based compensation $64 

  Number of Options Outstanding  Weighted Average Exercise Price 
Outstanding at January 1, 2017  1,846,000  $4.39 
Granted  -   - 
Forfeited  (90,000)  - 
Outstanding at March 31, 2017  1,756,000  $4.20 
Segment Information (Tables)
Summary of net revenues by geographic region

  Three months ended 
March 31,
2017
  Three months ended 
March 31,
2016
 
  Amount  Percentage  Amount  Percentage 
Net revenues from customers in the Americas $1,167   50% $2,005   64%
Net revenues from customers in Asia  834   36%  560   18%
Net revenues from customers in Europe  331   14%  567   18%
  $2,332   100% $3,132   100%
Net Loss Per Share (Tables)
Schedule of basic and diluted for net loss per share

(in thousands, except per share amounts) Three months ended
March 31,
 
  2017  2016 
BASIC AND DILUTED      
Weighted average number of common shares outstanding  48,845   43,810 
Net loss attributable to Neonode Inc. $(873) $(1,367)
         
Net loss per share - basic and diluted $(0.02) $(0.03)
Interim Period Reporting (Details) (USD $)
3 Months Ended 12 Months Ended 1 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Dec. 31, 2010
Mar. 10, 2017
Dec. 31, 2016
Aug. 31, 2016
Securities Purchase Agreement [Member]
Aug. 31, 2016
Securities Purchase Agreement [Member]
Aug. 31, 2016
Employee Investor Shares [Member]
Aug. 31, 2016
Outside Investor Shares [Member]
Aug. 31, 2016
Pre Funded Warrant Shares [Member]
Interim Period Reporting (Textual)
 
 
 
 
 
 
 
 
 
 
Number of equipment sold
 
 
$ 45,000,000 
 
 
 
 
 
 
 
Net loss
(873,000)
(1,367,000)
 
 
 
 
 
 
 
 
Accumulated deficit
(179,913,000)
 
 
 
(179,040,000)
 
 
 
 
 
Net cash used in operating activities
(1,605,000)
21,000 
 
 
 
 
 
 
 
 
Common stock available for issuance under shelf registration
1,800,000 
 
 
 
 
 
 
 
 
 
Common stock purchased by exercise of warrants
 
 
 
4,800,000 
 
 
 
 
 
 
Issuance of common stock
 
 
 
 
 
4,313,676 
8,627,352 
427,352 
4,600,000 
 
Net proceeds from issuance of common stock
 
 
 
 
 
 
7,900,000 
500,000 
4,600,000 
 
Share price
 
 
 
 
 
$ 1.12 
$ 1.12 
$ 1.17 
$ 1.00 
 
Securities purchase agreement, description
 
 
 
 
 
 
 
 
 
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. 
Shelf registration common stock offering price
20,000,000 
 
 
 
 
 
 
 
 
 
Proceeds from warrants
$ 4,800,000 
 
 
 
 
 
 
 
 
 
Warrant expiration date
Feb. 17, 2022 
 
 
 
 
 
 
 
 
 
Summary of Significant Accounting Policies (Details) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Summary of Significant Accounting Policies [Abstract]
 
 
Raw materials
$ 806 
$ 522 
Work-in-Process
168 
42 
Finished goods
570 
132 
Ending inventory
$ 1,544 
$ 696 
Summary of Significant Accounting Policies (Details 1)
3 Months Ended
Mar. 31, 2017
Computer equipment [Member]
 
Estimated useful lives of property and equipment
 
Estimated useful lives
3 years 
Furniture and fixtures [Member]
 
Estimated useful lives of property and equipment
 
Estimated useful lives
5 years 
Equipment [Member]
 
Estimated useful lives of property and equipment
 
Estimated useful lives
7 years 
Summary of Significant Accounting Policies (Details 2) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 12 Months Ended
Mar. 31, 2017
Dec. 31, 2016
Summary of Significant Accounting Policies [Abstract]
 
 
Balance at beginning of period
$ 11 
    
Provisions for warranty issued
11 
Balance at end of period
$ 12 
$ 11 
Summary of Significant Accounting Policies (Details 3)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Swedish Krona [Member]
 
 
Weighted average exchange rate consolidated statements of operations
 
 
Weighted-average exchange rate for consolidated statements of operations
8.92 
8.45 
Japanese Yen [Member]
 
 
Weighted average exchange rate consolidated statements of operations
 
 
Weighted-average exchange rate for consolidated statements of operations
113.71 
115.36 
South Korean Won [Member]
 
 
Weighted average exchange rate consolidated statements of operations
 
 
Weighted-average exchange rate for consolidated statements of operations
1,150.18 
1,193.75 
Taiwan Dollar [Member]
 
 
Weighted average exchange rate consolidated statements of operations
 
 
Weighted-average exchange rate for consolidated statements of operations
31.05 
33.06 
Summary of Significant Accounting Policies (Details 4)
Mar. 31, 2017
Dec. 31, 2016
Swedish Krona [Member]
 
 
Exchange Rate for Consolidated Balance Sheets
 
 
Exchange rate for the consolidated balance sheets
8.94 
9.07 
Japanese Yen [Member]
 
 
Exchange Rate for Consolidated Balance Sheets
 
 
Exchange rate for the consolidated balance sheets
111.75 
116.97 
South Korean Won [Member]
 
 
Exchange Rate for Consolidated Balance Sheets
 
 
Exchange rate for the consolidated balance sheets
1,116.94 
1,205.11 
Taiwan Dollar [Member]
 
 
Exchange Rate for Consolidated Balance Sheets
 
 
Exchange rate for the consolidated balance sheets
30.35 
32.28 
Summary of Significant Accounting Policies (Details Textual)
3 Months Ended 12 Months Ended 3 Months Ended 12 Months Ended 3 Months Ended 12 Months Ended 3 Months Ended 12 Months Ended 3 Months Ended
Mar. 31, 2017
USD ($)
Mar. 31, 2016
USD ($)
Dec. 31, 2016
USD ($)
Mar. 31, 2017
JPY (¥)
Mar. 31, 2017
KRW (?)
Mar. 31, 2017
SEK (kr)
Mar. 31, 2017
TWD ($)
Mar. 31, 2017
Prepayments for Future License Fees [Member]
USD ($)
Customers
Dec. 31, 2016
Prepayments for Future License Fees [Member]
USD ($)
Customers
Mar. 31, 2017
Deferred Engineering Development Fees [Member]
USD ($)
Customers
Mar. 31, 2017
Maximum [Member]
Mar. 31, 2017
Minimum [Member]
Mar. 31, 2017
SWEDEN
Dec. 31, 2016
SWEDEN
Mar. 31, 2017
Accounts Receivable [Member]
Customers
Dec. 31, 2016
Accounts Receivable [Member]
Customers
Mar. 31, 2017
Hewlett Packard [Member]
Sales Revenue, Net [Member]
Mar. 31, 2016
Hewlett Packard [Member]
Sales Revenue, Net [Member]
Mar. 31, 2017
Amazon Inc [Member]
Sales Revenue, Net [Member]
Mar. 31, 2016
Amazon Inc [Member]
Sales Revenue, Net [Member]
Mar. 31, 2016
Autoliv Development AB [Member]
Sales Revenue, Net [Member]
Mar. 31, 2017
Canon [Member]
Sales Revenue, Net [Member]
Mar. 31, 2017
Robert Bosch Car Multimedia [Member]
Sales Revenue, Net [Member]
Mar. 31, 2017
Airbar Sales [Member]
USD ($)
Dec. 31, 2016
Airbar Sales [Member]
USD ($)
Summary of Significant Accounting Policies (Textual)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred license fee revenue
$ 1,580,000 
 
$ 1,921,000 
 
 
 
 
$ 1,300,000 
$ 1,800,000 
$ 100,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of customer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic deposit coverage limits per owner and customer
250,000 
 
 
10,000,000,000 
50,000,000,000 
100,000,000 
3,000,000,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
149,000 
 
149,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs capitalized in projects in process
159,000 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
7,000 
(35,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation, general and administrative expenses
20,000 
13,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment in joint venture
3,000 
 
3,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity ownership percentage
50.00% 
 
 
 
 
 
 
 
 
 
50.00% 
20.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
Concentration risk, percentage
 
 
 
 
 
 
 
 
 
 
 
 
69.00% 
55.00% 
72.00% 
59.00% 
31.00% 
40.00% 
12.00% 
18.00% 
12.00% 
17.00% 
11.00% 
 
 
Advertising costs
147,000 
80,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest owned by Pronode Technologies AB
51.00% 
 
 
 
 
 
 
 
 
 
 
 
51.00% 
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest owned by Propoint AB
49.00% 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncontrolling interest, description
Noncontrolling interests' partners have less than 50% share of voting rights at any one of the subsidiary level companies. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Revenue
105,000 
595,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Warrant term
 
 
 
 
 
 
 
 
 
 
36 months 
12 months 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$ 100,000 
$ 100,000 
Warrants to purchase common stock outstanding
7,913,676 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Equity (Details) (Series B Preferred Stock [Member])
3 Months Ended
Mar. 31, 2017
Series B Preferred Stock [Member]
 
Schedule of conversion of preferred stock issued to common stock
 
Shares of Preferred Stock Not Exchanged
83 
Conversion Ratio
132.07 
Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged
10,962 
Stock-Based Compensation (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Summary of stock-based compensation expense
 
 
Total stock-based compensation expense
$ 20 
$ 114 
Remaining unrecognized expense of stock-based compensation
64 
 
Research and development [Member]
 
 
Summary of stock-based compensation expense
 
 
Total stock-based compensation expense
   
43 
Sales and marketing [Member]
 
 
Summary of stock-based compensation expense
 
 
Total stock-based compensation expense
14 
62 
General and administrative [Member]
 
 
Summary of stock-based compensation expense
 
 
Total stock-based compensation expense
$ 6 
$ 9 
Stock-Based Compensation (Details 1) (Stock options [Member], USD $)
3 Months Ended
Mar. 31, 2017
Stock options [Member]
 
Summary of all stock option plans
 
Number of Options/Warrants Outstanding, Beginning Balance
1,846,000 
Number of Options Outstanding, Granted
   
Number of Options Outstanding, Forfeited
(90,000)
Number of Options/Warrants Outstanding, Ending Balance
1,756,000 
Weighted Average Exercise Price, Outstanding, Beginning Balance
$ 4.39 
Weighted Average Exercise Price, Granted
   
Weighted Average Exercise Price, Expired/cancelled
   
Weighted Average Exercise Price, Outstanding, Ending Balance
$ 4.20 
Stock-Based Compensation (Details Textual) (USD $)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Mar. 31, 2017
Stock options [Member]
Dec. 31, 2016
Stock options [Member]
Stock-Based Compensation (Textual)
 
 
 
 
Aggregate vested options to purchase shares
 
 
265,000 
 
Vesting period
10 months 24 days 
 
 
 
Number of options outstanding
 
 
1,756,000 
1,846,000 
Options outstanding, vested and expected to vest, aggregate intrinsic value
 
 
$ 4,000 
 
Share-based compensation expense
$ 20,000 
$ 114,000 
 
 
Term of stock options description
 
 
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. 
 
Pre-Funded Warrant Shares
213,676 
 
 
 
Commitments and Contingencies (Details) (USD $)
0 Months Ended 3 Months Ended
Dec. 4, 2014
Dec. 6, 2012
Jan. 24, 2010
Mar. 31, 2017
Commitments and Contingencies (Textual)
 
 
 
 
Non-recurring engineering development costs contributed to TI
$ 835,000 
$ 500,000 
 
 
Description of NRE cost distributed to TI
 
Under the terms of the NN1002 Agreement we will reimburse Texas Instruments a non-recurring engineering fee of $0.25 per unit for each of the first two million units sold. 
Under the terms of the NN1001 Agreement, we have reimbursed 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. 
 
NRE cost contributed for each of first one million unit sold, Per unit
 
 
$ 0.08 
 
NRE cost contributed for next eight million unit sold, Per unit
 
 
$ 0.05 
 
NRE fee contributed for each of first two million unit sold, Per unit
 
$ 0.25 
 
 
Non recurring engineering costs description
 
 
 
Capital lease payment description
Under the terms of the NN1003 Agreement, we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. 
 
 
 
Non recurring engineering fee amount
 
 
 
$ 635,000 
 $235,000 at the feasibility review and contract signature (paid on January 20, 2015)

 

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

 

 $300,000 on completion on product validation ($100,000 paid and $200,000 accrued as of March 31, 2017)
Segment Information (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Summary of net revenues by geographic region
 
 
Total revenues
$ 2,332 
$ 3,132 
Revenues percentage
100.00% 
100.00% 
Americas [Member]
 
 
Summary of net revenues by geographic region
 
 
Total revenues
1,167 
2,005 
Revenues percentage
50.00% 
64.00% 
Asia [Member]
 
 
Summary of net revenues by geographic region
 
 
Total revenues
834 
560 
Revenues percentage
36.00% 
18.00% 
Europe [Member]
 
 
Summary of net revenues by geographic region
 
 
Total revenues
$ 331 
$ 567 
Revenues percentage
14.00% 
18.00% 
Segment Information (Details Textual)
3 Months Ended 12 Months Ended
Mar. 31, 2017
Segment
Dec. 31, 2016
U.S.
 
 
Segment Information (Textual)
 
 
Number of reportable segments
 
Percentage of sales
29.00% 
43.00% 
Sweden
 
 
Segment Information (Textual)
 
 
Percentage of sales
69.00% 
55.00% 
Net Loss Per Share (Details) (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
BASIC AND DILUTED
 
 
Weighted average number of common shares outstanding
48,845 
43,810 
Net loss attributable to Neonode Inc.
$ (873)
$ (1,367)
Net loss per share - basic and diluted
$ (0.02)
$ (0.03)
Net Loss Per Share (Details Textual)
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Stock Option [Member]
 
 
Net Loss Per Share (Textual)
 
 
Antidilutive securities excluded from computation of earnings per share
3,000 
1,000 
Warrant [Member]
 
 
Net Loss Per Share (Textual)
 
 
Antidilutive securities excluded from computation of earnings per share
4,900,000 
Convertible Preferred Stock [Member]
 
 
Net Loss Per Share (Textual)
 
 
Antidilutive securities excluded from computation of earnings per share
11,000 
11,000 

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