Neonode(NEON) - 2018 Q4 - Annual Report

Special Note on Forward-Looking Statements This section warns readers that the report contains forward-looking statements, which involve inherent risks and uncertainties - This section warns readers that the report contains forward-looking statements, which involve inherent risks and uncertainties. It advises against undue reliance on these statements and refers to "Item 1A. Risk Factors" for a discussion of factors that could cause actual results to differ materially. The company does not undertake to update or revise these statements[15] Part I Business Overview Neonode Inc. develops optical touch and gesture solutions, primarily licensing its zForce technology to OEMs and Tier 1 suppliers - Neonode develops optical touch and gesture solutions under the "zForce" brand, licensing technology to OEMs and Tier 1 suppliers, with approximately 67 million devices sold using their technology[20] - The company also designs and manufactures zForce AIR sensor modules, selling them to B2B customers, and offers the Neonode branded AirBar consumer product[21][34] - Strategy focuses on delivering proven technology, supporting integration, transitioning licensing customers to embedded sensors, and expanding into new markets with next-generation products[24][26] - Revenues are derived from technology licensing, embedded sensor module sales, and engineering consulting services, primarily in B2B markets[28] Revenue by Market (Percentage of Total Revenues) | Market | 2018 | 2017 | | :------------------ | :--- | :--- | | Automotive | 19% | 21% | | Consumer Electronics | 74% | 64% | | Sensor modules | 3% | 8% | | NRE | 4% | 7% | | Total | 100% | 100% | Revenue by Geographic Region (Percentage of Total Revenues) | Region | 2018 | 2017 | | :------------ | :--- | :--- | | U.S. | 50% | 41% | | Sweden | -% | 5% | | Japan | 34% | 27% | | China | 3% | 7% | | Germany | 9% | 12% | | Taiwan | 2% | 3% | | South Korea | 1% | 2% | | Canada | -% | 1% | | Singapore | -% | 1% | | Other | 1% | 1% | | Total | 100% | 100% | Total Assets by Geographic Region (in thousands) | Region | 2018 | 2017 | | :------------ | :----- | :----- | | U.S. | $2,828 | $3,694 | | Sweden | $10,308 | $9,312 | | Asia | $106 | $121 | | Total | $13,242 | $13,127 | Company Overview and Structure Neonode Inc. was incorporated in Delaware in 1997, with its principal executive office in Stockholm, Sweden, and a U.S. office in San Jose, California - Neonode Inc. was incorporated in Delaware in 1997, with its principal executive office in Stockholm, Sweden, and a U.S. office in San Jose, California[22] - The company has established subsidiaries in Sweden, Japan, South Korea, and Taiwan, and a 51% majority-owned consolidated subsidiary, Pronode Technologies AB (Sweden)[23] Strategic Direction and Market Focus The company's strategy focuses on delivering proven technology, transitioning to embedded sensors, expanding into new markets, and innovating next-generation products - The company's strategy is to deliver proven technology and support for integration, enabling customers to bring products to market with an optimal user experience[24] - Neonode is transitioning from solely licensed touch technology designs to designing, manufacturing, and selling embedded sensors, supported by an automated manufacturing system[25] - The goal is to remain a leader in touch technology, transition licensing customers to embedded sensors, expand into new markets, and innovate with next-generation products offering better price, performance, and architectural advantages[26] Revenue Streams and Product Offerings Revenues are generated from technology licensing, embedded sensor module sales, and engineering consulting services, primarily in B2B markets - Revenues are derived from technology licensing, selling embedded sensor modules, and engineering consulting services, mainly in B2B markets[28] - As of December 31, 2018, Neonode had 41 technology license agreements, with 17 customers actively shipping products embedding their technology in automotive, printer, specialized tablet, and e-reader markets[29][30] - The company developed zForce AIR optical sensing technology in 2015, leading to sensor modules for B2B customers and the AirBar consumer product, with sensor modules expected to become a significant revenue source over time[32][34][35] Key Market Segments and Product Adoption Neonode's touch technology is adopted across automotive, printer, and e-reader markets, with new sensor modules under development for hands-free and assisted driving applications - In 2016, 14 automotive OEMs used Neonode's touch technology in 36 automobile models' infotainment systems, shipping approximately 1.1 million products in both 2018 and 2017[39] - Printer OEMs are increasingly adopting Neonode's touch technology, with customers shipping approximately 8 million printers in 2018 and a cumulative 32 million since mid-2014[40] - Over 31 million e-readers and tablets have shipped with Neonode's touch technology since 2011, with over 2.0 million shipped in 2018[41] - The company is developing zForce AIR sensor modules for hands-free entry and automation in automotive exterior parts, and zForce DRIVE sensor technology for high-fidelity hand/finger detection on steering wheels for assisted driving[43] Product Backlog Overview The company's product backlog as of March 1, 2019, includes sensor modules and AirBar, though it is not indicative of future revenue due to short cycle times Product Backlog as of March 1, 2019 | Product | Backlog Amount | Number of Customers | | :-------------- | :--------------- | :------------------ | | Sensor Modules | ~$22,000 | 1 | | AirBar | ~$131,000 | 3 | - The company states that product backlog is not necessarily indicative of actual product revenue for any future period due to short order-to-shipment cycle times and the possibility of order cancellations without significant penalties[42] Sales Channels and Operations Sales and marketing operations are managed globally, with revenues from licensing agreements, sensor module sales, and engineering consulting services - Sales and marketing operations are managed from Stockholm, Sweden, with sales offices in the United States, Sweden, South Korea, Japan, and Taiwan[47] - Licensing agreements with OEMs, ODMs, and Tier 1 suppliers typically have an initial term of three years with automatic one-year renewals, with fees earned on a per-unit basis[44] - Sensor module sales are governed by product purchase agreements, and the company offers engineering consulting to customize hardware and/or firmware, generating NRE fee revenues[46] Customer Base and Concentration Neonode maintains 41 technology license agreements, with significant revenue and accounts receivable concentration from a few major customers like Hewlett-Packard, Epson, and Canon - As of December 31, 2018, Neonode had 41 technology license agreements (unchanged from 2017), with 17 customers currently shipping products embedding their technology[49] - The company began selling embedded sensor modules in October 2017, initiating a process to convert existing license customers to sensor modules[50] Customer Concentration (Percentage of Accounts Receivable) | Year | Number of Customers | Percentage of Accounts Receivable | | :--- | :------------------ | :------------------------------ | | 2018 | 4 | ~67% | | 2017 | 2 | ~69% | Major Customers by Revenue (2018) | Customer | Percentage of Revenues | | :--------------- | :--------------------- | | Hewlett-Packard Company | 35% | | Epson | 14% | | Canon | 12% | Major Customers by Revenue (2017) | Customer | Percentage of Revenues | | :--------------- | :--------------------- | | Hewlett-Packard Company | 28% | | Canon | 17% | | Bosch | 10% | Technology Overview and Advantages Neonode's optical sensing technology uses infrared beams to detect objects, offering advantages like superior image quality, faster response, and cost-efficiency - Neonode's optical sensing technology projects infrared beams to detect objects across a surface or through the air, enabling activation by any object (fingers, passive pens, thick gloves) and functioning through transparent materials or when fully submerged[61] - Key advantages of optical sensing include no additional layers (preserving image quality), faster response than capacitive, no downward pressure required, cost-efficiency, and support for multiple input methods like multi-finger tracking, taps, sweeps, and gestures[65] Competitive Landscape The touch technology market is highly competitive, with projected capacitive technologies as major rivals, while Neonode stands out as a high-volume optical sensing provider - The market for touch technology is intensely competitive, characterized by rapidly changing technology, evolving standards, and new product releases[62] - Resistive touch technologies are declining due to limitations, while projected capacitive (PCAP) technologies are the major competition, with many suppliers competing on price[63][64] - Neonode is one of the few companies that offer optical sensing technology in high volume[64] Competitors and Technology Offered | Company | Technology | | :-------------- | :---------------------------------- | | Synaptics | Capacitive; In-cell | | Cypress | Capacitive; In-cell | | Touch International | Resistive; Capacitive | | Continental | Capacitive / hands-free entry systems | | Brose | Capacitive / hands-free entry systems | ASIC Controller Development Neonode's proprietary ASIC controllers are essential for its licensing customers and sensor modules, with three generations developed for various sensing applications - Neonode's licensing customers and sensor modules require the use of its proprietary Application Specific Integrated Circuit (ASIC) controllers[67] - The company has developed three generations of ASICs: NN1001 (shipping since 2012), NN1002 (shipping since 2015), and NN1003 (shipping since 2016 and powering sensor modules, designed for high-speed sensing applications)[67][68] Patent and Trademark Portfolio Neonode protects its technology through a robust intellectual property portfolio, including 160 issued patents and 23 pending patents as of December 31, 2018 - Neonode relies on intellectual property laws and contractual provisions to protect its technology, including patents, copyrights, and trademarks[69][70] Patent Portfolio as of December 31, 2018 | Jurisdiction | Issued Patents | Pending Patents | | :---------------------- | :------------- | :-------------- | | United States | 67 | 13 | | Europe | 12 | 5 | | Japan | 16 | 1 | | China | 10 | 1 | | South Korea | 12 | 1 | | Canada | 11 | 0 | | Australia | 16 | 0 | | Singapore | 16 | 0 | | Patent Convention Treaty | Not Applicable | 2 | | Total | 160 | 23 | - The company filed ten new patent applications in 2018 and maintains trademarks for brands like Neonode, zForce, AirBar, and others[72][73] R&D Expenditures Research and development expenditures totaled $5.3 million in 2018 and $6.1 million in 2017, primarily conducted in-house Research and Development Expenditures (in millions) | Year | Amount | | :--- | :----- | | 2018 | $5.3 | | 2017 | $6.1 | - R&D activities are primarily in-house, sometimes in collaboration with external partners[74] Workforce Demographics As of December 31, 2018, Neonode had 45 employees and 7 full-time consultants across its global operations Employee and Consultant Count as of December 31, 2018 | Category | Count | | :-------------------------- | :---- | | Employees | 45 | | Full-time Consultants | 7 | | General and Administrative | 10 | | Sales and Marketing | 6 | | Engineering | 24 | | Production | 5 | - Employees and consultants are located in the United States, Sweden, Japan, South Korea, and Taiwan[75] SEC Filings and Website Neonode is subject to SEC informational requirements, with reports and other information available on www.sec.gov and www.neonode.com - Neonode is subject to SEC informational requirements and files reports, proxy statements, and other information, available on www.sec.gov and www.neonode.com[76](index=76&type=chunk)[77] Risk Factors The company faces multiple risks in supply chain, regulations, and international trade - Investment in common stock involves a high degree of risk, and potential investors should consider factors described in this section and other SEC filings[78] - Business risks include limited manufacturing experience, dependence on a limited number of customers (61% of 2018 net revenues from three customers), reliance on customers' ability to design, manufacture and sell products, lengthy and unpredictable product development cycles, and dependence on component suppliers[79][81][82][84][85] - Other business risks include difficulty verifying royalty amounts, the need to successfully develop and introduce new touch technology, potential fluctuations in operating results, a history of losses requiring additional capital, and the need to enhance sales and technology development organizations[86][87][88][90][91] - Risks related to owning stock include potential delisting from Nasdaq, provisions in corporate documents and Delaware law that could delay or prevent a change in control, stock price volatility, and potential negative effects from future sales of common stock by stockholders or the company[104][106][107][110][112] - The company's ability to issue common stock is currently limited due to a lack of sufficient authorized shares, which may impact future capital raising and employee incentives[111] Unresolved Staff Comments The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[115] Properties Neonode leases office and workshop spaces in San Jose (U.S.), Tokyo (Japan), Stockholm (Sweden), Kungsbacka (Sweden), Seoul (South Korea), and Taipei (Taiwan) - Neonode leases office spaces in San Jose, CA; Tokyo, Japan; Stockholm, Sweden; Seoul, South Korea; and Taipei, Taiwan[116][117][119] - The company also leases a workshop in Kungsbacka, Sweden[118] Rent Expense (in thousands) | Year | Amount | | :--- | :----- | | 2018 | $687 | | 2017 | $681 | Legal Proceedings Neonode is not currently involved in any material legal proceedings, though it may face routine disputes in the ordinary course of business - The company is not currently involved in any material legal proceedings[121] Mine Safety Disclosures This item is not applicable to Neonode Inc - This item is not applicable[122] Part II Market for Common Equity, Stockholder Matters, and Equity Purchases Neonode's common stock is traded on the Nasdaq Stock Market under the symbol NEON, with approximately 3,660 stockholders of record as of March 1, 2019 - Neonode's common stock is quoted on the Nasdaq Stock Market under the symbol NEON[124] - As of March 1, 2019, there were approximately 3,660 stockholders of record[125] - The Board of Directors intends to retain all earnings for business use and does not anticipate paying cash dividends in the foreseeable future[126] Selected Financial Data This item is not applicable to Neonode Inc - This item is not applicable[128] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Neonode's financial performance and condition for the years ended December 31, 2018 and 2017 - The company's business model augmented licensing with manufacturing and shipping sensor modules in October 2017, with expectations that sensor component sales will constitute the majority of revenue over time[130][133] - Neonode adopted the new revenue recognition standard (ASC 606) on January 1, 2018, using a modified retrospective approach, which impacted the timing of license fee revenue recognition and accounts receivable/deferred revenues[183][362][363][366][369] - The company also adopted the new lease standard (ASC 842) on January 1, 2019, and expects to include two material operating leases on its balance sheet, with no anticipated equity adjustment[185][186][373][374] Summary of Financial Results (in thousands, except percentages) | Metric | 2018 | 2017 | Variance (Dollars) | Variance (Percent) | | :---------------------------------- | :----- | :----- | :----------------- | :----------------- | | Total Revenue | $8,538 | $10,241 | $(1,703) | (16.6)% | | Total Cost of Sales | $921 | $2,343 | $(1,422) | (60.7)% | | Total Gross Margin | $7,617 | $7,898 | $(281) | (3.6)% | | Total Operating Expenses | $11,494 | $13,374 | $(1,880) | (14.1)% | | Operating Loss | $(3,877) | $(5,476) | $1,599 | (29.2)% | | Net Loss attributable to Neonode Inc. | $(3,060) | $(4,705) | $1,645 | (34.9)% | | Net Loss per Share | $(0.52) | $(0.89) | $0.37 | (41.6)% | Business and Strategic Direction Neonode develops optical touch and gesture solutions, with 67 million devices sold using its technology, and is transitioning to sensor module sales while maintaining its AirBar consumer product - Neonode develops user interface and optical interactive touch and gesture solutions, with its patented technology capable of sensing object size, depth, velocity, pressure, and proximity[129] - Since 2010, licensing customers have sold approximately 67 million devices using Neonode's technology. In October 2017, the company began manufacturing and shipping sensor modules[130] - As of December 31, 2018, Neonode had 41 technology license agreements and six supply agreements for embedded sensor modules, with plans to expand sensor module offerings in 2019, expecting them to constitute the majority of revenue[131][132][133] - The company sells AirBar, a Neonode branded consumer product, but has no current plans to develop new consumer market products[134] Key Accounting Policies and Estimates This section details Neonode's critical accounting policies, including revenue recognition, inventory valuation, asset impairment, and stock-based compensation, all prepared under U.S. GAAP - Consolidated financial statements are prepared in accordance with U.S. GAAP, including Neonode Inc. and its wholly-owned subsidiaries, plus 51% majority-owned Pronode Technologies AB[136] - Significant estimates are made for revenue recognition (performance obligations, standalone selling price, variable consideration), uncollectible receivables, inventory net realizable value, recoverability of capitalized project costs and long-lived assets, deferred tax asset valuation allowance, and stock-based compensation fair value[140] - Revenue is recognized when control of products or services is transferred and accepted by customers, with distinct performance obligations defined in contracts[141] - License fees are recognized when the IP license is available and the customer has the right to use it, with unbilled fees estimated using prior royalty data. Engineering service revenue is recognized as work is performed and accepted[145][146][148] - Sensor module revenue recognition depends on the sales channel; point-of-sale revenue is recognized upon product provision, while distributor sales are recognized when distributors gain control over products[154][155] - Inventory is stated at the lower of cost or net realizable value using FIFO. A $1.1 million write-down for AirBar inventory was recorded in Q4 2017 due to obsolescence and repricing[160] - The company accounts for its 50% interest in Neoeye AB using the equity method, reviewing for impairment based on financial condition and prospects[161][162] - Property and equipment are depreciated using the straight-line method over estimated useful lives (3-7 years). Long-lived assets are assessed for impairment based on future cash flows[165][167] - Research and development costs are expensed as incurred, primarily consisting of personnel and external consultancy costs[168] - Stock-based compensation expense for employees and non-employees is measured at fair value on the grant date using the Black-Scholes model and recognized over the vesting period[169][170] - Foreign currency translation gains/losses are included as a separate component of accumulated other comprehensive income (loss), while transaction gains/losses are included in general and administrative expenses[173] Deferred Revenues by Source (in thousands) | Source | 2018 | 2017 | | :---------------------- | :--- | :----- | | Deferred license fees | $0 | $1,089 | | Deferred AirBar revenues | $59 | $137 | | Deferred sensor modules revenues | $16 | $22 | | Total | $75 | $1,248 | Impact of Recent Accounting Standards Neonode adopted new accounting standards for revenue recognition (ASC 606) in 2018 and leases (ASC 842) in 2019, with ongoing evaluation for credit losses and immaterial impacts from other ASUs - Adopted ASU 2014-09 (ASC 606, Revenue Recognition) on January 1, 2018, using a modified retrospective approach, resulting in an increase in accounts receivable and a reduction in deferred revenues[183][362][363][369] - Adopted ASU 2016-02 (ASC 842, Leases) on January 1, 2019, using a modified retrospective approach, and will include two material operating leases on the consolidated balance sheets, with no anticipated equity adjustment[185][186][373][374] - ASU 2016-13 (Credit Losses) is being evaluated for impact, while ASU 2016-16 (Intra-Entity Transfers of Assets) and ASUs related to income tax accounting (ASU 2018-09, ASU 2018-05) were adopted with immaterial impact or no tax expense due to negative accumulated foreign earnings and valuation allowances[187][188][189][190][375][376][377] Financial Performance Analysis Neonode's total revenue decreased by 16.6% in 2018, while gross margin improved to 89%, and net loss decreased by 34.9% to $3.1 million Revenue Breakdown (in thousands, except percentages) | Revenue Source | 2018 Amount | 2018 % of Total | 2017 Amount | 2017 % of Total | Variance (Dollars) | Variance (Percent) | | :---------------------- | :---------- | :-------------- | :---------- | :-------------- | :----------------- | :----------------- | | License Fees | $7,954 | 93.2% | $8,684 | 84.8% | $(730) | (8.4)% | | Sensor Modules | $227 | 2.7% | $814 | 7.9% | $(587) | (72.1)% | | NRE | $357 | 4.2% | $743 | 7.3% | $(386) | (52.0)% | | Total Revenue | $8,538 | 100% | $10,241 | 100% | $(1,703) | (16.6)% | Cost of Sales Breakdown (in thousands, except percentages) | Cost of Sales Source | 2018 Amount | 2018 % of Revenue | 2017 Amount | 2017 % of Revenue | Variance (Dollars) | Variance (Percent) | | :---------------------- | :---------- | :---------------- | :---------- | :---------------- | :----------------- | :----------------- | | Sensor Modules | $638 | 7.5% | $1,758 | 17.2% | $(1,120) | (63.7)% | | NRE | $283 | 3.3% | $585 | 5.7% | $(302) | (51.6)% | | Total Cost of Sales | $921 | 10.8% | $2,343 | 22.9% | $(1,422) | (60.7)% | Operating Expenses (in thousands, except percentages) | Operating Expense | 2018 Amount | 2018 % of Revenue | 2017 Amount | 2017 % of Revenue | Variance (Dollars) | Variance (Percent) | | :---------------------- | :---------- | :---------------- | :---------- | :-------------- | :----------------- | :----------------- | | Research and Development | $5,278 | 61.8% | $6,078 | 59.3% | $(800) | (13.2)% | | Sales and Marketing | $1,995 | 23.4% | $2,772 | 27.1% | $(777) | (28.0)% | | General and Administrative | $4,221 | 49.4% | $4,524 | 44.2% | $(303) | (6.7)% | | Total Operating Expenses | $11,494 | 134.6% | $13,374 | 130.6% | $(1,880) | (14.1)% | - Total gross margin increased to 89% in 2018 from 77% in 2017, primarily due to lower NRE revenues with low margins and a reduced inventory write-down ($0.4 million in 2018 vs. $1.1 million in 2017)[202] - Net loss decreased to $3.1 million in 2018 from $4.7 million in 2017[213] - The effective tax rate was 0% in 2018 and 1% in 2017, with valuation allowances recorded for deferred tax assets due to uncertainty of realization[212] Contractual Obligations and Off-Balance Sheet Items Neonode has no off-balance sheet financing arrangements but maintains significant non-cancellable operating and capital lease commitments, alongside ASIC integration agreements - Neonode has no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market/credit risk support[216] Future Minimum Payments Under Non-Cancellable Operating Lease Commitments (in thousands) as of December 31, 2018 | Years ending December 31, | Total | | :---------------------- | :---- | | 2019 | $457 | | 2020 | $89 | | 2021 | $3 | | Total | $549 | Schedule of Minimum Future Rentals on Non-Cancelable Capital Leases (in thousands) as of December 31, 2018 | Year ending December 31, | Total | | :---------------------- | :---- | | 2019 | $602 | | 2020 | $616 | | 2021 | $502 | | 2022 | $39 | | Total minimum payments required | $1,759 | | Less amount representing interest | $(56) | | Present value of net minimum lease payments | $1,703 | | Less current portion | $(570) | | Net Capital Lease Obligation | $1,133 | - The company has agreements with Texas Instruments (NN1002) and STMicroelectronics (NN1003) for ASIC integration, with $500,000 in non-recurring engineering costs to TI (unpaid as of Dec 31, 2018) and $835,000 paid to STMicro[226][227] Financial Liquidity and Funding Neonode's cash increased to $6.6 million in 2018, supported by $4.1 million in financing activities, including private placements, following a 1-for-10 reverse stock split Cash and Working Capital (in millions) | Metric | December 31, 2018 | December 31, 2017 | | :------------- | :---------------- | :---------------- | | Cash | $6.6 | $5.8 | | Working Capital | $8.2 | $6.2 | Net Cash Used in Operating Activities (in millions) | Year | Amount | | :--- | :----- | | 2018 | $(2.9) | | 2017 | $(5.6) | - Net cash provided by financing activities was $4.1 million in 2018 (from $4.6 million stock sale proceeds less $0.6 million capital lease payments) and $8.6 million in 2017 (from $9.1 million stock sale proceeds less $0.4 million lease down payments)[236] - In December 2018, the company sold 2,940,767 shares of common stock in a private placement for $4.6 million in net proceeds, with participation from directors, management, employees, and a major shareholder[238][280] - In August 2017, the company issued 975,000 shares of common stock and warrants in a private placement for $9.1 million in net proceeds. Warrants to purchase 325,000 shares at $20.00 per share became exercisable in August 2018 and expire in August 2020[239][281] - Management believes current business plans and capital from the December 2018 private placement provide sufficient short-term liquidity, but future capital may be required if operations do not become cash flow positive[245][246] - A 1-for-10 reverse stock split was effected on October 1, 2018, and authorized common stock was reduced from 100,000,000 to 10,000,000 shares[242][243] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to Neonode Inc - This item is not applicable[248] Financial Statements and Supplementary Data This section presents Neonode's audited consolidated financial statements for the years ended December 31, 2018 and 2017, including the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, and Cash Flows, along with detailed notes to the financial statements - The section includes the Report of Independent Registered Public Accounting Firm, confirming the fair presentation of consolidated financial statements for 2018 and 2017 in conformity with U.S. GAAP[253] - The consolidated financial statements include Balance Sheets, Statements of Operations, Comprehensive Loss, Stockholders' Equity, and Cash Flows for the years ended December 31, 2018 and 2017[250] Report of Independent Registered Public Accounting Firm KMJ Corbin & Company LLP audited Neonode's consolidated financial statements for 2018 and 2017, affirming their fair presentation in conformity with U.S. GAAP - KMJ Corbin & Company LLP audited the consolidated financial statements for 2018 and 2017, providing an opinion that they are presented fairly, in all material respects, in conformity with U.S. GAAP[253] - The audit was conducted in accordance with PCAOB standards, assessing risks of material misstatement and evaluating accounting principles and estimates[255][256] Consolidated Balance Sheets Neonode's consolidated balance sheets show a slight increase in total assets to $13.24 million and a significant decrease in total liabilities to $3.45 million in 2018 Key Balance Sheet Data (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :-------------------------------- | :---------------- | :---------------- | | Cash | $6,555 | $5,796 | | Accounts receivable and unbilled revenues, net | $1,830 | $1,010 | | Inventory | $1,219 | $1,154 | | Total current assets | $10,494 | $9,797 | | Total assets | $13,242 | $13,127 | | Total current liabilities | $2,313 | $3,583 | | Deferred revenues | $75 | $1,248 | | Total liabilities | $3,446 | $5,264 | | Total stockholders' equity | $9,796 | $7,863 | - Total assets increased slightly from $13.13 million in 2017 to $13.24 million in 2018[259] - Total liabilities decreased significantly from $5.26 million in 2017 to $3.45 million in 2018, largely due to a reduction in deferred revenues[259] Consolidated Statements of Operations Neonode's consolidated statements of operations show a 16.6% decrease in total revenues to $8.54 million and a 34.9% improvement in net loss to $(3.06) million in 2018 Key Income Statement Data (in thousands, except per share amounts) | Metric | 2018 | 2017 | | :---------------------------------- | :----- | :----- | | Total revenues | $8,538 | $10,241 | | Total cost of revenues | $921 | $2,343 | | Total gross margin | $7,617 | $7,898 | | Total operating expenses | $11,494 | $13,374 | | Operating loss | $(3,877) | $(5,476) | | Net loss attributable to Neonode Inc. | $(3,060) | $(4,705) | | Basic and diluted loss per share | $(0.52) | $(0.89) | - Total revenues decreased by 16.6% from $10.24 million in 2017 to $8.54 million in 2018[262] - Net loss attributable to Neonode Inc. improved by 34.9% from $(4.71) million in 2017 to $(3.06) million in 2018[262] Consolidated Statements of Comprehensive Loss Neonode's comprehensive loss improved to $(3.42) million in 2018, influenced by a foreign currency translation loss of $(357) thousand Key Comprehensive Loss Data (in thousands) | Metric | 2018 | 2017 | | :------------------------------------------ | :------- | :------- | | Net loss including noncontrolling interests | $(3,942) | $(5,495) | | Foreign currency translation adjustments | $(357) | $72 | | Comprehensive loss attributable to Neonode Inc. | $(3,417) | $(4,633) | - Comprehensive loss attributable to Neonode Inc. improved from $(4.63) million in 2017 to $(3.42) million in 2018[265] - Foreign currency translation adjustments resulted in a loss of $(357) thousand in 2018, compared to a gain of $72 thousand in 2017[265] Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $9.80 million in 2018, driven by $4.62 million from common stock sales and a $1.58 million ASC 606 adjustment Key Stockholders' Equity Changes (in thousands) | Metric | 2018 | 2017 | | :------------------------------------------ | :----- | :----- | | Balances, January 1 | $7,863 | $4,135 | | Stock option and warrant compensation expense | $29 | $72 | | Proceeds from sale of common stock, net | $4,620 | $9,079 | | Adjustment related to adoption of ASC 606 | $1,583 | - | | Foreign currency translation adjustment | $(357) | $72 | | Net loss | $(3,942) | $(5,495) | | Balances, December 31 | $9,796 | $7,863 | - Total stockholders' equity increased from $7.86 million in 2017 to $9.80 million in 2018[269] - Key drivers for the 2018 increase include $4.62 million from common stock sales and a $1.58 million adjustment from ASC 606 adoption, partially offset by a net loss of $3.06 million[269] Consolidated Statements of Cash Flows Net cash used in operating activities decreased to $(2.86) million in 2018, while financing activities provided $4.07 million, primarily from common stock issuance Key Cash Flow Data (in thousands) | Metric | 2018 | 2017 | | :------------------------------------------ | :------- | :------- | | Net cash used in operating activities | $(2,859) | $(5,581) | | Net cash used in investing activities | $(232) | $(656) | | Net cash provided by financing activities | $4,069 | $8,641 | | Effect of exchange rate changes on cash | $(219) | $(84) | | Net change in cash | $759 | $2,320 | | Cash at end of year | $6,555 | $5,796 | - Net cash used in operating activities decreased from $(5.58) million in 2017 to $(2.86) million in 2018[272] - Net cash provided by financing activities was $4.07 million in 2018, primarily from common stock issuance, compared to $8.64 million in 2017[272] Notes to the Consolidated Financial Statements The notes provide detailed information on Neonode's operations, financial performance, significant accounting policies, and intellectual property, including $185.2 million accumulated deficit and $59.7 million federal NOLs - The notes detail the company's background, organization, and operations, including its development and licensing of user interfaces and optical touch technology, and the manufacturing and sale of AirBar and embedded sensor modules[275][276] - The company incurred net losses of $3.1 million in 2018 and $4.7 million in 2017, with an accumulated deficit of $185.2 million as of December 31, 2018, and used cash in operating activities of $2.9 million and $5.6 million, respectively[277] - Significant accounting policies include revenue recognition (ASC 606 adoption), inventory valuation (FIFO, $1.1M write-down in 2017), property and equipment depreciation (straight-line), and stock-based compensation (Black-Scholes model)[289][290][296][297][303][351][352] - The company adopted new accounting standards for revenue recognition (ASC 606) in 2018 and leases (ASC 842) in 2019, with the former impacting accounts receivable and deferred revenues[362][372] Inventory Breakdown (in thousands) | Category | December 31, 2018 | December 31, 2017 | | :--------------- | :---------------- | :---------------- | | Raw materials | $246 | $164 | | Work-in-Process | $220 | $231 | | Finished goods | $753 | $759 | | Ending inventory | $1,219 | $1,154 | Property and Equipment, Net (in thousands) | Category | 2018 | 2017 | | :------------------------------------ | :----- | :----- | | Computers, software, furniture and fixtures | $1,407 | $1,313 | | Equipment under capital lease | $3,525 | $3,590 | | Less accumulated depreciation and amortization | $(2,448) | $(1,576) | | Property and equipment, net | $2,484 | $3,327 | Stock-Based Compensation Expense (in thousands) | Category | 2018 | 2017 | | :-------------------------- | :--- | :--- | | Research and development | $0 | $0 | | Sales and marketing | $6 | $50 | | General and administrative | $23 | $22 | | Total | $29 | $72 | - As of December 31, 2018, the company had 160 issued patents and 23 pending patents[69] - The company has federal, state, and foreign net operating losses of $59.7 million, $20.0 million, and $4.7 million, respectively, as of December 31, 2018, with a full valuation allowance against deferred tax assets[428] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with accountants on accounting and financial disclosure - There are no changes in or disagreements with accountants on accounting and financial disclosure[438] Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2018, concluding they are effective at a reasonable assurance level - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018[439] - Management assessed the effectiveness of internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2018[444] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2018[441] Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2018 - Management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2018, concluding they are effective at a reasonable assurance level[439] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2018 - There were no changes in internal control over financial reporting during the quarter ended December 31, 2018, that materially affected or are reasonably likely to materially affect internal control over financial reporting[441] Management's Annual Report on Internal Control over Financial Reporting Management assessed and concluded that internal control over financial reporting was effective as of December 31, 2018, based on the COSO framework - Management is responsible for establishing and maintaining adequate internal control over financial reporting and assessed its effectiveness as of December 31, 2018, using the COSO framework, concluding it was effective[442][444] Other Information The company reported no other information for this item - There is no other information to report[445] Part III Directors, Executive Officers and Corporate Governance The information required for this item will be incorporated by reference from the registrant's definitive proxy statement for the 2019 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2019 Annual Meeting of Stockholders' definitive proxy statement[447] Executive Compensation The information required for this item will be incorporated by reference from the registrant's definitive proxy statement for the 2019 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2019 Annual Meeting of Stockholders' definitive proxy statement[448] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item will be incorporated by reference from the registrant's definitive proxy statement for the 2019 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2019 Annual Meeting of Stockholders' definitive proxy statement[449] Certain Relationships and Related Transactions, and Director Independence The information required for this item will be incorporated by reference from the registrant's definitive proxy statement for the 2019 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2019 Annual Meeting of Stockholders' definitive proxy statement[450] Principal Accounting Fees and Services The information required for this item will be incorporated by reference from the registrant's definitive proxy statement for the 2019 Annual Meeting of Stockholders - Information for this item is incorporated by reference from the 2019 Annual Meeting of Stockholders' definitive proxy statement[451] Part IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements filed under Item 8 and provides a comprehensive table of exhibits, including corporate documents, warrant forms, securities purchase agreements, employment agreements, stock incentive plans, and certifications - The consolidated financial statements are listed in the index to the consolidated financial statements and filed under Item 8 of this Annual Report[454] - Financial statement schedules are not applicable[455] - The exhibits include corporate documents (Restated Certificate of Incorporation, Bylaws), various warrant forms and Securities Purchase Agreements (2016, 2017, 2018), employment agreements for key executives, the 2015 Stock Incentive Plan, and certifications (Sarbanes-Oxley Act)[456] Financial Statements The consolidated financial statements are listed in the index and filed under Item 8 of this Annual Report - The consolidated financial statements of the registrant are listed in the index to the consolidated financial statements and filed under Item 8 of this Annual Report[454] Financial Statement Schedules Financial Statement Schedules are not applicable - Financial Statement Schedules are not applicable[455] Exhibits The exhibits include corporate documents, warrant forms, securities purchase agreements, employment agreements, stock incentive plans, and Sarbanes-Oxley Act certifications - The exhibits include corporate documents (Restated Certificate of Incorporation, Bylaws), various warrant forms and Securities Purchase Agreements (2016, 2017, 2018), employment agreements for key executives, the 2015 Stock Incentive Plan, and certifications (Sarbanes-Oxley Act)[456] Form 10-K Summary The company reported no Form 10-K summary for this item - There is no Form 10-K summary[457]