2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the U.S. GAAP and include the accounts of Neonode Inc. and its wholly owned subsidiaries,
as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies AB. The remaining 49% of Pronode Technologies
AB is owned by 2X-Communication AB, located in Kungsbacka, Sweden. Pronode Technologies AB was organized to sell engineering services
within the automotive markets. All inter-company accounts and transactions have been eliminated in consolidation.
Neonode consolidates entities
in which it has a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50%
of the voting rights.
The condensed consolidated
balance sheets at March 31, 2021 and December 31, 2020 and the condensed consolidated statements of operations, comprehensive loss, stockholders’
equity and cash flows for the three months ended March 31, 2021 and 2020 include our accounts and those of our wholly owned subsidiaries
as well as Pronode Technologies AB.
Estimates and Judgments
The preparation of financial
statements in conformity with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements,
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and
expenses. Actual results could differ from these estimates and judgments.
Significant estimates and
judgments include, but are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations,
the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable
consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables;
determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived assets; for leases, determining
whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing
rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets; and the
fair value of options issued for stock-based compensation.
Cash and Cash Equivalents
We have not had any liquid
investments other than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original
maturities of three months of less to be cash equivalents.
Concentration of Cash
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 950,000 Krona per customer and covers deposits in all types of accounts. For bank accounts of the category held
by Neonode, the Japanese government provides full insurance coverage. 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 receivable is stated
at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make
required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer.
Should all efforts fail to recover the related receivable, we will write off the account. We also record an allowance for all customers
based on certain other factors including the length of time the receivables are past due and historical collection experience with customers.
Our allowance for doubtful accounts was approximately $79,000 as of March 31, 2021 and December 31, 2020, respectively.
Projects in Process
Projects in process consist
of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering
labor costs and project-specific equipment costs. These costs are capitalized on our balance sheet as an asset and deferred until revenue
for each project is recognized in accordance with our revenue recognition policy. There were no costs capitalized in projects as of March
31, 2021 and December 31, 2020, respectively.
The Company’s inventory
consists primarily of components that will be used in the manufacturing of our sensor modules. We classify inventory for reporting purposes
as raw materials, work-in-process, and finished goods.
Inventory is stated at the
lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable value is the
estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.
Due to the low sell-through of our AirBar products,
management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials. Management has
further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location it is stored. The
AirBar inventory reserve was $0.8 million and $0.9 million as of March 31, 2021 and December 31, 2020, respectively.
To protect our manufacturing partner from losses
in relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee covering the production of 20,000
AirBars. Excess inventory was purchased from our manufacturing partner in 2019 and has been fully reserved.
Raw materials, work-in-process,
and finished goods are as follows (in thousands):
||March 31,|| ||
||December 31,|| |
|| ||45|| ||
|| ||21|| |
|| ||815|| ||
|| ||702|| |
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
|Furniture and fixtures
Equipment purchased under
a finance lease is recognized over the term of the lease if that lease term is shorter than the estimated useful life.
Upon retirement or sale of
property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected
in the condensed consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.
Right of Use Assets
A right-of-use asset represents
a lessee’s right to use a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases
for buildings and finance leases for manufacturing equipment.
Right-of-use assets are measured initially at the present value of
the lease payments, plus any lease payments made before a lease begins and any initial direct costs, such as commissions paid to obtain
Right-of-use assets are subsequently
measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct
costs not yet expensed.
Long-Lived Asset Recoverability
We assess the recoverability
of long-lived assets by estimating the future cash flow from the associated assets in accordance with relevant accounting guidance. If
the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated,
we may incur charges for impairment of these assets. As of March 31, 2021, 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 $(166,000) and $(87,000) during the three months ended March 31, 2021
and 2020, respectively. Gains (losses) resulting from foreign currency transactions are included in general and administrative expenses
in the accompanying condensed consolidated statements of operations and were $82,000 and $49,000 during the three months ended March 31,
2021 and 2020, respectively.
Concentration of Credit and Business Risks
Our customers are located in the U.S., Europe and Asia.
As of March 31, 2021, five
customers represented approximately 78% of our consolidated accounts receivable and unbilled revenues.
As of December 31, 2020, three
customers represented approximately 62% of our consolidated accounts receivable and unbilled revenues.
Customers who accounted for
10% or more of our net revenues during the three months ended March 31, 2021 are as follows:
||Hewlett Packard Company – 19%|
||LG – 17%|
||Seiko Epson Corporation – 15%|
||Lexmark Intl Inc – 14%|
||Alpine – 13%|
Customers who accounted for 10% or more of our
net revenues during the three months ended March 31, 2020 are as follows:
||Hewlett Packard Company – 36%|
||Epson – 19%|
||Alpine – 17%|
We recognize revenue when
control of products is transferred to our customers, and when services are completed and accepted by our customers. The amount of revenue
we recognize reflects the consideration we expect to receive for those products or services. Our contracts with customers may include
combinations of products and services, for example, a contract that includes products and related engineering services. We structure our
contracts such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly
defined in each contract.
License fees for products and sales of AirBar and sensor modules are
recognized on a per-unit basis; therefore, we generally satisfy performance obligations as units are shipped to our customers. Non-recurring
engineering service performance obligations are satisfied as work is performed and accepted by our customers.
We recognize revenue net of
allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat all
product shipping and handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods, therefore
we treat all shipping and handling charges as expenses.
Revenues from our business
areas derive from three different revenue streams: license fees, non-recurring engineering fees and the sale of sensor modules.
We earn revenue from licensing
our internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees
the right to incorporate our IP components in their products, with terms and conditions that vary by licensee. Fees under these agreements
may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products
incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance
For technology license arrangements
that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when
the license is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we
record unbilled license fees, using prior royalty revenue data by customer to make estimates of those royalties.
Explicit return rights are not offered to customers.
There have been no returns through March 31, 2021.
For technology license or sensor module contracts that require modification
or customization of the underlying technology to adapt that technology to the customer’s desired use, we determine whether the technology
license or sensor module, and engineering consulting services represent separate performance obligations. We perform our analysis on a
contract-by-contract basis. If there are separate performance obligations, we determine the standalone selling price (“SSP”)
of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied. We provide engineering
consulting services to our customers under a signed Statement of Work (“SOW”). Deliverables and payment terms are specified
in each SOW. We generally charge an hourly rate for engineering services, and we recognize revenue as engineering services specified in
contracts are completed and accepted by our customers. Any upfront payments we receive for future non-recurring engineering services are
recorded as unearned revenue until that revenue is earned.
We believe that recognizing non-recurring engineering service revenues
as progress towards completion of engineering services and customer acceptance of those services occurs best reflects the economics of
those transactions, because engineering services as tracked in our systems correspond directly with the value to our customers of our
performance completed to date. Hours performed for each engineering project are tracked and reflect progress made on each project and
are charged at a consistent hourly rate.
Revenues from engineering
services contracts that are short-term in nature are recorded when those services are complete and accepted by customers.
Revenues from engineering
services contracts with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required
to produce such deliverables are recognized as they are completed and accepted by customers.
Estimated losses on all SOW
projects are recognized in full as soon as they become evident. During the three months ended March 31, 2021 and 2020, no losses related
to SOW projects were recorded.
Optical Sensor Modules
We earn revenue from sales of sensor modules hardware products to our
Original Equipment Manufacturers (“OEM”) and Tier 1 supplier customers, who embed our hardware into their products, and from
sales of branded consumer products that incorporate our sensor modules sold through distributors or directly to end users. These distributors
are generally given business terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate
in various cooperative marketing programs. Our sales agreements generally provide customers with limited rights of return and warranty
The timing of revenue recognition related to AirBar
modules depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue for AirBar modules
sold point-of-sale when we provide the promised product to the customer.
We generally use distributors to provide AirBar and sensor modules
to our customers and analyze the terms of distributor agreements to determine when control passes from us to our distributors. For sales
of AirBar and sensor modules sold through distributors, revenues are recognized when our distributors obtain control over our products.
Control passes to our distributors when we have a present right to payment for products sold to distributors, the distributors have legal
title to and physical possession of products purchased from us, and the distributors have significant risks and rewards of ownership of
Distributors participate in various cooperative
marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received
by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue
could be adversely affected.
Under U.S. GAAP, companies may make reasonable aggregations and approximations
of returns data to accurately estimate returns. Our AirBar and Module returns and warranty experience to date has enabled us to make reasonable
returns estimates, which are supported by the fact that our product sales involve homogenous transactions. The reserve for future sales
returns is recorded as a reduction of our accounts receivable and revenue and was $74,000 as of March 31, 2021 and $74,000 as of December
31, 2020. If the actual future returns were to deviate from the historical data on which the reserve had been established, our revenue
could be adversely affected.
The following table presents
disaggregated revenues by market for the three months ended March 31, 2021 and 2020 (dollars in thousands):
||Three months ended|
March 31, 2021
||Three months ended|
March 31, 2020
|| || ||
|| || ||
|| || ||
|| || |
|Net revenues from automotive||
|Net revenues from consumer electronics||
|| ||797|| ||
|| ||781|| ||
|| || || ||
|| || || ||
|| || || ||
|| || || |
|| || || ||
|| || || ||
|| || || ||
| || |
|Net revenues from medical||
|Net revenues from distributors||
|| ||184|| ||
|| ||39|| ||
|Net revenues from other||
|| ||161|| ||
|| ||20|| ||
Our contracts with customers
may include promises to transfer multiple products and services to a customer, particularly when the contract is for a product and related
engineering services fees for customizing that product for our customer. Determining whether products and services are considered distinct
performance obligations that should be accounted for separately may require significant judgment. Judgment may also be required to determine
the SSP for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations
and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance
Judgment is also required
to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us.
Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability
when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional
information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal
of any incremental revenue would occur.
Finally, judgment is required to determine the
amount of unbilled license fees at the end of each reporting period.
Timing of revenue recognition
may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments
from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our
The following table presents accounts receivable
and deferred revenues as of March 31, 2021 and 2020 (in thousands):
|Accounts receivable and unbilled revenue||
|| ||120|| ||
|| ||138|| |
The timing of revenue recognition, billings and
cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits or deferred
revenue (contract liabilities) on the consolidated balance sheets. Generally, billing occurs subsequent to revenue recognition, resulting
in contract assets; contract assets are generally classified as current. The Company sometimes receives advances or deposits from its
customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current. These assets
and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.
We do not anticipate impairment
of our contract asset related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance
in that asset account. We will continue to monitor the timeliness of receipts from those customers, however, to assess whether the contract
asset has been impaired.
The allowance for doubtful
accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on
known troubled accounts, historical experience, and other currently available evidence. Our allowance for doubtful accounts was approximately
$79,000 as of March 31, 2021 and December 31, 2020.
Payment terms and conditions
vary by the type of contract; however, payments generally occur 30-60 days after invoicing for license fees and sensor modules to our
resellers and distributors. Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not
include a significant financing component. Our intent is to provide our customers with consistent invoicing terms for the convenience
of our customers, not to receive financing from our customers.
Costs to Obtain Contracts
We record the incremental
costs of obtaining a contract with a customer as an asset, if we expect the benefit of those costs to cover a period greater than one
year. We currently have no incremental costs that must be capitalized.
We expense as incurred costs
of obtaining a contract when the amortization period of those costs would have been less than or equal to one year.
The following table summarizes
the activity related to the product warranty liability (in thousands):
|Balance at beginning of period||
|Provisions for warranty issued||
|| ||2|| ||
|| ||1|| |
|Balance at end of period||
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 months from the customer receipt of the product.
Deferred revenues consist
primarily of prepayments for license fees, and other products or services for which we have been paid in advance and earn the revenue
when we transfer control of the product or service. Deferred revenues may also include upfront payments for consulting services to be
performed in the future, such as non-recurring engineering services.
We defer license fees until
we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer
has a right to use the license. Engineering development fee revenues are deferred until engineering services have been completed and accepted
by our customers.
The following table presents
our deferred revenues (in thousands):
|Deferred revenues HMI Solutions
|Deferred revenues HMI Products
During the three months ended
March 31, 2021, the Company recognized revenues of approximately $18,000 related to contract liabilities outstanding at the beginning
of the year.
Advertising costs are expensed
as incurred. Advertising costs for the three months ended March 31, 2021 and 2020 amounted to approximately $19,000 and $7,000, respectively.
Research and Development
Research and development (“R&D”)
costs are expensed as incurred. R&D costs consist primarily of personnel related costs in addition to external consultancy costs such
as testing, certifying and measurements.
Stock-Based Compensation Expense
We measure the cost of employee
services received in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award
on the grant date, and recognize the value as compensation expense over the period the employee is required to provide services in exchange
for the award, usually the vesting period.
We account for equity instruments
issued to non-employees at their estimated fair value.
When determining stock-based
compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes
option pricing model.
We recognize any noncontrolling interest, also
known as a minority interest, as a separate line item in equity in the consolidated financial statements. A noncontrolling interest represents
the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us. Generally, any interest that holds less
than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are other factors, such as decision-making
rights, that are considered as well. We include the amount of net income (loss) attributable to noncontrolling interests in consolidated
net income (loss) on the face of the consolidated statements of operations.
The Company provides either
in the 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:
||Net income or loss;|
||Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and|
||Each component of other comprehensive income or loss.|
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, 2021 and December 31, 2020. 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, 2021 and December
31, 2020, 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, 2021
and 2020. 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, 2021 and 2020 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8).
Other Comprehensive Income (Loss)
Our other comprehensive income
(loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected
as a separate component of stockholders’ equity in the condensed consolidated balance sheets.
Cash Flow Information
Cash flows in foreign currencies
have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average
exchange rate for the condensed consolidated statements of operations was as follows:
||Three months ended |
|| ||9.68|| |
|| ||106.03|| ||
|| ||108.97|| |
|South Korean Won||
|| ||1,114.49|| ||
|| ||1,192.79|| |
|| ||28.08|| ||
|| ||30.12|| |
Exchange rate for the consolidated balance sheets
was as follows:
|South Korean Won
Fair Value of Financial Instruments
We disclose the estimated
fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts
receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.
New Accounting Pronouncements
In September 2016, the FASB issued ASU No. 2016-13,
Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”),
supplemented by subsequent accounting standards updates. The new standard requires entities to measure all expected credit losses for
financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.
ASU 2016-13, as amended, is scheduled to become effective for fiscal years beginning after December 15, 2023, with early adoption permitted.
In the future, we will evaluate the impact that ASU 2016-13, as amended, will have on our consolidated financial statements, specifically
regarding our trade receivables; however, we do not expect any significant impact from implementation of the new standard.
In December 2019, the FASB
issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Tax, which simplifies the accounting for income
taxes. We adopted ASU 2019-12 on January 1, 2021 and the adoption of this ASU did not have a significant impact on our consolidated financial