UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2021

 

☐ Transition report pursuant to section 13 or 15(d) of the Securities and Exchange Act of 1934

 

For the transition period from _______ to ________

 

Commission file number 1-35526

 

	NEONODE INC.
	(Exact name of registrant as specified in its charter)

 

Delaware		94-1517641
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

Karlavägen 100, 115 26 Stockholm, Sweden

(Address of principal executive offices and zip code)

 

	+46 (0) 8 667 17 17
	(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001 per share		NEON		The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐   No ☒

 

The number of shares of the registrant’s common stock outstanding as of May 10, 2021 was 11,504,665.

 

 

 

NEONODE INC.

 

Form 10-Q

For the Fiscal Quarter Ended March 31, 2021

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION			1
	Item 1	Financial Statements	1
		Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020 (Audited)	1
		Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020	2
		Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2021 and 2020	3
		Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the quarter to date periods ended March 31, 2020 through March 31, 2021	4
		Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020	5
		Notes to Unaudited Condensed Consolidated Financial Statements	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	31
	Item 4	Controls and Procedures	31
PART II OTHER INFORMATION			32
	Item 1	Legal Proceedings	32
	Item 1A	Risk Factors	32
	Item 5	Other Information	32
	Item 6	Exhibits	33
SIGNATURES			34
EXHIBITS

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

NEONODE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

 

		March 31,				December 31,
		2021				2020
ASSETS		(Unaudited)				(Audited)
Current assets:
Cash		$	8,145			$	10,473
Accounts receivable and unbilled revenue, net			1,326				1,743
Inventory			1,675				1,273
Prepaid expenses and other current assets			820				1,161
Total current assets			11,966				14,650
Property and equipment, net			814				1,003
Operating lease right-of-use assets			743				919
Total assets		$	13,523			$	16,572
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	491			$	1,084
Accrued payroll and employee benefits			1,071				1,170
Accrued expenses			464				545
Deferred revenues			120				138
Current portion of finance lease obligations			624				769
Current portion of operating lease obligations			377				504
Total current liabilities			3,147				4,210
Finance lease obligations, net of current portion			48				95
Operating lease obligations, net of current portion			251				377
Total liabilities			3,446				4,682
Commitments and contingencies
Stockholders’ equity:
Common stock, 25,000,000 shares authorized, with par value of $0.001; 11,504,665 shares issued and outstanding at March 31, 2021 and December 31, 2020			12				12
Additional paid-in capital			211,686				211,663
Accumulated other comprehensive loss			(570	)			(404	)
Accumulated deficit			(197,726	)			(196,158	)
Total Neonode Inc. stockholders’ equity			13,402				15,113
Noncontrolling interests			(3,325	)			(3,223	)
Total stockholders’ equity			10,077				11,890
Total liabilities and stockholders’ equity		$	13,523			$	16,572

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

		Three months ended March 31,
		2021				2020
Revenues:
HMI Solutions		$	1,299			$	1,182
HMI Products			366				112
Total revenues			1,665				1,294
Cost of revenues:
HMI Solutions			—				(1	)
HMI Products			(277	)			(43	)
Total cost of revenues			(277	)			(44	)
Total gross profit			1,388				1,250
Operating expenses:
Research and development			1,142				995
Sales and marketing			788				545
General and administrative			1,087				799
Total operating expenses			3,017				2,339
Operating loss			(1,629	)			(1,089	)
Other expense:
Interest expense			5				7
Total other expense			5				7
Loss before provision for income taxes			(1,634	)			(1,096	)
Provision for income taxes			36				16
Net loss including noncontrolling interests			(1,670	)			(1,112	)
Less: net loss attributable to noncontrolling interests			102				102
Net loss attributable to Neonode Inc.		$	(1,568	)		$	(1,010	)
Loss per common share:
Basic and diluted loss per share		$	(0.14	)		$	(0.11	)
Basic and diluted – weighted average number of common shares outstanding			11,504				9,171

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

		Three months ended March 31,
		2021				2020
Net loss including noncontrolling interests		$	(1,670	)		$	(1,112	)
Other comprehensive loss:
Foreign currency translation adjustments			(166	)			(87	)
Comprehensive loss			(1,836	)			(1,199	)
Less: Comprehensive loss attributable to noncontrolling interests			102				102
Comprehensive loss attributable to Neonode Inc.		$	(1,734	)		$	(1,097	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except for Preferred Stock Shares Issued¹)

(Unaudited)

  

For the Quarter to Date periods ended March 31, 2020 through March 31, 2021

 

		Preferred Stock Shares Issued				Preferred Stock Amount				Common Stock Shares Issued				Common Stock Amount				Additional Paid-in Capital				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total Neonode Inc. Stockholders’ Equity				Noncontrolling Interests				Total Stockholders’ Equity
Balances, December 31, 2019			-			$	-				9,171			$	9			$	197,543			$	(639	)		$	(190,520	)		$	6,393			$	(2,546	)		$	3,847
Foreign currency translation adjustment			-				-				-				-				-				(87	)			-				(87	)			-				(87	)
Net loss			-				-				-				-				-				-				(1,010	)			(1,010	)			(102	)			(1,112	)
Balances, March 31, 2020			-			$	-				9,171			$	9			$	197,543			$	(726	)		$	(191,530	)		$	5,296			$	(2,648	)		$	2,648
Foreign currency translation adjustment			-				-				-				-				-				64				-				64				-				64
Net loss			-				-				-				-				-				-				(1,612	)			(1,612	)			(154	)			(1,766	)
Balances, June 30, 2020			-			$	-				9,171			$	9			$	197,543			$	(662	)		$	(193,142	)		$	3,748			$	(2,802	)		$	946
Issuance of shares for cash, net of offering costs			3,932				3,932				1,612				1				9,597				-				-				13,530				-				13,530
Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest			517				517				-				-				(1)				-				-				516				-				516
Conversion of Series C-1 and C-2 Preferred Stock to common stock			(4,449	)			(4,449		)		684					1			4,448				-				-				-					-			-
Preferred dividends				-				-			-					-				-				-			(33)				(33)					-			(33)
Foreign currency translation adjustment			-				-				-				-				-				(228	)			-				(228	)			-				(228	)
Net loss			-				-				-				-				-				-				(1,638	)			(1,638	)			(110	)			(1,748	)
Balances, September 30, 2020			-			$	-				11,467			$	11			$	211,587			$	(890	)		$	(194,813	)		$	15,895			$	(2,912	)		$	12,983
Stock-based compensation			-				-				37				1				76				-				-				77				-				77
Foreign currency translation adjustment			-				-				-				-				-				486				-				486				-				486
Net loss			-				-				-				-				-				-				(1,345	)			(1,345	)			(311	)			(1,656	)
Balances, December 31, 2020			-			$	-				11,504			$	12			$	211,663			$	(404	)		$	(196,158	)		$	15,113			$	(3,223	)		$	11,890
Stock-based compensation			-				-				-				-				23				-				-				23				-				23
Foreign currency translation adjustment			-				-				-				-				-				(166	)			-				(166	)			-				(166	)
Net loss			-				-				-				-				-				-				(1,568	)			(1,568	)			(102	)			(1,670	)
Balances, March 31, 2021			-			$	-				11,504			$	12			$	211,686			$	(570	)		$	(197,726	)		$	13,402			$	(3,325	)		$	10,077

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

Preferred Shares Issued per series can be found under the equity footnote (see Note 3).

 

 

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Three months ended March 31,
		2021				2020
Cash flows from operating activities:
Net loss (including noncontrolling interests)		$	(1,670	)		$	(1,112	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation expense			23				-
Depreciation and amortization			199				195
Amortization of operating lease right-of-use assets			129				91
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue, net			405				188
Projects in process			-				(51	)
Inventory			(493	)			(16	)
Prepaid expenses and other current assets			299				45
Accounts payable and accrued expenses			(657	)			(224	)
Deferred revenues			(15	)			6
Operating lease obligations			(210	)			(91	)
Net cash used in operating activities			(1,990	)			(969	)
Cash flows from investing activities:
Purchase of property and equipment			(62	)			(5	)
Net cash used in investing activities			(62	)			(5	)
Cash flows from financing activities:
Principal payments on finance lease obligations			(148	)			(132	)
Net cash used in financing activities			(148	)			(132	)
Effect of exchange rate changes on cash			(128	)			(64	)
Net decrease in cash			(2,328	)			(1,170	)
Cash at beginning of period			10,473				2,357
Cash at end of period		$	8,145			$	1,187
Supplemental disclosure of cash flow information:
Cash paid for income taxes		$	36			$	16
Cash paid for interest		$	5			$	7

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

NEONODE INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1. Interim Period Reporting

 

The accompanying unaudited interim condensed consolidated financial statements include all adjustments consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations for the three months ended March 31, 2021 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, 2021 and 2020 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, 2020.

 

Operations

 

Neonode Inc., collectively with its subsidiaries is referred to as “Neonode” or the “Company”, develops advanced optical sensing solutions for contactless touch, touch, gesture sensing, and in-cabin monitoring. We market and sell our contactless touch, touch, and gesture sensing products and solutions using our zForce technology platform, and our in-cabin monitoring solutions using our MultiSensing technology platform. Neonode offers customized optical touch and gesture control solutions for many different markets and segments.

 

In our operations for the three months ended March 31, 2021, we focused on three different business areas, human machine interface (“HMI”) Solutions, HMI Products and Remote Sensing Solutions. On May 4, 2021, we announced a new strategy and organizational update targeting an increased focus on the Company’s contactless touch business and on current market opportunities in North America, Asia, and Europe. We thereby changed to a regional sales organization to replace our business area structure going forward.

 

In HMI Solutions, Neonode offered customized optical touch and gesture control solutions for many different markets and segments. In HMI Products, the Company provided plug-and-play sensor modules that enable touch on any surface, in-air touch, and gesture control for a wide range of applications. In Remote Sensing Solutions, Neonode offered driver and cabin monitoring solutions for vehicles based on the Company’s flexible, scalable and hardware-agnostic software platform.

 

Revenues are derived from three different revenue streams: license fees, non-recurring engineering fees and the sale of sensor modules.

 

Liquidity

 

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses attributable to Neonode Inc. of approximately $1.6 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively, and had an accumulated deficit of approximately $197.7 million and $196.2 million as of March 31, 2021 and December 31, 2020, respectively. In addition, operating activities used cash of approximately $2.0 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.

  

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

 

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 to us on acceptable terms, or at all, we may be unable to adequately fund our business plans which could have a negative effect on our business, results of operations and financial condition. If funds are available through the issuance of equity or debt securities, 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.

 

We expect revenues will enable us to reduce our operating losses in coming years. In addition, we intend to continue to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating loss.

  

 

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 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 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

 

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.

 

Inventory

 

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,
		2021				2020
Raw materials		$	815			$	550
Work-in-process			45				21
Finished goods			815				702
Ending inventory		$	1,675			$	1,273

 

 

Property and Equipment

 

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

 

Estimated useful lives

 

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

 

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

  

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

 

Right of Use Assets

 

A right-of-use asset represents a lessee’s right to use a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases for buildings and finance leases for manufacturing equipment.

 

Right-of-use assets are measured initially at the present value of the lease payments, plus any lease payments made before a lease begins and any initial direct costs, such as commissions paid to obtain a lease.

 

Right-of-use assets are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct costs not yet expensed.

 

 

Long-Lived Asset Recoverability

 

We assess the recoverability of long-lived assets by estimating the future cash flow from the associated assets in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of March 31, 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%

 

 

Revenue Recognition

 

We recognize revenue when control of products is transferred to our customers, and when services are completed and accepted by our customers. The amount of revenue we recognize reflects the consideration we expect to receive for those products or services. Our contracts with customers may include combinations of products and services, for example, a contract that includes products and related engineering services. We structure our contracts such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly defined in each contract.

 

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.

 

Licensing Revenues:

 

We earn revenue from licensing our internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products, with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support.

 

For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when the license is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we record unbilled license fees, using prior royalty revenue data by customer to make estimates of those royalties.

 

Explicit return rights are not offered to customers. There have been no returns through March 31, 2021.

 

Engineering Services:

 

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 Revenues:

 

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 provisions.

 

The timing of revenue recognition related to AirBar modules depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue for AirBar modules sold point-of-sale 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 products purchased.

 

Distributors participate in various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.

 

Under U.S. GAAP, companies may make reasonable aggregations and approximations of returns data to accurately estimate returns. Our AirBar 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
		Amount				Percentage				Amount				Percentage
HMI Solutions
Net revenues from automotive		$	502				39	%		$	401				39	%
Net revenues from consumer electronics			797				61	%			781				61	%
		$	1,299				100	%		$	1,182				100	%
HMI Products
Net revenues from medical		$	21				6	%		$	53				47	%
Net revenues from distributors			184				50	%			39				35	%
Net revenues from other			161				44	%			20				18	%
		$	366				100	%		$	112				100	%

 

 

Significant Judgments

 

Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract is for a product and related engineering services fees for customizing that product for our customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. Judgment may also be required to determine the SSP for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations.

 

Judgment is also required to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us. Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal of any incremental revenue would occur.

 

Finally, judgment is required to determine the amount of unbilled license fees at the end of each reporting period.

 

Contract Balances

 

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our customers.

 

The following table presents accounts receivable and deferred revenues as of March 31, 2021 and 2020 (in thousands):

 

		March 31, 2021				December 31, 2020
Accounts receivable and unbilled revenue		$	1,326			$	1,743
Deferred revenues			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.

 

Product Warranty

 

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

 

		March 31, 2021				December 31, 2020
Balance at beginning of period		$	25			$	24
Provisions for warranty issued			2				1
Balance at end of period		$	27			$	25

 

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

 

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):

 

		March 31, 2021				December 31, 2020
Deferred revenues HMI Solutions		$	33			$	37
Deferred revenues HMI Products			87				101
		$	120			$	138

 

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

 

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.

 

Noncontrolling Interests

 

We recognize any noncontrolling interest, also known as a minority interest, as a separate line item in equity in the consolidated financial statements. A noncontrolling interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us. Generally, any interest that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are other factors, such as decision-making rights, that are considered as well. We include the amount of net income (loss) attributable to noncontrolling interests in consolidated net income (loss) on the face of the consolidated statements of operations.

 

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

 

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

  

Income taxes

 

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

 

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of March 31, 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 March 31,
		2021				2020
Swedish Krona			8.40				9.68
Japanese Yen			106.03				108.97
South Korean Won			1,114.49				1,192.79
Taiwan Dollar			28.08				30.12

 

Exchange rate for the consolidated balance sheets was as follows:

 

		As of
		March 31,				December 31,
		2021				2020
Swedish Krona			8.71				8.22
Japanese Yen			110.60				103.23
South Korean Won			1,127.17				1,088.59
Taiwan Dollar			28.47				28.09

 

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 statements.

  

3. Stockholders’ Equity

 

On August 7, 2020, we closed a private placement (the “Private Placement”) with certain institutional and accredited investors. We issued a total of 1,611,845 shares of common stock at a price of $6.50 per share, and a total of 365 shares of Series C-1 Preferred Stock and 3,050 shares of Series C-2 Preferred Stock, each with a conversion price of $6.50 per share and a stated value of $1,000 per share, for approximately $13.9 million in aggregate gross proceeds.

 

Common Stock

 

At our annual meeting of our stockholders held on September 29, 2020, stockholders approved a proposal to increase the number of authorized shares of our common stock to 25,000,000 shares. Accordingly, on November 5, 2020, we filed an amendment to the Neonode Inc. Restated Certificate of Incorporation, as amended (our “Certificate of Incorporation”), with the Secretary of State of the State of Delaware to increase the number of authorized shares of our common stock to 25,000,000 shares.

 

On December 29, 2020, we issued 37,288 shares of our common stock to key employees pursuant to our 2020 long term incentive program (“2020 LTIP”) see Note 4.

 

During the three months ended March 31, 2021, there were no activities that affected common stock.

 

Preferred Stock

  

On August 6, 2020, in connection with the closing of the Private Placement, the Company designated (i) 365 shares of its authorized and unissued preferred stock as Series C-1 Preferred Stock by filing a Series C-1 Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware and (ii) 4,084 shares of its authorized and unissued preferred stock as Series C-2 Preferred Stock by filing a Series C-2 Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware.

 

On September 24 and 29, 2020, respectively, the Series C-1 Preferred Stock and Series C-2 Preferred Stock (together, the “Series C Preferred Shares”) were converted into 684,378 shares of Neonode common stock.

  

The holders of the Series C-1 and C-2 Preferred Shares were entitled to receive dividends at the rate per share of 5% per annum, totaling $33,000. As of December 31, 2020, all of the preferred dividends had been paid.

 

On December 7, 2020, we filed Certificates of Elimination with the Secretary of State of the State of Delaware to eliminate the Series A Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock and Series C-2 Preferred Stock.

 

There were no transactions in our preferred stock during the three months ended March 31, 2021 and 2020. No shares of preferred stock were issued and outstanding as of March 31, 2021.

 

Details of the preferred stock activities are set forth below:

 

		Series C-1 Preferred Stock Shares Issued				Series C-1 Preferred Stock Amount				Series C-2 Preferred Stock Shares Issued				Series C-2 Preferred Stock Amount
Balances, December 31, 2019			-				-				-				-
Issuance of Preferred Shares for cash			365				365				3,567				3,567
Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest			-				-				517				517
Conversion of Preferred Shares to common stock			(365	)			(365	)			(4,084	)			(4,084	)
Balances, December 31, 2020			-			$	-				-			$	-

 

Warrants

 

As of March 31, 2021 and December 31, 2020, there were 431,368 warrants to purchase common stock outstanding.

 

 

4. Stock-Based Compensation

 

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

 

Stock Options / Stock awards

 

During the year ended December 31, 2020, our stockholders approved the Neonode Inc. 2020 Stock Incentive Plan (the “2020 Plan”) which replaced our 2015 Stock Incentive Plan (the “2015 Plan”), which in turn replaced our Neonode Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Although no new awards may be made under the 2015 or 2006 Plans, these plans are still operative for previously granted awards. Under the 2020 Plan, 750,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2020 Plan are set by our compensation committee at its discretion.

 

Accordingly, as of March 31, 2021, we had three equity incentive plans:

 

	●	The 2006 Equity Incentive Plan (the “2006 Plan”).
	●	The 2015 Equity Incentive Plan (the “2015 Plan”).
	●	The 2020 Equity Incentive Plan (the “2020 Plan”).

 

In 2020 we established the Neonode Inc. 2020 Long Term Incentive Plan (the “2020 LTIP”) to provide eligible persons with the opportunity to acquire an equity interest, or otherwise increase their equity interest, in the Company as an incentive for them to remain in the service of the Company. Through the 2020 LTIP, eligible employees of Neonode may waive between 50% to 67% of future unearned bonuses that may be awarded to them under the Company’s annual bonus arrangement in exchange for the grant of shares of the Company’s common stock.

 

On December 29, 2020, we issued 37,288 shares of common stock to key employees pursuant to the 2020 LTIP. The shares were immediately vested but subject to a two-year lock-up period after issuance. In the event the participant’s employment with Neonode is terminated by the participant during the two-year lock-up period, the Company will repurchase the shares at a price equal to 30% of the lower of market value at issuance and the termination date. The shares issued on December 29, 2020 represent two-thirds of the total shares available for issuance under the 2020 LTIP and the last one-third is planned to be issued at the end of December 2021. Neonode has reported and paid Swedish social charges of $75,000 for the issued shares but only 30% of the stock-based compensation (totaling $77,000) was included in the consolidated statement of operations for the year ended December 31, 2020, with the remainder to be recognized ratably over the two-year lock-up period. For the three months ended March 31, 2021, $23,000 of stock-based compensation was included in our condensed consolidated statement of operations. Unrecognized compensation expense related to the 2020 LTIP as of March 31, 2021 was $154,000, which will be recognized over two years from issuance of the shares of common stock.

 

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, 2021			10,500			$	29.61
Expired			(1,000	)			61.10
Outstanding at March 31, 2021			9,500			$	26.19

 

The aggregate intrinsic value of the 9,500 stock options that are outstanding, vested and expected to vest as of March 31, 2021 was $0.

 

For the three months ended March 31, 2021 and 2020, we recorded no stock-based compensation expense related to the vesting of stock options. The estimated fair value of the stock options is calculated using the Black-Scholes option pricing model as of the grant date of the stock option.

 

During the three months ended March 31, 2021, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.

 

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

 

 

5. Commitments and Contingencies

 

Litigation

 

On August 26, 2020, a putative stockholder of Neonode filed a purported class action lawsuit (C.A. No. 2020-0701-AGB) in the Delaware Court of Chancery (the “Court”) against Neonode and the Board of Directors of Neonode for alleged breach of fiduciary duty in connection with disclosure of information concerning Proposal 5 and Proposal 6 in the proxy statement filed with the SEC by Neonode on August 20, 2020 for the 2020 Annual Meeting of Stockholders of Neonode (the “Proxy Statement”). These proposals for shareholder approval related to the Private Placement by Neonode on August 5, 2020 in which two directors and the chief executive officer of Neonode participated. The relief sought by the plaintiff included a preliminary injunction to enjoin the stockholder votes on Proposal 5 and Proposal 6. On September 13, 2020, the plaintiff amended his complaint to also enjoin the stockholder vote on Proposal 1 in the Proxy Statement concerning election of directors. Neonode and the other named defendants believe that the disclosures set forth in the Proxy Statement complied fully with all applicable law, that no supplemental disclosure was required, and that the plaintiffs’ allegations are without merit. However, in an effort to avoid the nuisance and ongoing expense relating to the claims in the lawsuit, Neonode filed definitive additional materials to the Proxy Statement on September 18, 2020. The plaintiff withdrew his motion to preliminarily enjoin the stockholder votes on Proposals 1, 5, and 6 based upon the definitive additional materials to the Proxy Statement. On November 23, 2020, the Court entered an order to dismiss the lawsuit.

 

On September 2, 2020, a separate putative stockholder of Neonode filed a purported class action lawsuit (Case No. 1:20-cv-01174-UNA) in the United States District Court for the District of Delaware against Neonode, the Board of Directors of Neonode, and the Chief Executive Officer of Neonode for alleged violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, in connection with disclosure of information concerning Proposal 5 and Proposal 6 in the Proxy Statement, and generally containing the same substantive allegations as in the above previously-filed Delaware Court of Chancery action. On October 20, 2020, the plaintiff voluntarily dismissed the lawsuit in the United States District Court. However, on February 11, 2021, the plaintiff’s counsel informed Neonode that they would file a fee petition as a result of Neonode filing the definitive additional materials to the Proxy Statement on September 18, 2020.  Neonode intends to vigorously defend against any attempt by the plaintiff’s counsel to obtain any fee award.  

 

Indemnities and Guarantees

 

Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising because of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of March 31, 2021 and December 31, 2020.

 

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us regarding intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of March 31, 2021 and December 31, 2020.

 

One of our manufacturing partners has previously purchased material for the final assembly of AirBars. To protect the manufacturer from losses in relation to AirBar production, we agreed to secure the value of the inventory in a bank guarantee. At March 31, 2021, the guaranteed amount is $100,000 and represents the value of the remaining material in inventory at March 31, 2021.

 

Management’s judgment is that the bank guarantee is a contingent guarantee and management will record a liability when it is probable we will have to purchase the inventory. As of May 12, 2021, management’s judgment is that we will sell the remaining AirBars and thereby purchase the components and the assembly service from the manufacturing partner. No liability has therefore been recorded for the period ended March 31, 2021.

 

Patent Assignment

 

On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC. The assignment provides the Company the right to share potential proceeds generated from a licensing and monetization program.

 

On June 8, 2020, Neonode Smartphone LLC, a subsidiary of Aequitas Technologies LLC filed complaints against Apple and Samsung in the Western District of Texas for infringing two patents. These litigation matters are still ongoing.

 

Non-Recurring Engineering Development Costs

 

On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC. Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold. As of March 31, 2021, we had made no payments to TI under the NN1002 Agreement.

 

6. Segment Information

 

We have one reportable segment, which is comprised of the touch technology licensing and sensor module business. All of our sales for the three months ended March 31, 2021 and 2020 were to customers located in the U.S., Europe and Asia. The Company reports revenues from external customers based on the country where the customer is located.

 

 

The following table presents net revenues by geographic area for the three months ended March 31, 2021 and 2020 (dollars in thousands):

 

		Three months ended March 31, 2021								Three months ended March 31, 2020
		Amount				Percentage				Amount				Percentage
United States		$	693				42	%		$	589				46	%
Japan			405				24	%			474				37	%
South Korea			284				17	%			1				-	%
China			134				8	%			34				3	%
Germany			109				7	%			120				9	%
Switzerland			21				1	%			55				4	%
Other			19				1	%			21				1	%
		$	1,665				100	%		$	1,294				100	%

 

The following table presents our total assets by geographic region as of March 31, 2021 and December 31, 2020 (in thousands):

 

		March 31, 2021				December 31, 2020
U.S.		$	7,933			$	7,253
Sweden			5,504				9,210
Asia			86				109
Total		$	13,523			$	16,572

 

7. Leases

 

We have operating leases for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms of six months to two years. One of our primary operating leases includes options to extend the lease for one to three years and the other primary lease includes an option to annually extend; those operating leases also include options to terminate the leases within one year. Future renewal options that are not likely to be executed as of the balance sheet date are excluded from right-of-use assets and related lease liabilities.

 

Our operating leases represent building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility. Our Stockholm corporate office lease has a remaining lease term of two years and both of our leases are automatically renewed at a cost increase of 2% on an annual basis, unless we provide written notice nine months prior to the respective expiration dates.

 

We report operating lease right-of-use assets, as well as current and noncurrent operating lease obligations on our consolidated balance sheets for the right to use those buildings in our business. Our finance leases represent manufacturing equipment; we report the manufacturing equipment, as well as current and noncurrent finance lease obligations on our condensed consolidated balance sheets for our manufacturing equipment.

 

Generally, interest rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate.

 

The components of lease expense were as follows (in thousands):

 

		Three Months Ended March 31, 2021				Three Months Ended March 31, 2020
Operating lease cost (1)		$	176			$	119
Finance lease cost:
Amortization of leased assets		$	169			$	151
Interest on lease liabilities			4				7
Total finance lease cost		$	173			$	158

  

(1)

Includes short term lease costs of $38,000 and $24,000 for the three months ended March 31, 2021 and 2020, respectively.

 

 

Supplemental cash flow information related to leases was as follows (in thousands):

 

		Three  Months Ended March 31, 2021				Three  Months Ended March 31, 2020
Cash paid for amounts included in leases:
Operating cash flows from operating leases		$	(210	)		$	(91	)
Operating cash flows from finance leases			(4	)			(7	)
Financing cash flows from finance leases			(148	)			(132	)
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			-				-

  

Supplemental balance sheet information related to leases was as follows (in thousands):

 

		March 31, 2021				December 31, 2020
Operating leases
Operating lease right-of-use assets		$	743			$	919
Current portion of operating lease obligations		$	377			$	504
Operating lease liabilities, net of current portion			251				377
Total operating lease liabilities		$	628			$	881
Finance leases
Property and equipment, at cost		$	3,589			$	3,806
Accumulated depreciation			(2,937	)			(2,941	)
Property and equipment, net		$	652			$	865
Current portion of finance lease obligations		$	624			$	769
Finance lease liabilities, net of current portion			48				95
Total finance lease liabilities		$	672			$	864

  

		Three  Months Ended March 31, 2021				Three  Months Ended March 31, 2020
Weighted Average Remaining Lease Term
Operating leases			1.5 years				1.0 years
Finance leases			0.9 years				1.4 years
Weighted Average Discount Rate:
Operating leases			5	%			5	%
Finance leases			2	%			2	%

 

 

A summary of future minimum payments under non-cancellable operating lease commitments as of March 31, 2021 is as follows (in thousands):

 

Years ending December 31,		Total
2021(remaining months)		$	293
2022			364
			657
Less imputed interest			(29	)
Total lease liabilities		$	628
Less current portion			(377	)
		$	251

 

The following is a schedule of minimum future rentals on the non-cancellable finance leases as of March 31, 2021 (in thousands):

 

Year ending December 31,		Total
2021 (remaining months)		$	589
2022			82
2023			8
Total minimum payments required:			679
Less amount representing interest:			(7	)
Present value of net minimum lease payments:			672
Less current portion			(624	)
		$	48

 

8. Net Loss per Share

 

Basic net loss per common share for the three months ended March 31, 2021 and 2020 was computed by dividing the net loss attributable to Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to Neonode Inc. by the weighted average number of shares of common stock and common stock equivalents outstanding.

 

Potential common stock equivalents of approximately 0 and 0 outstanding stock options and 0 and 0 outstanding stock warrants under the treasury stock method, and 0 and 0 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share calculation for the three months ended March 31, 2021 and 2020, respectively, due to their anti-dilutive effect.

 

		Three months ended March 31,
(in thousands, except per share amounts)		2021				2020
BASIC AND DILUTED
Weighted average number of common shares outstanding			11,504				9,171
Net loss attributable to Neonode Inc.		$	(1,568	)		$	(1,010	)
Net loss per share - basic and diluted		$	(0.14	)		$	(0.11	)

 

9. Subsequent Events

 

On May 10, 2021, the Company entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with B. Riley Securities, Inc. (“B Riley”), under which the Company may offer and sell from time to time, at its sole discretion, shares of its common stock having an aggregate offering price of up to $25 million through B. Riley as its sales agent. The Company agreed to pay B. Riley a commission of 3.0% of the gross proceeds of the sales price per share of any common stock sold through B. Riley under the ATM Agreement.

 

In connection its entering into the ATM Agreement, on May 10, 2021, the Company filed a shelf registration statement on Form S-3 with the SEC for a maximum aggregate offering price of $100,000,000, which included a base prospectus and a sales agreement prospectus covering the shares to be sold under the ATM Agreement.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some forward-looking statements by the use of words such as “believe,” “anticipate,” “expect,” “intend,” “goal,” “plan,” and similar expressions. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the impact of the COVID-19 pandemic, our history of losses since inception, our dependence on a limited number of customers, our reliance on our customers’ ability to develop and sell products that incorporate our touch technology, the length of a product development and release cycle, our and our customers’ reliance on component suppliers, the difficulty in verifying royalty amounts owed to us, our limited experience manufacturing hardware devices, our ability to remain competitive in response to new technologies, our dependence on key members of our management and development team, the costs to defend, as well as risks of losing, patents and intellectual property rights and our ability to obtain adequate capital to fund future operations. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in our publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the date of this Quarterly Report on Form 10-Q. Because actual events or results may differ materially from those discussed in or implied by forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. We do not undertake responsibility to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether as a result of new information, future events or otherwise.

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2020 included in our Annual Report on Form 10-K.

 

Neonode Inc., collectively with its subsidiaries, is referred to in this Form 10-Q as “Neonode”, “we”, “us”, “our”, “registrant”, or “Company”.

 

Overview

 

Our company provides advanced optical sensing solutions for human-machine interface (“HMI”) and remote sensing solutions for driver and cabin monitoring features in automotive and other application areas.

 

We mainly operate in the business-to-business (“B2B”) markets.

  

  

HMI Solutions

 

We license our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed our technology into products they develop, manufacture and sell. Since 2010, our HMI Solutions customers have sold over 80 million devices that use our technology and within this business area we derive revenues through technology licensing and engineering consulting services.

 

As of March 31, 2021, we had entered into 42 technology license agreements with global OEMs, Global Design Manufacturers (“ODMs”) and Tier 1 suppliers.

 

Our licensing customer base is primarily in the automotive and printer industries. Thirteen of our licensing customers are currently shipping products that embed our touch and gesture technology. We anticipate current and new customers will initiate product shipments throughout 2021 and in future years as they complete final product development and release cycles. Customer product development and release cycles typically take between 6 months to 36 months. We earn our license fees on a per unit basis when our customers ship products using our technology.

 

We also offer engineering consulting services to our licensing customers on a flat rate or hourly rate basis. Typically, our customers require engineering support during the development and initial manufacturing phase for their products using our technology.

  

HMI Products

 

In addition to our technical solutions business, we design and manufacture sensor modules that incorporate our patented technology. We sell our embedded sensors components to OEMs, ODMs and Tier 1 suppliers for use in their products. Within this business area we derive revenues through selling embedded sensor modules and engineering consulting services.

 

We utilize a robotic manufacturing process designed specifically for our components. Industry specific sensor modules with a common technology platform provides hardware touch, gesture and object sensing solutions that, paired with our technology licensing platform, gives us a full range of options to enter and compete in key markets.

 

We also offer engineering consulting services to our sensor module customers on a flat rate or hourly rate basis. Typically, our customers require hardware or software modifications of our standard products or support during the development and initial manufacturing phase for their products using our technology.

 

In October 2017, we began selling embedded sensor modules to business customers in the industrial and consumer electronics markets. Over time, we expect a significant portion of our revenues will be derived from the HMI Products business area. 

 

Our offerings include a consumer product, AirBar, powered by our sensor modules. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers. In 2016 and 2017, we began shipping 15.6 inch, 13.3 inch and 14 inch AirBar to distributors and customers in the United States and Europe. We have no current plans to develop new Neonode branded products for the consumer markets.

 

Remote Sensing Solutions

 

With this newly formed business area, we intend to address the demand for cost-effective driver and cabin monitoring systems. We have developed a software platform for driver and cabin monitoring that is flexible, scalable and hardware-agnostic, and uses computationally efficient machine-learning algorithms. Within this business area we expect to derive revenues through technology licensing and engineering consulting services.  

 

Impact of COVID-19

 

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Our near term growth and overall business has been and is continuing to be adversely impacted by COVID-19 and we expect it will continue to be adversely impact by COVID-19 and the related global economic slowdown. Although we have noted additional demand in our contactless touch products and some increases in sales of licensed products, COVID-19 has negative impacted some of our customers’ businesses and their sales volumes. We are experiencing challenges in obtaining deliveries of components needed to manufacture our sensor modules and we may have difficulties delivering our products to our customers in time and at a reasonable cost. Our operations were impacted as we paused business-related travel and our employees to a high extent work remotely. The extent of COVID-19’s impact on our operational and financial performance going forward will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict at this time considering the rapidly evolving landscape. To mitigate the financial effects of the COVID-19 pandemic, we have undertaken cost-reduction measures. In particular, we implemented a Swedish government-backed program of short-term layoffs that resulted in the reduction of staff working hours by 20% between mid-April to mid-August last year. We are continuing to monitor the impact of the COVID-19 pandemic and we may take further actions in response. There is a risk that we will not be successful in mitigating COVID-19’s impact on our business, and our sales may not increase in line with our expectations and our operating margins could fluctuate or decline.

 

 

Results of Operations

 

A summary of our financial results is as follows (in thousands, except percentages):

 

		Three months ended March 31,								2021 vs 2020
		2021				2020				Variance in Dollars				Variance in Percent
Revenue:
HMI Solutions		$	1,299			$	1,182			$	117				9.9	%
Percentage of revenue			78.0	%			91.3	%
HMI Products		$	366			$	112			$	254				226.8	%
Percentage of revenue			22.0	%			8.7	%
Total Revenue		$	1,665			$	1,294			$	371				28.7	%
Cost of Sales:
HMI Solutions		$	-			$	1			$	(1	)			(100.0	)%
Percentage of revenue			0.0	%			0.1	%
HMI Products		$	277			$	43			$	234				544.2	%
Percentage of revenue			16.6	%			3.3	%
Total Cost of Sales		$	277			$	44			$	233				529.5	%
Total Gross Profit		$	1,388			$	1,250			$	138				11.0	%
Operating Expense:
Research and development		$	1,142			$	995			$	147				14.8	%
Percentage of revenue			68.6	%			76.9	%
Sales and marketing			788				545				243				44.6	%
Percentage of revenue			47.3	%			42.1	%
General and administrative			1,087				799				288				36.0	%
Percentage of revenue			65.3	%			61.7	%
Total Operating Expenses		$	3,017			$	2,339			$	678				29.0	%
Percentage of revenue			181.2	%			180.8	%
Operating Loss		$	(1,629	)		$	(1,089	)		$	540				49.6	%
Percentage of revenue			(97.8	)%			(84.2	)%
Interest expense			(5	)			(7	)			2				(28.6	)%
Percentage of revenue			(0.3	)%			(0.5	)%
Provision for income taxes			(36	)			(16	)			(20	)			125.0	%
Percentage of revenue			(2.2	)%			(1.2	)%
Less: net loss attributable to noncontrolling interests		$	102			$	102			$	-				0.0	%
Percentage of revenue			6.1	%			7.9	%
Net Loss attributable to Neonode Inc.		$	(1,568	)		$	(1,010	)		$	(558	)			55.2	%
Percentage of revenue			(94.2	)%			(78.1	)%
Net Loss per share attributable to Neonode Inc.		$	(0.14	)		$	(0.11	)		$	(0.03	)			27.3	%
Percentage of revenue			0.0	%			0.0	%

 

 

Net Revenues

 

All of our sales for the three months ended March 31, 2021 and 2020 were to customers located in the U.S., Europe and Asia.

 

The increase of 29% in total net revenues for the first quarter 2021 as compared to the same period in 2020 was primarily related to higher module and Airbar sales within our HMI Products business area.

 

Revenues within our HMI Solutions business area during the three-month period ended March 31, 2021 was somewhat higher than the same period last year, mainly driven by strong sales within the automotive market segment.

 

There were no revenues from our Remote Sensing Solutions business area for the three months ended March 31, 2021.

 

The following table presents the net revenues by business area and revenue stream 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
		Amount				Percentage				Amount				Percentage
HMI Solutions
License fees		$	1,295				99	%		$	1,169				99	%
Non-recurring engineering			4				1	%			13				1	%
Total		$	1,299				100	%		$	1,182				100	%
HMI Products
Sensor modules		$	355				97	%		$	98				88	%
Non-recurring engineering			11				3	%			14				12	%
Total		$	366				100	%		$	112				100	%

 

		Three months ended March 31, 2021								Three months ended March 31, 2020
		Amount				Percentage				Amount				Percentage
HMI Solutions
Net revenues from automotive		$	502				39	%		$	401				34	%
Net revenues from consumer electronics			797				61	%			781				66	%
Total		$	1,299				100	%		$	1,182				100	%
HMI Products
Net revenues from medical		$	21				6	%		$	53				47	%
Net revenues from distributors			184				50	%			39				35	%
Net revenues from other			161				44	%			20				18	%
Total		$	366				100	%		$	112				100	%

 

Gross Margin

 

Our combined total gross margin was 83% and 97% for the three months ended March 31, 2021 and 2020, respectively. The decrease in total gross margin in 2021 as compared to 2020 was primarily due to higher product sales with lower margins. For the three months ended March 31, 2021, revenues from our HMI Solutions business area accounted for 78% of total revenue compared to 91% in the same period in 2020 and revenues from our HMI Products business area accounted for 22% of total revenue compared to 9% in the same period 2020. There were no revenues from our Remote Sensing Solutions business area for the three months ended March 31, 2021 and 2020.

 

Our cost of revenues includes the direct cost of production of certain customer prototypes, costs of engineering personnel, engineering consultants to complete the engineering design contracts and cost of goods sold for sensor modules includes fully burdened manufacturing costs, outsourced final assembly costs, and component costs of sensor modules.

 

Research and Development

 

Research and development (“R&D”) expenses for the three months ended March 31, 2021 and 2020 were $1.1 million and $1.0 million, respectively. R&D expenses primarily consist of personnel-related costs in addition to external consultancy costs, such as testing, certifying and measurements, along with costs related to developing and building new product prototypes. 

 

 

Sales and Marketing

 

Sales and marketing expenses for the three months ended March 31, 2021 and 2020 were $0.8 million and $0.5 million, respectively. The increase was primarily due to higher staff expenses due to a reallocation of employees to the marketing function.

 

Our sales activities focus on OEM, ODM and Tier 1 customers who will license our technology or purchase and embed our touch sensor modules into their products.

 

General and Administrative

 

General and administrative (“G&A”) expenses for the three months ended March 31, 2021 and 2020 were $1.1 million and $0.8 million, respectively. The increase was primarily due to higher costs related to staff and in-house consultants.

 

Income Taxes

 

Our effective tax rate was (1%) and (1%) for the three months ended March 31, 2021 and 2020, respectively. The negative tax rate in the three months ended March 31, 2021 and March 31, 2020 was due to withholding taxes from sales. We recorded valuation allowances for the three-month periods ended March 31, 2021 and March 31, 2020 for deferred tax assets related to net operating losses due to the uncertainty of realization.

 

Net Loss

 

As a result of the factors discussed above, we recorded a net loss attributable to Neonode Inc. of $1.6 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.

 

Contractual Obligation and Off-Balance Sheet Arrangements

 

We previously agreed to secure the value of inventory purchased by one of our AirBars manufacturing partners. At December 31, 2020, the guaranteed amount was decreased from $210,000 to $100,000. We do not have any other transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than the operating leases incurred in the normal course of business.

 

We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support. We do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the consolidated financial statements.

  

Contractual Obligations and Commercial Commitments

 

Non-Recurring Engineering Development Costs

 

On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC, which is used in our licensed technology. Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold. As of March 31, 2021, we had made no payments to TI under the NN1002 Agreement.  

 

 

Operating Leases 

 

We did not renew our lease for the office space located at 2880 Zanker Road, San Jose, CA 95134 in August 2020 and Neonode Inc. now operates through a virtual office.

 

On December 1, 2020, Neonode Technologies AB entered into a lease for 6,684 square feet of office space located at Karlavägen 100, Stockholm, Sweden. The lease agreement is valid through November 2022. The lease is extended on a yearly basis unless written notice is given nine months prior to the expiration date.

 

On December 1, 2015, Pronode Technologies AB entered into a lease agreement for 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka, Sweden. The lease can be terminated with nine months’ written notice prior to the termination date.

 

In January 2015, our subsidiary Neonode Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea. The lease was terminated on December 18, 2020 and we now only have a virtual office in South Korea.

 

On December 1, 2015, Neonode Taiwan Ltd. entered into a lease agreement located at Rm. 2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan. The lease is renewed monthly.

 

On September 1, 2019 we entered into a lease of office space located at NishiShinjuku Takagi Building, 1203 NishiShinjuku, Shinjukuku, Tokyo, Japan. The lease is valid through August 31, 2021 and is extended on a yearly basis unless written notice is given three months prior to the expiration date.

 

For the months ended March 31, 2021 and 2020, we recorded approximately $173,000 and $139,000, respectively, for rent expense.

 

See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions.

 

Equipment Subject to Finance Lease

 

In April 2014, we entered into a lease for certain specialized milling equipment. Under the terms of the lease agreement, we are obligated to purchase the equipment at the end of the original six-year lease term for 10% of the original purchase price of the equipment. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2014 when the equipment went into service. On July 1, 2020, the lease contract was extended for one year. The implicit interest rate of the extended lease period is 9.85% per annum.

 

Between the second and the fourth quarters of 2016, we entered into six leases for component production equipment. Under the terms of five of the lease agreements entered into during 2016, we are obligated to purchase the equipment at the end of the original three to five years lease terms for 5-10% of the original purchase price of the equipment. In accordance with relevant accounting guidance these five leases are classified as finance leases. The lease payments and depreciation periods began between June and November 2016 when the equipment went into service. The implicit interest rate of these five leases is currently approximately 3% per annum. The additional lease entered into during 2016 is a hire-purchase agreement that requires the equipment to be paid off after five years. In accordance with relevant accounting guidance the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2016 when the equipment went into service. The implicit interest rate of this lease is approximately 3% per annum.

 

In 2017, we entered into one lease for component production equipment. Under the terms of the lease agreement the lease will be renewed within one year of the end of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in May 2017 when the equipment went into service. The implicit interest rate of the lease is approximately 1.5% per annum.

 

In 2018, we entered into one lease for component production equipment. Under the terms of the agreement, the lease will be renewed within one year of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in August 2018 when the equipment went into service. The implicit interest rate of the lease is approximately 1.5% per annum.

 

See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.

  

 

Liquidity and Capital Resources

 

Our liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things:

 

	●	licensing of our technology;
	●	purchases of our sensor products, including AirBar;
	●	operating expenses;
	●	timing of our OEM customer product shipments;
	●	timing of payment for our technology licensing agreements;
	●	gross profit margin; and
	●	ability to raise additional capital, if necessary.

 

As of March 31, 2021, we had cash of $8.1 million compared to $10.5 million as of December 31, 2020.

 

Working capital (current assets less current liabilities) was $8.8 million as of March 31, 2021, compared to $10.4 million as of December 31, 2020.

 

Net cash used in operating activities for the three months ended March 31, 2021 was $2.0 million and was primarily the result of a net loss of $1.7 million and approximately $0.4 million in non-cash operating expenses, comprised of stock based compensation expense, depreciation and amortization and amortization of operating lease right-of-use assets.

 

Net cash used in operating activities for the three months ended March 31, 2020 was $1.0 million and was primarily the result of a net loss of $1.1 million and approximately $0.3 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets.

 

Accounts receivable and unbilled revenues decreased by approximately $0.4 million as of March 31, 2021 compared to December 31, 2020. This was due to some large customer invoices outstanding at year end 2020 that settled during the first three months of 2021.

 

Inventory increased by approximately $0.5 million during the three months ended March 31, 2021 due to purchased components to secure our estimated sales for the coming twelve months.

 

Deferred revenues decreased by approximately $15,000 during the three months ended March 31, 2021.

 

During the three months ended March 31, 2021 and 2020, we purchased approximately $62,000 and $5,000, respectively, of property and equipment, primarily new leasehold improvements for the new Stockholm office and demo equipment.

 

Net cash used in financing activities of $148,000 and $132,000 during the three months ended March 31, 2021 and 2020, respectively, was the result of principal payments on finance leases.

 

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.7 million and $1.1 million for the three months ended March 31, 2021 and 2020, respectively, and had an accumulated deficit of approximately $197.7 million and $196.2 million as of March 31, 2021 and December 31, 2020, respectively. In addition, operating activities used cash of approximately $2.0 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.

 

 

The condensed consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business.

 

We aim to grow our revenues in all business areas and continue to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating loss.

 

In the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. Historically, we have been able to access the capital markets through sales of common stock and warrants to generate liquidity. Our management believes it could raise capital through public or private offerings if needed to provide us with sufficient liquidity.

 

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, no assurance can be given that stockholders will approve an increase in the number of our authorized shares of common stock. If funds and sufficient authorized shares 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.

 

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. They are subject to foreign currency exchange rate risk. Any increase or decrease in the exchange rate of the U.S. Dollar compared to the Swedish Krona, Japanese Yen, South Korean Won or Taiwan Dollar will impact our future operating results.

 

 

Critical Accounting Policies

 

Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract covers 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 stand-alone selling price for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations.

 

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.

 

See Note 2 – Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion of critical accounting policies and discussion of estimates.

 

There have been no other changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Under the supervision of and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2021. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

In designing and evaluating disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

  

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently involved in any material legal proceedings. However, from time to time, we may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including, but not limited to, employee, customer and vendor disputes.

 

Item 1A. Risk Factors

 

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

Item 5. Other Information

 

Not applicable.

 

 

Item 6. Exhibits

 

Exhibit #		Description
3.1		Restated Certificate of Incorporation of Neonode Inc., dated November 7, 2018 (incorporated by reference to Exhibit 3.14 of the registrant’s quarterly report on Form 10-Q filed on November 8, 2018)
3.1.1		Certificate of First Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.1 of the registrant’s quarterly report on Form 10-Q filed August 14, 2019)
3.1.C.1		Certificate of Designation of Preferences, Rights and Limitations of Series C-1 5% Convertible Preferred Stock, dated August 6, 2020 (incorporated by reference to Exhibit 3.1.C.1 of the registrant’s current report on Form 8-K filed August 10, 2020)
3.1.C.2		Certificate of Designation of Preferences, Rights and Limitations of Series C-2 5% Convertible Preferred Stock, dated August 6, 2020 (incorporated by reference to Exhibit 3.1.C.2 of the registrant’s current report on Form 8-K filed August 10, 2020)
3.1.2		Certificate of Second Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.2 of the registrant’s quarterly report on Form 10-Q filed August 14, 2019)
3.1.3		Certificate of Third Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.3 of the registrant’s quarterly report on Form 10-Q filed November 10, 2020)
3.2		Bylaws (incorporated by reference to Exhibit 3.2 of the registrant’s quarterly report on Form 10-Q filed on November 8, 2018 (file no. 1-35526))
10.1		Employment Agreement, dated March 30, 2021, by and between Neonode Technologies AB and Fredrik Nihlén (incorporated by reference to Exhibit 10.1 of the registrant’s current report on Form 8-K filed on March 31, 2021)
10.2		At Market Issuance Sales Agreement, dated May 7, 2021, by and between Neonode Inc. and B. Riley Securities, Inc. (incorporated by reference to Exhibit 1.2 of the registrant’s registration statement on Form S-3 (File No. 333-255964) filed on May 10, 2021)
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
32		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101. INS		XBRL Instance Document
101. SCH		XBRL Taxonomy Extension Schema Document
101. CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101. DEF		XBRL Taxonomy Extension Definition Linkbase Document
101. LAB		XBRL Taxonomy Extension Label Linkbase Document
101. PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	NEONODE INC.
Date: May 12, 2021	By:	/s/ Maria Ek
		Maria Ek
		Chief Financial Officer,
		Vice President, Finance,
		Treasurer and Secretary
		(Principal Financial and Accounting Officer)

 

 

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