UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from ________ to ________
Commission
file number
| (Exact name of registrant as specified in its charter) |
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(Address of principal executive offices and zip code)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
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.
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).
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 | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
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The number of shares of the registrant’s common stock outstanding
as of August 3, 2021 was
NEONODE INC.
Quarterly Report on Form 10-Q
For the Fiscal Quarter Ended June 30, 2021
TABLE OF CONTENTS
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEONODE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable and unbilled revenue, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued payroll and employee benefits | ||||||||
| Accrued expenses | ||||||||
| Deferred revenues | ||||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease obligations | ||||||||
| Total current liabilities | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Neonode Inc. stockholders’ equity | ||||||||
| Noncontrolling interests | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| License fees | $ | $ | $ | $ | ||||||||||||
| Sensor modules | ||||||||||||||||
| Non-recurring engineering | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues: | ||||||||||||||||
| Sensor modules | ||||||||||||||||
| Non-recurring engineering | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Total gross margin | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other expense: | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Total other expense | ||||||||||||||||
| Loss before provision for income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss including noncontrolling interests | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Less: Net loss attributable to noncontrolling interests | ||||||||||||||||
| Net loss attributable to Neonode Inc. | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Loss per common share: | ||||||||||||||||
| Basic and diluted loss per share | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Basic and diluted – weighted average number of common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss): | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Comprehensive loss attributable to noncontrolling interests | ||||||||||||||||
| Comprehensive loss attributable to Neonode Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except for Preferred Stock Shares Issued1)
(Unaudited)
For the Quarter to Date periods ended June 30, 2020 through June 30, 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 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ( |
) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balances, March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balances, June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||
| Issuance of shares for cash, net of offering costs | ||||||||||||||||||||||||||||||||||||||||
| Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest | - | ( | ) | - | ||||||||||||||||||||||||||||||||||||
| Conversion of Series C-1 and C-2 Preferred Stock to common stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Preferred dividends | - | - | ( | ) | ( | ) | ( |
) | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ( |
) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balances, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balances, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ( | ) | ( | ) | ( |
) | ||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
| Balances, March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( |
) | ( |
) | |||||||||||||||||||||||||||||
| Balances, June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( |
) | $ | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
4
NEONODE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| Six months ended June 30, |
||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss (including noncontrolling interests) | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and unbilled revenue, net | ||||||||
| Projects in process | ||||||||
| Inventory | ( |
) | ( |
) | ||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable and accrued expenses | ( |
) | ( |
) | ||||
| Deferred revenues | ( |
) | ||||||
| Operating lease obligations | ( |
) | ( |
) | ||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from short-term borrowings | ||||||||
| Proceeds from short-term tax credits | - | |||||||
| Principal payments on finance lease obligations | ( |
) | ( |
) | ||||
| Net cash (used in) provided by financing activities | ( |
) | ||||||
| Effect of exchange rate changes on cash | ( |
) | ||||||
| Net decrease in cash | ( |
) | ( |
) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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 and six months ended June 30, 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 and six months ended June 30, 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., which is collectively with its subsidiaries referred to as “Neonode” or the “Company” in this report, develops advanced optical sensing solutions for contactless touch, touch, gesture sensing, and remote sensing solutions for driver and in-cabin monitoring features. We market and sell our contactless touch, touch, and gesture sensing products and solutions using our zForce technology platform, and our remote sensing solutions using our MultiSensing technology platform. Neonode offers customized optical touch and gesture control solutions for many different markets and segments.
In our operations, we have historically 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 (“AMER”), Asia-Pacific (“APAC”), and Europe, Middle East and Africa (“EMEA”). We thereby changed from a business area organization to a regional sales organization going forward. Revenues are however primarily monitored per our revenue streams license fees, sensor modules and non-recurring engineering (“NRE”).
Liquidity
We
have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses
of approximately $
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.
6
2. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated
financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode Inc. and its wholly owned subsidiaries,
as well as Pronode Technologies AB, a
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 June 30, 2021 and December 31, 2020 and the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three and six months ended June 30, 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, Taiwan and Sweden.
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 $
7
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 to projects in process as of June 30, 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 $
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
Raw materials, work-in-process, and finished goods are as follows (in thousands):
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Ending inventory | $ | $ | ||||||
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 | |||
| Furniture and fixtures | |||
| Equipment |
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.
8
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 began 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 flows from the associated assets in accordance with relevant accounting guidance. If the estimated undiscounted future cash flows 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 June 30, 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 $
Concentration of Credit and Business Risks
Our customers are located in U.S., Europe and Asia.
As of June 30, 2021,
As
of December 31, 2020,
Customers
who accounted for
| ● | Hewlett Packard Company – | |
| ● | Seiko Epson Corporation – |
| ● | LG Electronics Inc. – |
Customers
who accounted for
| ● | Hewlett Packard Company – | |
| ● | Seiko Epson Corporation – | |
| ● | LG Electronics Inc. – |
9
Customers
who accounted for
| ● | Epson – | |
| ● | Hewlett Packard Company – | |
| ● | Alpine – |
Customers
who accounted for
| ● | Alpine – | |
| ● | Epson – | |
| ● | Hewlett Packard Company – |
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”) and our licensing customer base is primarily in the automotive and printer industries. 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 June 30, 2021.
10
Engineering Services Revenues:
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 or on a flat rate for engineering services, and we recognize revenue as the engineering services specified in the 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 and six months ended June 30, 2021 and 2020, no losses related to SOW projects were recorded.
Touch Sensor Modules Revenues:
We earn revenue from sales of touch sensor modules (“TSMs”) products to our OEM and Tier 1 supplier customers, who embed our hardware into their products, and, occasionally, from sales of our AirBar branded consumer products (incorporating our TSM technology) sold through distributors. These distributors are generally given business terms that do not allow them to return unsold inventory. Our sales agreements generally provide customers with limited rights of return and warranty provisions.
The timing of revenue recognition related to sales of TSMs and AirBars depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue for products sold point-of-sale (online sales and other direct sales to customers) when we provide the promised product to the customer.
Because we generally use distributors to provide TSMs and AirBars to our customers, we analyze the terms of distributor agreements to determine when control passes from us to our distributors. For sales of TSMs and AirBars 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 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 $
11
The following tables present disaggregated revenues by market for the three and six months ended June 30, 2021 and 2020 (dollars in thousands):
| Three
months ended June 30, 2021 | Three
months ended June 30, 2020 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| Net revenues from consumer electronics | $ | % | $ | % | ||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| APAC | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from consumer electronics | % | % | ||||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| EMEA | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from medical | % | % | ||||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| Six
months ended June 30, 2021 | Six
months ended June 30, 2020 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| Net revenues from consumer electronics | $ | % | $ | % | ||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| APAC | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from consumer electronics | % | % | ||||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| EMEA | ||||||||||||||||
| Net revenues from automotive | $ | % | $ | % | ||||||||||||
| Net revenues from medical | % | % | ||||||||||||||
| Net revenues from distributors and other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
12
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 June 30, 2021 and December 31, 2020 (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Accounts receivable and unbilled revenue | $ | $ | ||||||
| Deferred revenues | ||||||||
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 June 30, 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.
13
Product Warranty
The following table summarizes the activity related to the product warranty liability (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Provisions for warranty issued | ||||||||
| Balance at end of period | $ | $ | ||||||
The Company accrues for warranty costs as part of its cost of sales of sensor modules based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 months from the customer receipt of the product.
Deferred Revenues
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):
| June 30, 2021 | December 31, 2020 | |||||||
| Deferred revenues license fees | $ | $ | ||||||
| Deferred revenues sensor modules | ||||||||
| Deferred revenues non-recurring engineering | ||||||||
| $ | $ | |||||||
During
the three and six months ended June 30, 2021, the Company recognized revenues of approximately $
Advertising
Advertising
costs are expensed as incurred. Advertising costs for the three and six months ended June 30, 2021 and 2020 amounted to approximately
$
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.
14
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 represents less than
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 June 30, 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 June 30, 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 and six months ended June 30, 2021 and 2020, respectively. 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 and six months ended June 30, 2021 and 2020 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8).
15
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:
| Six
months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Swedish Krona | ||||||||
| Japanese Yen | ||||||||
| South Korean Won | ||||||||
| Taiwan Dollar | ||||||||
Exchange rate for the consolidated balance sheets was as follows:
| As of | ||||||||
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Swedish Krona | ||||||||
| Japanese Yen | ||||||||
| South Korean Won | ||||||||
| Taiwan Dollar | ||||||||
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 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 at this time.
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
May 10, 2021, we entered into an At Market Issuance Sales AgreementSM (the “Sales Agreement”) with B. Riley
Securities with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from
time to time, in our sole discretion, issue and sell through B. Riley Securities, acting as sales agent, up to $
Pursuant
to the Sale Agreement, B. Riley Securities may sell the shares by any method permitted that is deemed an “at the market”
offering as defined in Rule 415 under the Securities Act. B. Riley Securities will use commercially reasonable efforts consistent with
its normal trading and sales practices to sell the shares from time to time, based upon instructions from us (including any price or
size limits or other customary parameters or conditions we may impose). We will pay B. Riley Securities a commission of
We are not obligated to sell any shares under the Sale Agreement. The offering of shares pursuant to the Sale Agreement will terminate upon the earlier to occur of (i) the issuance and sale, through B. Riley Securities, of all of the shares subject to the Sales Agreement and (ii) termination of the Sale Agreement in accordance with its terms.
16
On August 7, 2020, we closed
a private placement (the “Private Placement”) with certain institutional and accredited investors. We issued a total of
Common Stock
At our annual meeting of stockholders
held on September 29, 2020, stockholders approved a proposal to increase the number of authorized shares of our common stock to
On
December 29, 2020, we issued
During the three and six months ended June 30, 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
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
The
holders of the Series C-1 and C-2 Preferred Shares were entitled to receive dividends at the rate per share of
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 and six months ended June 30, 2021 and 2020. No shares of preferred stock were issued and outstanding as of June 30, 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 | ||||||||||||||||
| Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest | ||||||||||||||||
| Conversion of Preferred Shares to common stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balances, December 31, 2020 | $ | $ | ||||||||||||||
Warrants
As of June 30, 2021 and December
31, 2020, the Company had outstanding warrants to purchase
17
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 solely on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.
Stock Options
During the year ended 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,
As of June 30, 2021, we had three equity incentive plans:
| ● | The 2006 Plan; | |
| ● | The 2015 Plan; and | |
| ● | 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. Under the 2020 LTIP, eligible employees of Neonode may waive between
On
December 29, 2020, we issued
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 | $ | |||||||
| Expired | ( | ) | ||||||
| Outstanding at June 30, 2021 | $ | |||||||
18
The
aggregate intrinsic value of the
For the three and six months ended June 30, 2021 and 2020, we recorded no compensation expense related to the vesting of stock options. The fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the date of grant of the stock option.
During the three and six months ended June 30, 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 September 2, 2020, a 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 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 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.
19
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 any 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 June 30, 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 June 30, 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 June 30, 2021, the guaranteed
amount is $
Management’s judgment is that the bank guarantee is a contingent guarantee and management will record a liability when it is probable that we will have to purchase the inventory. As of August 11, 2021, management’s judgment is that we will sell the remaining AirBars and purchase the components and the assembly service from the manufacturing partner. No liability has therefore been recorded for the period ended June 30, 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
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.
20
6. Segment Information
We
have
The following table presents net revenues by geographic area for the three and six months ended June 30, 2021 and 2020, respectively, (dollars in thousands):
| Three
months ended June 30, 2021 | Three
months ended June 30, 2020 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| Japan | $ | % | $ | % | ||||||||||||
| United States | % | % | ||||||||||||||
| South Korea | % | % | ||||||||||||||
| China | % | % | ||||||||||||||
| Germany | % | % | ||||||||||||||
| Switzerland | % | % | ||||||||||||||
| Taiwan | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
| Six
months ended June 30, 2021 | Six
months ended June 30, 2020 | |||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| United States | $ | % | $ | % | ||||||||||||
| Japan | % | % | ||||||||||||||
| South Korea | % | % | ||||||||||||||
| China | % | % | ||||||||||||||
| Germany | % | % | ||||||||||||||
| Switzerland | % | % | ||||||||||||||
| Sweden | % | % | ||||||||||||||
| Other | % | % | ||||||||||||||
| $ | % | $ | % | |||||||||||||
The following table presents our total assets by geographic region as of June 30, 2021 and December 31, 2020 (in thousands):
| June 30, 2021 | December 31, 2020 | |||||||
| U.S. | $ | $ | ||||||
| Sweden | ||||||||
| Asia | ||||||||
| Total | $ | $ | ||||||
21
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
Our
operating leases represent building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility.
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 June 30, 2021 | Six
Months Ended June 30, 2021 | |||||||
| Operating lease cost (1) | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of leased assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | $ | $ | ||||||
| (1) |
| Three
Months Ended June 30, 2020 | Six
Months Ended June 30, 2020 | |||||||
| Operating lease cost (1) | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of leased assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Total finance lease cost | $ | $ | ||||||
| (1) |
22
Supplemental cash flow information related to leases was as follows (in thousands):
| Three
Months Ended June 30, 2021 | Six
Months Ended June 30, 2021 | |||||||
| Cash paid for amounts included in leases: | ||||||||
| Operating cash flows from operating leases | $ | ( | ) | $ | ( | ) | ||
| Operating cash flows from finance leases | ( | ) | ( | ) | ||||
| Financing cash flows from finance leases | ( | ) | ( | ) | ||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | ||||||||
| Three months ended June 30, | Six months ended June 30, | |||||||
| 2020 | 2020 | |||||||
| Cash paid for amounts included in leases: | ||||||||
| Operating cash flows from operating leases | $ | ( | ) | $ | ( | ) | ||
| Operating cash flows from finance leases | ( | ) | ( | ) | ||||
| Financing cash flows from finance leases | ( | ) | ( | ) | ||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | ||||||||
Supplemental balance sheet information related to leases was as follows (in thousands):
| June 30, 2021 | December 31,
2020 | |||||||
| Operating leases | ||||||||
| Operating lease right-of-use assets | $ | $ | ||||||
| Current portion of operating lease obligations | $ | $ | ||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Finance leases | ||||||||
| Property and equipment, at cost | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Current portion of finance lease obligations | $ | $ | ||||||
| Finance lease liabilities, net of current portion | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| June 30, 2021 | December 31, 2020 | |||||||
| Weighted Average Remaining Lease Term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted Average Discount Rate: | ||||||||
| Operating leases (2) | % | % | ||||||
| Finance leases | % | % | ||||||
| (2) | Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019 |
23
A summary of future minimum payments under non-cancellable operating lease commitments as of June 30, 2021 is as follows (in thousands):
| Years ending December 31, | Total | |||
| 2021 (remaining months) | $ | |||
| 2022 | ||||
| Less imputed interest | ( | ) | ||
| Total lease liabilities | $ | |||
| Less current portion | ( | ) | ||
| $ | ||||
The following is a schedule of minimum future rentals on the non-cancellable finance leases as of June 30, 2021 (in thousands):
| Year ending December 31, | Total | |||
| 2021 (remaining months) | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total minimum payments required: | ||||
| Less amount representing interest: | ( | ) | ||
| Present value of net minimum lease payments: | ||||
| Less current portion | ( | ) | ||
| $ | ||||
8. Net Loss per Share
Basic net loss per common share for the three and six months ended June 30, 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.
There were no potentially dilutive common stock equivalents for the three and six months ended June 30, 2021 and 2020, respectively.
| (in thousands, except per share amounts) | Three
months ended June 30, | |||||||
| 2021 | 2020 | |||||||
| BASIC AND DILUTED | ||||||||
| Weighted average number of common shares outstanding | ||||||||
| Net loss attributable to Neonode Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
| (in thousands, except per share amounts) | Six
months ended June 30, | |||||||
| 2021 | 2020 | |||||||
| BASIC AND DILUTED | ||||||||
| Weighted average number of common shares outstanding | ||||||||
| Net loss attributable to Neonode Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss per share - basic and diluted | $ | ( | ) | $ | ( | ) | ||
24
9. Subsequent Events
On July 2, and 6, 2021, we
sold
No other subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as discussed elsewhere in the accompanying notes.
25
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 (including the emergence of COVID-19 variants), 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 contactless touch, touch, gesture sensing, and remote sensing solutions for driver and in-cabin monitoring features. We market and sell our contactless touch, touch, and gesture sensing products and solutions using our zForce technology platform, and our remote sensing solutions using our MultiSensing technology platform. Neonode offers customized optical touch and gesture control solutions for many different markets and segments and mainly operates in the business-to-business (“B2B”) markets.
License Sales
We license our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed our Human Machine Interface (“HMI”) technology into products they develop, manufacture and sell. Since 2010, our licensing customers have sold approximately 82 million devices that use our patented technology.
As of June 30, 2021, we had thirty-five valid technology license agreements with global OEMs, Original 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 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.
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Product Sales
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 HMI use in their products.
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.
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 product sales.
Our offerings include a consumer product, AirBar. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers and other devices. AirBar is powered by our sensor modules. We have no current plans to develop new Neonode branded products for the consumer markets.
Non-recurring Engineering Services Sales
We also offer engineering consulting services to our licensing and sensor module customers on a flat rate or hourly rate basis.
Typically, our licensing customers require engineering support during the development and initial manufacturing phase for their products using our technology, while our sensor module 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.
Remote Sensing Solutions
We also 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 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 impacted by COVID-19 and the emergence of new COVID-19 variants and their impact on the global economy. Although we have noted additional demand in our contactless touch products and some increases in sales of licensed products, COVID-19 has negatively impacted some of our customers’ businesses and their sales volumes, which, in turn, has impacted our business. 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 still work remotely. The extent of the COVID-19 pandemic’s impact on our operational and financial performance going forward will depend on future developments, including the duration, spread and intensity of the pandemic (including the emergence of new COVID-19 variants), all of which are uncertain and difficult to predict at this time. 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 the COVID-19 pandemic’s impact on our business, and our sales may not increase in line with our expectations and our operating margins could fluctuate or decline.
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Results of Operations
A summary of our financial results is as follows (in thousands, except percentages):
| Three
months ended June 30, | 2021 vs 2020 | |||||||||||||||
| 2021 | 2020 | Variance in Dollars | Variance in Percent | |||||||||||||
| Revenue: | ||||||||||||||||
| License fees | $ | 1,358 | $ | 674 | $ | 684 | 101.5 | % | ||||||||
| Percentage of revenue | 79.0 | % | 88.9 | % | ||||||||||||
| Sensor modules | 346 | 66 | 280 | 424.2 | % | |||||||||||
| Percentage of revenue | 20.1 | % | 8.7 | % | ||||||||||||
| Non-recurring engineering | $ | 16 | $ | 18 | $ | (2 | ) | (11.1 | )% | |||||||
| Percentage of revenue | 0.9 | % | 2.4 | % | ||||||||||||
| Total Revenue | $ | 1,720 | $ | 758 | $ | 962 | 126.9 | % | ||||||||
| Cost of Sales: | ||||||||||||||||
| Sensor modules | $ | 212 | $ | 72 | $ | 140 | 194.4 | % | ||||||||
| Percentage of revenue | 12.3 | % | 9.5 | % | ||||||||||||
| Non-recurring engineering | $ | 9 | $ | 51 | $ | (42 | ) | (82.4 | )% | |||||||
| Percentage of revenue | 0.5 | % | 6.7 | % | ||||||||||||
| Total Cost of Sales | $ | 221 | $ | 123 | $ | 98 | 79.7 | % | ||||||||
| Total Gross Margin | $ | 1,499 | $ | 635 | $ | 864 | 136.1 | % | ||||||||
| Operating Expense: | ||||||||||||||||
| Research and development | $ | 1,379 | $ | 1,043 | $ | 336 | 32.2 | % | ||||||||
| Percentage of revenue | 80.2 | % | 137.6 | % | ||||||||||||
| Sales and marketing | 769 | 648 | 121 | 18.7 | % | |||||||||||
| Percentage of revenue | 44.7 | % | 85.5 | % | ||||||||||||
| General and administrative | 1,147 | 700 | 447 | 63.9 | % | |||||||||||
| Percentage of revenue | 66.7 | % | 92.3 | % | ||||||||||||
| Total Operating Expenses | $ | 3,295 | $ | 2,391 | $ | 904 | 37.8 | % | ||||||||
| Percentage of revenue | 191.6 | % | 315.4 | % | ||||||||||||
| Operating Loss | $ | (1,796 | ) | $ | (1,756 | ) | $ | (40 | ) | 2.3 | % | |||||
| Percentage of revenue | (104.4 | )% | (231.7 | )% | ||||||||||||
| Interest expense | 3 | 7 | (4 | ) | (57.1 | )% | ||||||||||
| Percentage of revenue | 0.2 | % | 0.9 | % | ||||||||||||
| Provision for income taxes | 37 | 3 | 34 | 1,133.3 | % | |||||||||||
| Percentage of revenue | 2.2 | % | 0.4 | % | ||||||||||||
| Less: net loss attributable to noncontrolling interests | $ | 179 | $ | 154 | $ | 25 | 16.2 | % | ||||||||
| Percentage of revenue | 10.4 | % | 20.3 | % | ||||||||||||
| Net loss attributable to Neonode Inc. | $ | (1,657 | ) | $ | (1,612 | ) | $ | (45 | ) | 2.8 | % | |||||
| Percentage of revenue | (96.3 | )% | (212.7 | )% | ||||||||||||
| Net loss per share attributable to Neonode Inc. | $ | (0.14 | ) | $ | (0.18 | ) | $ | 0.04 | (22.2 | )% | ||||||
| Percentage of revenue | 0.0 | % | 0.0 | % | ||||||||||||
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| Six
months ended June 30, | 2021 vs 2020 | |||||||||||||||
| 2021 | 2020 | Variance in Dollars | Variance in Percent | |||||||||||||
| Revenue: | ||||||||||||||||
| License fees | $ | 2,653 | $ | 1,843 | $ | 810 | 44.0 | % | ||||||||
| Percentage of revenue | 78.4 | % | 89.8 | % | ||||||||||||
| Sensor modules | 701 | 164 | 537 | 327.4 | % | |||||||||||
| Percentage of revenue | 20.7 | % | 8.0 | % | ||||||||||||
| Non-recurring engineering | $ | 31 | $ | 45 | $ | (14 | ) | (31.1 | )% | |||||||
| Percentage of revenue | 0.9 | % | 2.2 | % | ||||||||||||
| Total Revenue | $ | 3,385 | $ | 2,052 | $ | 1,333 | 65.0 | % | ||||||||
| Cost of Sales: | ||||||||||||||||
| Sensor modules | $ | 482 | $ | 108 | $ | 374 | 346.3 | % | ||||||||
| Percentage of revenue | 14.2 | % | 5.3 | % | ||||||||||||
| Non-recurring engineering | $ | 16 | $ | 59 | $ | (43 | ) | (72.9 | )% | |||||||
| Percentage of revenue | 0.5 | % | 2.9 | % | ||||||||||||
| Total Cost of Sales | $ | 498 | $ | 167 | $ | 331 | 198.2 | % | ||||||||
| Total Gross Margin | $ | 2,887 | $ | 1,885 | $ | 1,002 | 53.2 | % | ||||||||
| Operating Expense: | ||||||||||||||||
| Research and development | $ | 2,521 | $ | 2,038 | $ | 483 | 23.7 | % | ||||||||
| Percentage of revenue | 74.5 | % | 99.3 | % | ||||||||||||
| Sales and marketing | 1,557 | 1,193 | 364 | 30.5 | % | |||||||||||
| Percentage of revenue | 46.0 | % | 58.1 | % | ||||||||||||
| General and administrative | 2,234 | 1,499 | 735 | 49.0 | % | |||||||||||
| Percentage of revenue | 66.0 | % | 73.1 | % | ||||||||||||
| Total Operating Expenses | $ | 6,312 | $ | 4,730 | $ | 1,582 | 33.4 | % | ||||||||
| Percentage of revenue | 186.5 | % | 230.5 | % | ||||||||||||
| Operating Loss | $ | (3,425 | ) | $ | (2,845 | ) | $ | (580 | ) | 20.4 | % | |||||
| Percentage of revenue | (101.2 | )% | (138.6 | )% | ||||||||||||
| Interest expense | 8 | 14 | (6 | ) | (42.9 | )% | ||||||||||
| Percentage of revenue | 0.2 | % | 0.7 | % | ||||||||||||
| Provision for income taxes | 73 | 19 | 54 | 284.2 | % | |||||||||||
| Percentage of revenue | 2.2 | % | 0.9 | % | ||||||||||||
| Less: net loss attributable to noncontrolling interests | $ | 281 | $ | 256 | $ | 25 | 9.8 | % | ||||||||
| Percentage of revenue | 8.3 | % | 12.5 | % | ||||||||||||
| Net Loss attributable to Neonode Inc. | $ | (3,225 | ) | $ | (2,622 | ) | $ | (603 | ) | 23.0 | % | |||||
| Percentage of revenue | (95.3 | )% | (127,8 | )% | ||||||||||||
| Net Loss per share attributable to Neonode Inc. | $ | (0.28 | ) | $ | (0.29 | ) | $ | 0.01 | (3.4 | )% | ||||||
| Percentage of revenue | 0.0 | % | 0.0 | % | ||||||||||||
Net Revenues
All of our sales for the three and six months ended June 30, 2021 and 2020 were to customers located in the U.S., Europe and Asia.
The increase of 127% and 65% in total net revenues for the three and six months ended June 30, 2021 as compared to the same periods in 2020 was related to higher license fees and higher sensor modules sales, partly offset by a decrease in non-recurring engineering revenues.
License Fees Revenues
The increase in license fees revenues for the three and six months ended June 30, 2021 compared to the same periods in 2020 is mostly pandemic-related and within our legacy business. Licensing revenues in 2020 were depressed by the general economic slow-down associated with the pandemic. For 2021, revenues are still rebounding. We have seen an increase in license fees revenues in the second quarter of 2021 compared to the first.
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Touch Sensor Modules Revenues
The interest for contactless touch is the main driver for the increase in revenues from sale of our TSMs. We have seen Asia as the first adopter for our contactless touch technology. As expected, most of our sales are related to retrofit solutions due to long product development cycles.
Non-recurring Engineering Revenues
Most of our non-recurring revenues are related to both hardware and software related customization of our TSMs and decreased for the three and six months ended June 30, 2021 compared to the same periods in 2020.
There were no revenues related to Remote Sensing Solutions for the three and six months ended June 30, 2021.
The following tables presents the net revenues by geographical area and revenue stream for the three and six months ended June 30, 2021 and 2020 (dollars in thousands):
| Three months ended June 30, 2021 |
Three months ended June 30, 2020 |
|||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| License fees | $ | 569 | 97 | % | $ | 260 | 98 | % | ||||||||
| Sensor modules | 15 | 3 | % | 6 | 2 | % | ||||||||||
| $ | 584 | 100 | % | $ | 266 | 100 | % | |||||||||
| APAC | ||||||||||||||||
| License fees | $ | 706 | 71 | % | $ | 388 | 95 | % | ||||||||
| Sensor modules | 264 | 27 | % | 16 | 4 | % | ||||||||||
| Non-recurring engineering | 16 | 2 | % | 4 | 1 | % | ||||||||||
| $ | 986 | 100 | % | $ | 408 | 100 | % | |||||||||
| EMEA | ||||||||||||||||
| License fees | $ | 83 | 55 | % | $ | 26 | 31 | % | ||||||||
| Sensor modules | 67 | 45 | % | 44 | 52 | % | ||||||||||
| Non-recurring engineering | - | - | % | 14 | 17 | % | ||||||||||
| $ | 150 | 100 | % | $ | 84 | 100 | % | |||||||||
| Six months ended June 30, 2021 |
Six months ended June 30, 2020 |
|||||||||||||||
| Amount | Percentage | Amount | Percentage | |||||||||||||
| AMER | ||||||||||||||||
| License fees | $ | 1,160 | 91 | % | $ | 802 | 94 | % | ||||||||
| Sensor modules | 117 | 9 | % | 47 | 5 | % | ||||||||||
| Non-recurring engineering | - | - | % | 8 | 1 | % | ||||||||||
| $ | 1,277 | 100 | % | $ | 857 | 100 | % | |||||||||
| APAC | ||||||||||||||||
| License fees | $ | 1,304 | 72 | % | $ | 894 | 97 | % | ||||||||
| Sensor modules | 481 | 26 | % | 16 | 2 | % | ||||||||||
| Non-recurring engineering | 31 | 2 | % | 9 | 1 | % | ||||||||||
| $ | 1,816 | 100 | % | $ | 919 | 100 | % | |||||||||
| EMEA | ||||||||||||||||
| License fees | $ | 189 | 65 | % | $ | 147 | 53 | % | ||||||||
| Sensor modules | 103 | 35 | % | 101 | 37 | % | ||||||||||
| Non-recurring engineering | - | - | % | 28 | 10 | % | ||||||||||
| $ | 292 | 100 | % | $ | 276 | 100 | % | |||||||||
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Gross Margin
Our combined total gross margin was 87% and 85% for the three and six months ended June 30, 2021 and 84% and 92% for the three and six months ended June 30, 2020, respectively. For the three and six months ended June 30, 2021, gross margin related to sensor module sales was 39% and 31% compared to (9)% and 34% for the same periods in 2020. The reason for the decrease in the six months ended June 30, 2021 compared to the same period 2020 is low-margin AirBar sales during the first three months of 2021.
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. 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 and six months ended June 30, 2021 were $1.4 million and $2.5 million, respectively. For the same periods in 2020, the R&D expenses were $1.0 million and $2.0 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.
The increases were primarily related to higher staff expenses for the three and six months ended June 30, 2021, which can be explained by the reduced working hours associated with the governmental pandemic related support program in Sweden during 2020.
Sales and Marketing
Sales and marketing expenses for the three and six months ended June 30, 2021 were $0.8 million and $1.6 million, respectively. The sales and marketing costs for the same periods in 2020 were $0.6 million and $1.2 million, respectively. Again, the increases for the three and six months ended June 30, 2021 were primarily due to higher staff expenses and the Swedish governmental support program during 2020
Our sales and marketing 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 and six months ended June 30, 2021 were $1.1 million and $2.2 million, respectively. The G&A expenses for the three and six months ended June 30, 2020 were $0.7 million and $1.5 million, respectively. The increase was primarily due to higher costs related to staff and in-house consultants in combination with high professional fees for the three and six months ended June 30, 2021.
Income Taxes
Our effective tax rate was (2)% and (2)% for the three and six months ended June 30, 2021, respectively, and 0% and (1)% for the three and six months ended June 30, 2020, respectively. The negative tax rate in the three and six months ended June 30, 2021 and June 30, 2020 is due to withholding taxes from sales. We recorded valuation allowances for the three and six-month periods ended June 30, 2021 and June 30, 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 $1.7 million and $3.2 million for the three and six months ended June 30, 2021, respectively, and $1.6 million and $2.6 million for the same periods in 2020 respectively.
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Contractual Obligations 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 June 30, 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 will not be renewed thereafter since we have decided to only have a virtual office in Japan.
For the three and months ended June 30, 2021, we recorded approximately $171,000 and $344,000 for rent expense. For the three and six months ended June 30, 2020, we recorded approximately $142,000 and $281,000 for rent expense.
See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions.
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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 June 30, 2021, we had cash of $6.6 million compared to $10.5 million as of December 31, 2020.
Working capital (current assets less current liabilities) was $7.1 million as of June 30, 2021, compared to $10.4 million as of December 31, 2020.
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Net cash used in operating activities for the six months ended June 30, 2021 was $3.4 million and was primarily the result of a net loss of $3.5 million and approximately $0.7 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets, partly offset by changes in operating assets and liabilities of $(0.6) million.
Net cash used in operating activities for the six months ended June 30, 2020 was $1.9 million and was primarily the result of a net loss of $2.9 million and approximately $0.4 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 $0.5 million as of June 30, 2021 compared to December 31, 2020. This was due to estimated lower revenues.
Inventory increased by approximately $880,000 during the six months ended June 30, 2021 compared to December 31, 2020, primarily due to purchase of components to secure production in line with estimated product sales.
Deferred revenues decreased by approximately $6,000 during the six months ended June 30, 2021 compared to December 31, 2020.
During the six months ended June 30, 2021, we purchased approximately $67,000 of property and equipment, primarily furniture and test equipment.
Net cash used in financing activities of $0.3 million during the six months ended June 30, 2021 was the result of principal payments on finance leases.
Net cash provided by financing activities of $1.3 million during the six months ended June 30, 2020 was the result of short-term borrowings of $966,000 and short-term tax credits of $542,000, offset by principal payments on finance leases of $164,000.
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 $3.2 million and $1.6 million and $2.6 million for the three and six months ended June 30, 2021 and 2020, respectively, and had an accumulated deficit of approximately $199.4 million and $196.2 million as of June 30, 2021 and December 31, 2020, respectively. In addition, operating activities used cash of approximately $3.4 million and $1.9 million for the six months ended June 30, 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.
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.
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At-the-Market Offering Program
On May 10, 2021, we entered into an At Market Issuance Sales AgreementSM (the “Sales Agreement”) with B. Riley Securities with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from time to time, in our sole discretion, issue and sell through B. Riley Securities, acting as sales agent, up to $25 million of shares of our common stock.
Pursuant to the Sale Agreement, B. Riley Securities may sell the shares by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act. B. Riley Securities will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us (including any price or size limits or other customary parameters or conditions we may impose). We will pay B. Riley Securities a commission of 3.0% of the gross sales price per share sold under the Sales Agreement.
We are not obligated to sell any shares under the Sale Agreement. The offering of shares pursuant to the Sale Agreement will terminate upon the earlier to occur of (i) the issuance and sale, through B. Riley Securities, of all of the shares subject to the Sales Agreement and (ii) termination of the Sale Agreement in accordance with its terms.
On July 2 and 6, 2021 we sold 6,028 and 9,808 shares, respectively, under the ATM Facility with aggregate net proceeds to us of $100,000.
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 June 30, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are currently involved in one legal proceeding as described in Note 5 – Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements. 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
| * | Filed herewith |
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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: August 11, 2021 | By: | /s/ Fredrik Nihlén |
| Fredrik Nihlén | ||
| Chief Financial Officer, | ||
| Vice President, Finance, | ||
| Treasurer and Secretary | ||
| (Principal Financial and Accounting Officer) | ||
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