Neonode(NEON) - 2019 Q4 - Annual Report

Special Note on Forward-Looking Statements This report contains forward-looking statements subject to inherent risks and uncertainties that may affect future plans, business strategy, results of operations, and financial position - This report contains forward-looking statements subject to inherent risks and uncertainties that may affect future plans, business strategy, results of operations, and financial position[15] - Key factors that could cause actual results to differ materially include a history of losses, dependence on limited customers, reliance on customer product development, supply chain issues, difficulty verifying royalties, limited manufacturing experience, competition, dependence on key management, intellectual property defense costs, capital needs, and stock listing status[15] - The company does not undertake responsibility to update or revise any forward-looking statements[15] PART I This section details the company's business operations, risk factors, properties, and legal proceedings Item 1. Business Neonode Inc. develops optical touch and gesture control solutions (zForce) and remote sensing for human-machine interface (HMI), primarily licensing its technology to Original Equipment Manufacturers (OEMs) and Tier 1 suppliers. The company also designs and manufactures zForce AIR sensor modules and sells the AirBar consumer product, aiming to expand into new markets and develop next-generation products Our Company Neonode Inc. was incorporated in Delaware in 1997, with its principal executive office in Stockholm, Sweden, and several wholly-owned subsidiaries - Neonode Inc. was incorporated in Delaware on September 4, 1997, with its principal executive office in Stockholm, Sweden, and a U.S. office in San Jose, California[23] - The company has established several wholly-owned subsidiaries and a majority-owned consolidated subsidiary (Pronode Technologies AB) and entered into a joint venture (Neoeye AB) since 2008[24][252] Strategy and Focus Areas Neonode's strategy is to deliver value-adding HMI and remote sensing solutions and products, offering specialized engineering services for integration into customer systems - Neonode's strategy is to deliver value-adding HMI and remote sensing solutions and products, offering specialized engineering services for integration into customer systems[25] - The company aims to remain a leader in optical touch and gesture control, pursuing opportunities in both licensing and product sales, expanding to new markets, and developing next-generation products with better price, performance, and architectural advantages[26] Business Model Neonode's business model primarily involves licensing its zForce technology and selling zForce AIR sensor modules, with engineering services offered for integration Licensing The company licenses its technology to OEMs and Tier 1 suppliers, earning per-unit royalties and offering engineering consulting services - As of December 31, 2019, Neonode had 42 technology license agreements with global OEMs, ODMs, and Tier 1 suppliers, with 16 customers actively shipping products embedding their technology[28][29][118] - The company earns royalties on a per-unit basis when customers ship products using its technology, typically after a product development and release cycle of 6 to 36 months[29] - Licensing customers must use Neonode's Application Specific Integrated Circuit (ASIC) controllers, developed with and sold by Texas Instruments and ST Microelectronics[30] - Engineering consulting services are offered to licensing customers on a flat or hourly rate basis, primarily during the development and initial manufacturing phases[31] Product Sales Neonode designs and manufactures zForce AIR sensor modules for various markets and sells the AirBar consumer product through distributors - Neonode designs and manufactures zForce AIR sensor modules for OEMs, ODMs, and Tier 1 suppliers in medical, automotive, and aeronautic markets[32][34] - The company also sells its Neonode branded AirBar product, a plug-and-play accessory for notebook computers, through distributors[33] - Over time, Neonode expects a significant portion of its revenues to be derived from sales of sensor modules[34][120] Markets Neonode's solutions are applied in automotive, printers, office equipment, medical technology, industrial control systems, and avionics markets - In the automotive market, Neonode's solutions address HMI and remote sensing needs, acting as a Tier 2 component supplier with license agreements with several Tier 1 suppliers[35][36] - Customer product shipments in the automotive segment decreased from approximately 1.1 million in 2018 to 0.9 million in 2019[37] - In the printers and office equipment market, Neonode has operational license agreements with three leading global OEMs, with customers shipping approximately 5 million printers in 2019 and 37 million cumulatively since mid-2014[38] - Other markets served include medical technology, industrial control systems, and avionics, with ongoing development projects and increasing demand for remote sensing solutions[39][40] Product Backlog The zForce AIR sensor module product backlog was approximately $56,000 as of February 26, 2020, for orders expected within 60 days - The zForce AIR sensor module product backlog was approximately $56,000 as of February 26, 2020, for orders confirmed to be shipped within 60 days to two customers[41] - The company does not believe its product backlog is necessarily indicative of actual product revenue for any future period due to short cycle times and potential order cancellations[41] Distribution, Sales and Marketing Neonode manages sales and marketing from Stockholm, Sweden, with offices globally, serving OEMs, ODMs, and Tier 1 suppliers through licensing and sensor module sales - For licensing, OEMs, ODMs, and Tier 1 suppliers are primary customers, with technology licensing agreements typically having an initial term of three years and automatic one-year renewals[42] - Engineering services (NRE) are sold during the development and launch phases of customer products[42] - For sensor module sales, OEMs, ODMs, and Tier 1 suppliers are primary customers, with modules manufactured by the majority-owned subsidiary Pronode in Sweden[44] - Sales and marketing operations are managed from Stockholm, Sweden, with sales offices in the United States, Sweden, South Korea, Japan, and Taiwan, and products also sold through external sales representatives, partners, and distributors[45] Customers Neonode has 42 technology license agreements with 16 active shipping customers, but faces high customer concentration with three customers representing 72% of receivables - As of December 31, 2019, Neonode had 42 technology license agreements (up from 41 in 2018), with 16 customers currently shipping products such as e-readers, tablets, printers, automotive consoles, and GPS devices[47][118][181] - Customer concentration is high, with three customers representing approximately 72% of consolidated accounts receivable and unbilled revenues as of December 31, 2019 (compared to four customers representing 67% in 2018)[48][285] Major Revenue Contributors (10% or more of revenues) | Customer | 2019 Revenue % | 2018 Revenue % | | :--------------------- | :------------- | :------------- | | Hewlett-Packard Company | 38% | 35% | | Epson | 14% | 16% | | Alpine | - | 15% | | Canon | 12% | - | Revenues by Market and Geography Revenue distribution by market shows consumer electronics as the largest segment, while geographically, the U.S. and Japan are primary contributors Revenues by Market (as % of total revenues) | Market | 2019 | 2018 | | :----------------- | :--- | :--- | | Automotive | 28% | 19% | | Consumer electronics | 62% | 74% | | Sensor modules | 8% | 3% | | NRE | 2% | 4% | | Total | 100% | 100% | Revenues by Geographic Region (as % of total revenues) | Region | 2019 | 2018 | | :------- | :--- | :--- | | U.S. | 48% | 50% | | Japan | 32% | 34% | | China | 5% | 3% | | Germany | 9% | 9% | | Other | 6% | 4% | | Total| 100% | 100% | Total Assets by Geographic Region (in thousands) | Region | 2019 | 2018 | | :-------- | :------ | :------- | | U.S. | $2,898 | $2,828 | | Sweden | $4,430 | $10,308 | | Asia | $108 | $106 | | Total | $7,436 | $13,242 | Competition Neonode faces competition from various touch and gesture control technologies, including resistive, capacitive, other optical, ultrasonic, and radar solutions - Neonode faces competition from various touch and gesture control technologies, including resistive, capacitive, other optical, ultrasonic, and radar solutions[55] - Projective capacitive technology is a prevalent standard in mobile phones and tablets, posing significant competition, requiring continuous technology development and improvement to maintain market share[55] Intellectual Property Neonode protects its technology through patents, copyrights, trademarks, and trade secrets, and assigned a patent portfolio to Aequitas Technologies LLC for monetization - Neonode relies on patents, copyrights, trademarks, and trade secrets to protect its proprietary technology, covering user interfaces, optics, controller integrated circuits, drivers, and applications[57][58] Patent Portfolio (as of December 31, 2019) | Jurisdiction | No. of Issued Patents | No. of Patents Pending | | :---------------------- | :-------------------- | :--------------------- | | United States | 59 | 9 | | Europe | 11 | 5 | | Japan | 11 | 0 | | China | 8 | 0 | | South Korea | 12 | 0 | | Canada | 2 | 0 | | Australia | 1 | 0 | | Singapore | 2 | 0 | | Patent Convention Treaty | Not Applicable | 2 | | Total: | 106 | 16 | - On May 6, 2019, Neonode assigned a patent portfolio to Aequitas Technologies LLC for monetization, retaining a non-exclusive, royalty-free, perpetual license and the right to receive 50% of net proceeds[60][376] - The company protects its brand by registering trademarks globally, including Neonode, zForce, AirBar, and others[62] Research and Development Research and development expenses were $5.2 million in 2019, primarily focused on in-house technology and software platform development Research and Development Expenses (in millions) | Year | R&D Expenses | | :--- | :----------- | | 2019 | $5.2 | | 2018 | $5.3 | - Research and development activities are predominantly in-house but may also involve collaboration with external partners and specialists[63] Employees As of December 31, 2019, Neonode had 46 employees and 14 consultants across engineering, administration, sales, marketing, and production - As of December 31, 2019, Neonode had 46 employees and 14 full-time consultants, with 27 in engineering, 9 in general and administrative, 6 in sales and marketing, and 4 in production[64] - Employees and consultants are located in the United States, Sweden, Japan, South Korea, and Taiwan[64] Additional Information Neonode is subject to SEC informational requirements, with reports available on the SEC's and company's websites - Neonode is subject to SEC informational requirements and files reports (e.g., 10-K, 10-Q, 8-K) which are available on the SEC's website (www.sec.gov) and the company's website (www.neonode.com)[65](index=65&type=chunk)[66] Item 1A. Risk Factors This section outlines significant risks that could materially harm Neonode's business, financial condition, results of operations, or cash flows. These risks include a history of losses, high customer concentration, reliance on third-party product development and component suppliers, challenges in manufacturing and new technology introduction, operational fluctuations, dependence on key personnel, intellectual property enforcement issues, foreign currency exposure, cybersecurity threats, and various stock-related risks such as price volatility and potential delisting Risks Related to Our Business Neonode faces risks including a history of losses, high customer concentration, reliance on third-party product development and suppliers, and dependence on key personnel - Neonode has a history of substantial net losses since inception and may require additional capital, which might not be available on commercially attractive terms or at all[68] - The company is highly dependent on a limited number of customers; in 2019, three customers represented approximately 72% of consolidated net revenues, and the loss or reduction in business from a major customer could have a material adverse effect[69] - Revenues rely on customers' ability to design, manufacture, and sell products incorporating Neonode's touch technology, and lengthy, unpredictable product development cycles (18 to 60 months) can cause revenue fluctuations[70][71] - Reliance on component suppliers (e.g., Texas Instruments, ST Microelectronics) for ASICs and microcontrollers, with potential disruptions from global events like COVID-19, could adversely affect manufacturing and sales[72] - Limited experience in manufacturing hardware products and the need to continuously develop and introduce new, cost-effective touch technology are significant risks to competitiveness and revenue generation[74][76] - Operating results may fluctuate significantly due to factors such as competitor actions, infrastructure upgrades, key personnel retention, technical difficulties, economic conditions (including COVID-19), and strategic pricing decisions[79][80] - The company is dependent on key personnel, including its CEO and CFO, and the unplanned loss of any management member could have a materially adverse effect[83] Risks Related to Our Intellectual Property The company's growth depends on intellectual property licensing, with risks in protection, enforcement, and the success of patent monetization efforts - Neonode's revenues and growth depend on licensing fees from its intellectual property, and failure to protect or enforce these rights successfully could harm its competitive position and results of operations[84] - Strategic efforts around patent monetization, including the assignment of a portfolio to Aequitas Technologies LLC, may not be successful and could negatively impact financial condition[85] - Enforcing intellectual property rights against infringement can be expensive and time-consuming, with no assurance of success, and foreign countries may not provide the same level of protection as the United States[86][87] Risks Related to Our International Presence and IT Infrastructure International operations expose Neonode to currency risks, while cybersecurity threats and internal control weaknesses pose operational and financial reporting risks - Neonode's international presence exposes it to currency risks, primarily the Swedish Krona relative to the U.S. dollar, which could adversely affect operating results[88] - Security breaches and other disruptions to information technology infrastructure, including those managed by third parties, could interfere with operations, compromise confidential information, and expose the company to liability[89][90][91] - Failure to detect material weaknesses in internal control over financial reporting could adversely affect financial reporting and public confidence[92] Risks Related to Owning Our Stock Stock ownership risks include potential dilution from future sales, price volatility, and impacts from delisting or a limited number of controlling stockholders - Future sales of common stock, including through capital-raising activities, could adversely affect its price and dilute existing stockholders' investments[93] - The company is eligible to terminate its U.S. public company registration due to having fewer than 300 stockholders of record, which would reduce disclosure requirements[94] - Delisting from the Nasdaq Stock Market or a potential listing on Nasdaq Stockholm could adversely affect liquidity, trading prices, and the ability to raise capital[95][96][97] - The company's stock price has been volatile due to various factors, including operating results, competitor actions, new technologies, economic conditions, and analyst recommendations[98][102] - A limited number of stockholders, including directors, hold a significant portion of outstanding common stock, which could impact stockholder votes and delay or prevent a change in control[100][101] Item 1B. Unresolved Staff Comments There are no unresolved staff comments Item 2. Properties As of December 31, 2019, Neonode leased approximately 7,000 square feet for its corporate headquarters in Stockholm, Sweden, and additional office facilities in the United States, Japan, South Korea, and Taiwan. Its majority-owned subsidiary, Pronode Technologies AB, leased a 9,000 square foot workshop in Kungsbacka, Sweden. The company believes its current facilities are adequate for its needs - Leased approximately 7,000 square feet for corporate headquarters in Stockholm, Sweden, and additional office facilities in the United States, Japan, South Korea, and Taiwan[105] - Majority subsidiary Pronode Technologies AB leased a workshop of approximately 9,000 square feet in Kungsbacka, Sweden[105] - The company believes its facilities are adequate and suitable for current needs[106] Item 3. Legal Proceedings Neonode is not currently involved in any material legal proceedings, although it may become subject to claims and litigation in the ordinary course of business - The company is not currently involved in any material legal proceedings[107] - From time to time, Neonode may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business[107] Item 4. Mine Safety Disclosures This item is not applicable to Neonode Inc PART II This section covers the market for Neonode's common equity, selected financial data, management's discussion and analysis, and financial statements Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Neonode's common stock is quoted on the Nasdaq Stock Market under the symbol NEON. As of March 2, 2020, there were approximately 150 stockholders of record. The Board of Directors intends to retain all earnings for business use and does not anticipate paying cash dividends in the foreseeable future - Neonode's common stock is quoted on the Nasdaq Stock Market under the symbol NEON[111] - As of March 2, 2020, there were approximately 150 stockholders of record of the common stock[112] - The Board of Directors intends to retain all earnings for use in the business and does not anticipate paying cash dividends in the foreseeable future[113] Item 6. Selected Financial Data This item is marked as 'Not Applicable' in the report Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of Neonode's business, critical accounting policies, and a detailed analysis of its financial performance for 2019 and 2018. The company experienced a total revenue decrease of 22.2% in 2019, primarily due to a decline in license fees and non-recurring engineering (NRE) fees, partially offset by a significant increase in sensor module sales. Neonode reported a net loss of $5.3 million in 2019, an increase of 73.1% from 2018, driven by operating expenses that outpaced revenue. The company's liquidity decreased, and it continues to operate on a going concern basis, potentially requiring additional capital Overview Neonode develops user interface and optical interactive touch and gesture solutions, licensing its technology and manufacturing sensor modules, with plans to expand product offerings - Neonode develops user interface and optical interactive touch and gesture solutions, licensing its technology to OEMs and Tier 1 suppliers, who have sold approximately 73 million devices using the technology since 2010[116][117][177] - In October 2017, Neonode augmented its licensing business by manufacturing and shipping sensor modules, and it plans to expand these offerings in 2020, expecting sensor module sales to eventually constitute the majority of its revenue[117][119][120] - As of December 31, 2019, the company had 42 technology license agreements (up from 41 in 2018), with 16 customers actively shipping products using its touch technology[118][181] - The company started selling AirBar, a Neonode branded consumer product, in Q4 2016 but has no current plans to develop new Neonode branded products for consumer markets[121] Critical Accounting Policies and Estimates This section details Neonode's critical accounting policies and estimates, including revenue recognition, inventory valuation, and the adoption of new accounting pronouncements Estimates Financial statement preparation requires significant estimates and judgments for revenue recognition, asset recoverability, leases, and stock-based compensation - The preparation of financial statements in conformity with U.S. GAAP requires making significant estimates and judgments that affect reported amounts of assets, liabilities, revenue, and expenses[126][127][266][267] - Key estimates include revenue recognition (performance obligations, standalone selling price, transaction prices, transfer of control), variable consideration, uncollectible receivables, inventory net realizable value, asset recoverability, leases, deferred tax assets valuation allowance, and fair value of stock-based compensation[127][267] Revenue Recognition Revenue is recognized upon transfer of control or service completion, with specific policies for licensing, engineering services, and sensor module sales - Revenue is recognized when control of products is transferred to customers or when services are completed and accepted, reflecting the consideration expected for those products or services[128][290] - Licensing revenues are recognized when the intellectual property license is made available and the customer has the right to use it, with unbilled license fees estimated based on prior royalty data[132][133][293][294] - Engineering services revenues are recognized as work is performed and accepted by customers, typically on an hourly rate basis, with upfront payments recorded as unearned revenue[135][137][296][297] - Sensor module revenues are recognized when distributors obtain control over products, or at point-of-sale for direct sales, with allowances for returns and cooperative marketing programs based on historical experience[142][143][144][302][303][304] Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable are stated at net realizable value, with allowances for estimated losses based on customer financial history and collection experience - Accounts receivable are stated at net realizable value, with allowances maintained for estimated losses from customers' inability to make payments, based on financial history, past due status, and historical collection experience[145][271] Allowance for Doubtful Accounts (in thousands) | Year | Allowance for Doubtful Accounts | | :--- | :------------------------------ | | 2019 | $85 | | 2018 | $149 | Inventory Inventory is valued at the lower of cost or net realizable value using FIFO, with write-downs for advance payments and slow-moving components - Inventory is stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) method[147][273] - In 2019, the company wrote down $0.3 million for advance payments for module components and reserved 100% of slow-moving AirBar components; in 2018, a $0.4 million write-down was recorded for obsolete or slow-moving AirBar inventory[147][187][274][275] Inventory Composition (in thousands) | Category | December 31, 2019 | December 31, 2018 | | :---------------- | :---------------- | :---------------- | | Raw materials | $396 | $246 | | Work-in-process | $186 | $220 | | Finished goods | $448 | $753 | | Ending inventory | $1,030 | $1,219 | Investment in Joint Venture Neonode invested $3,000 for a 50% interest in Neoeye AB, accounted for using the equity method, with no operations through December 31, 2019 - Neonode invested $3,000 for a 50% interest in Neoeye AB, accounted for using the equity method, with no operations through December 31, 2019[149][278] Projects in Process Projects in process include capitalized direct engineering labor and project-specific equipment costs, deferred until revenue recognition - Projects in process consist of capitalized direct engineering labor and project-specific equipment costs, deferred until revenue recognition[150][272] Projects in Process (in thousands) | Year | Projects in Process | | :--- | :------------------ | | 2019 | $8 | | 2018 | $0 | Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization, computed using the straight-line method over estimated useful lives - Property and equipment are stated at cost, net of accumulated depreciation and amortization, computed using the straight-line method over estimated useful lives (3-7 years)[152][279] - Depreciation and amortization expense was $0.9 million in 2019 and $1.0 million in 2018[342] Long-Lived Assets Impairment of long-lived assets is assessed by estimating future cash flows; as of December 31, 2019, no impairment was believed to exist - Impairment of long-lived assets is assessed by estimating future cash flows; as of December 31, 2019, no impairment was believed to exist[154][283] Research and Development Research and development costs, primarily personnel and external consultancy, are expensed as incurred - Research and development costs, primarily personnel and external consultancy costs, are expensed as incurred[155][320] Stock-Based Compensation Expense The cost of employee services for equity awards is measured at estimated fair value on the grant date and recognized as compensation expense over the vesting period - The cost of employee services for equity awards, including share options, is measured at estimated fair value on the grant date and recognized as compensation expense over the vesting period[156][321] - The Black-Scholes option pricing model is used to determine the estimated fair value of options and warrants[157][322] Non-controlling Interests Non-controlling interests represent the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to Neonode, recognized as a separate equity item - Non-controlling interests (minority interests) are recognized as a separate line item in equity and represent the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to Neonode[158][324] Foreign Currency Translation and Transaction Gains and Losses Foreign currency translation gains/losses are included in accumulated other comprehensive income, while transaction gains/losses affect operating results - The functional currency of foreign subsidiaries is the local currency (Swedish Krona, Japanese Yen, South Korean Won, Taiwan Dollar); translation gains/losses are included as a separate component of accumulated other comprehensive income (loss)[161][284] Foreign Currency Transaction Gains/(Losses) (in thousands) | Year | Transaction Gains/(Losses) | | :--- | :------------------------- | | 2019 | $105 | | 2018 | $(58) | Foreign Currency Translation Gains/(Losses) (in thousands) | Year | Translation Gains/(Losses) | | :--- | :------------------------- | | 2019 | $(183) | | 2018 | $(357) | Net Loss per Share Net loss per share is computed based on the weighted-average number of common shares outstanding, adjusted for the 1-for-10 reverse stock split - Net loss per share is computed based on the weighted-average number of common shares outstanding, adjusted for the 1-for-10 reverse stock split on October 1, 2018[162][163][328] - Potential common stock equivalents (warrants, convertible preferred stock, stock options) are excluded from diluted EPS calculations for 2019 and 2018 due to their anti-dilutive effect[163][395] Other Comprehensive Income (Loss) Other comprehensive income (loss) includes foreign currency translation gains and losses, reflected as a separate component of stockholders' equity - Other comprehensive income (loss) includes foreign currency translation gains and losses, reflected as a separate component of stockholders' equity[164][329] Cash Flow Information Cash flows in foreign currencies are converted to U.S. Dollars using approximate weighted-average exchange rates for the respective reporting periods - Cash flows in foreign currencies are converted to U.S. Dollars using approximate weighted-average exchange rates for the respective reporting periods[165][330] Weighted-Average Exchange Rates for Consolidated Statements of Operations | Currency | 2019 | 2018 | | :---------------- | :----- | :----- | | Swedish Krona | 9.46 | 8.70 | | Japanese Yen | 109.01 | 110.43 | | South Korean Won | 1,165.70 | 1,100.50 | | Taiwan Dollar | 30.90 | 30.15 | Exchange Rates for Consolidated Balance Sheets (as of December 31) | Currency | 2019 | 2018 | | :---------------- | :------- | :------- | | Swedish Krona | 9.34 | 8.87 | | Japanese Yen | 108.66 | 109.69 | | South Korean Won | 1,154.56 | 1,113.63 | | Taiwan Dollar | 30.00 | 30.61 | Deferred Revenues Deferred revenues consist of prepayments for license fees, products, or services, and upfront payments for future non-recurring engineering services - Deferred revenues consist of prepayments for license fees, products, or services, and upfront payments for future non-recurring engineering services, recognized when accounting requirements are met[167][168][316][317] Deferred Revenues by Source (in thousands) | Source | 2019 | 2018 | | :----------------------- | :--- | :--- | | Deferred license fees revenues | $28 | $- | | Deferred NRE revenues | $20 | $- | | Deferred AirBar revenues | $6 | $59 | | Deferred sensor modules revenues | $13 | $16 | | Total | $67 | $75 | - Contracted revenue not yet recognized was $67,000 as of December 31, 2019, with approximately 100% expected to be recognized over the next twelve months[318] New Accounting Pronouncements Neonode adopted ASU No. 2016-02 (Leases) in 2019 and is evaluating the impact of ASU No. 2016-13 (Credit Losses) and ASU 2019-12 (Income Taxes) - Neonode adopted ASU No. 2016-02, 'Leases (Topic 842),' on January 1, 2019, using the modified retrospective approach and electing practical expedients, resulting in the recognition of operating lease right-of-use assets and obligations[170][171][172][334][335][336] - The company is evaluating the impact of ASU No. 2016-13, 'Financial Instruments-Credit Losses (Topic 326),' which was delayed for smaller reporting companies until fiscal years beginning after December 15, 2022, and ASU 2019-12, 'Income Taxes (Topic 740),' effective for fiscal years beginning after December 15, 2020[173][174][175][338][339] Results of Operations This section provides a detailed analysis of Neonode's financial performance, including revenues, gross margin, operating expenses, and net loss for 2019 and 2018 Financial Results Summary Total revenue decreased by 22.2% in 2019, leading to a 73.1% increase in net loss attributable to Neonode Inc Summary of Financial Results (in thousands, except percentages) | Metric | 2019 | 2018 | Variance (Dollars) | Variance (Percent) | | :-------------------------------------- | :---------- | :---------- | :----------------- | :----------------- | | Revenue: | | | | | | License Fees | $5,966 | $7,954 | $(1,988) | (25.0)% | | Sensor Modules | $560 | $227 | $333 | 146.7% | | NRE | $120 | $357 | $(237) | (66.4)% | | Total Revenue | $6,646 | $8,538 | $(1,892) | (22.2)% | | Cost of Sales: | | | | | | Sensor Modules | $499 | $638 | $(139) | (21.8)% | | NRE | $184 | $283 | $(99) | (35.0)% | | Total Cost of Sales | $683 | $921 | $(238) | (25.8)% | | Total Gross Margin | $5,963 | $7,617 | $(1,654) | (21.7)% | | Operating Expense: | | | | | | Research and Development | $5,239 | $5,278 | $(39) | (0.7)% | | Sales and Marketing | $2,158 | $1,995 | $163 | 8.2% | | General and Administrative | $4,296 | $4,221 | $75 | 1.8% | | Total Operating Expenses | $11,693 | $11,494 | $199 | 1.7% | | Operating Loss | $(5,730)| $(3,877)| $(1,853) | 47.8% |\ | Net Loss attributable to Neonode Inc. | $(5,298)| $(3,060)| $(2,238) | 73.1% | | Net Loss attributable to Neonode Inc. Per Share | $(0.60) | $(0.52) | $(0.08) | 15.4% | Revenues Total revenues decreased by 22.2% in 2019, driven by lower license fees from e-reader and printer customers, partially offset by increased sensor module sales - Total revenues decreased by 22.2% to $6.6 million in 2019 from $8.5 million in 2018[178] - License fees, the majority of total revenue, decreased by 25% in 2019 compared to 2018, primarily due to an 87% decrease from e-reader customers and a 27% decrease from printer customers, partially offset by a 13% increase from automotive customers[182] - Sensor module sales increased by 146.7% to $560,000 in 2019 from $227,000 in 2018, with efforts focused on markets like medical technology, industrial control systems, and avionics[178][183] - Revenues from license fees and sensor module sales may be negatively impacted in 2020 due to the coronavirus (COVID-19) outbreak, affecting component availability and product demand[184] Non-recurring engineering fees ("NRE") NRE fees decreased by 66% in 2019 due to a decline in new license customers and related design projects, with a shift in project focus to avionics - NRE fees decreased 66% in 2019 compared to 2018, due to a decline in new license customers and related design projects[185] - In 2019, 62% of total NRE fees were earned from avionics projects (compared to 0% in 2018), while 0% were from automotive projects (compared to 80% in 2018)[185] Gross Margin The combined total gross margin slightly increased to 90% in 2019, primarily due to higher margins on sensor module sales, despite lower NRE gross margins - The combined total gross margin slightly increased to 90% in 2019 from 89% in 2018, primarily due to higher margins on sensor module sales, partially offset by increased valuation reserves for slow-moving/obsolete inventory and lower NRE gross margins[186] - License fees maintained a 100% gross margin, while NRE projects had a (53%) gross margin in 2019 (compared to 21% in 2018) due to investments in customer projects in new markets[187] - In 2019, the company wrote down $0.3 million for an advance payment for module components and a reservation of AirBar components[187] Research and Development R&D expenses decreased by 1% in 2019, representing 79% of total revenue, with a focus on developing technology and software platforms for sensor modules - R&D expenses decreased by 1% in 2019 compared to 2018 (primarily currency related), representing 79% of total revenue in 2019 (compared to 62% in 2018)[189] - The R&D department had 27 employees and 7 consultants in 2019, focusing on developing technology and software platforms for sensor modules and customer integration[189][190] Sales and Marketing Sales and marketing expenses increased by 8.2% in 2019, primarily due to investment in a new partner program, representing 32% of total revenue - Sales and marketing expenses increased by 8.2% in 2019 compared to 2018, primarily due to investment in a new partner program, representing 32% of total revenue (compared to 23% in 2018)[191] - The sales team focuses on OEM, ODM, and Tier 1 customers for technology licensing or sensor module purchases, with plans to expand activities in 2020 and future years[192] General and Administrative General and administrative expenses increased by 2% in 2019, primarily due to a write-down of prepaid prototype work, representing 65% of revenue - General and administrative (G&A) expenses increased by 2% in 2019 from 2018, primarily due to a write-down of prepaid prototype work, representing 65% of revenue (compared to 49% in 2018)[193] - As of December 31, 2019, the G&A department had nine full-time employees and one consultant[193] Interest Expense Interest expense, primarily related to finance leases, decreased from $49,000 in 2018 to $34,000 in 2019 Interest Expense (in thousands) | Year | Interest Expense | | :--- | :--------------- | | 2019 | $34 | | 2018 | $49 | - Interest expense was mainly related to finance leases[194] Foreign Currency Translation and Transaction Gains and Losses Foreign currency transaction gains were $105,000 in 2019, while translation losses were $(183,000), impacting operating results and comprehensive income - Foreign currency transaction gains were $105,000 in 2019 (compared to losses of $(58,000) in 2018), included in general and administrative expenses[195] - Foreign currency translation losses were $(183,000) in 2019 (compared to $(357,000) in 2018), included as a separate component of accumulated other comprehensive income (loss)[195] Income Taxes The effective tax rate was 0% in both 2019 and 2018, with valuation allowances recorded for deferred tax assets due to uncertainty of realization - The effective tax rate was 0% in both 2019 and 2018, with valuation allowances recorded for deferred tax assets due to uncertainty of realization[196] Net Loss Net loss increased to $5.3 million in 2019 from $3.1 million in 2018 Net Loss (in millions) | Year | Net Loss | | :--- | :------- | | 2019 | $5.3 | | 2018 | $3.1 | Contractual Obligation and Off-Balance Sheet Arrangements Neonode has a $210,000 bank guarantee for AirBar packaging material and no other material off-balance sheet arrangements - Neonode has a bank guarantee of $210,000 in favor of a manufacturing partner for AirBar packaging material, valid until December 31, 2020[198][374] - The company does not have any other material off-balance sheet arrangements or special purpose entities that would affect its liquidity or capital resources[198][200] Operating Leases Neonode leases office facilities and a workshop in various global locations, with rent expense of $649,000 in 2019 - Neonode leases office facilities in San Jose, Stockholm, Seoul, Taipei, and Tokyo, and a workshop in Kungsbacka, Sweden[201][202][203] Rent Expense (in thousands) | Year | Rent Expense | | :--- | :----------- | | 2019 | $649 | | 2018 | $687 | Equipment Subject to Finance Lease Neonode has finance leases for specialized milling and component production equipment with varying terms and implicit interest rates - Neonode has finance leases for specialized milling equipment (entered April 2014, 6-year term, 4% implicit interest rate) and component production equipment (entered 2016-2018, 3-5 year terms, 1.5-3% implicit interest rates)[206][207][208][209] Non-Recurring Engineering Development Costs Neonode has NRE development agreements with Texas Instruments and STMicroelectronics for ASIC integration, having reimbursed STMicro $835,000 - Under the NN1002 Agreement with Texas Instruments (TI), Neonode agreed to pay $500,000 for ASIC integration, but no payments were made as of December 31, 2019[210][377] - Under the NN1003 Agreement with STMicroelectronics (STMicro), Neonode reimbursed STMicro a total of $835,000 for non-recurring engineering costs for ASIC integration as of December 31, 2019[211][377] Liquidity and Capital Resources Neonode's liquidity depends on sales volume and operating profit, with cash decreasing to $2.4 million in 2019, and the company may require additional capital - Neonode's liquidity is dependent on sales volume, operating profit, and asset efficiency[213] Key Liquidity Metrics (in millions) | Metric | December 31, 2019 | December 31, 2018 | | :-------------- | :---------------- | :---------------- | | Cash | $2.4 | $6.6 | | Working Capital | $2.4 | $8.2 | Net Cash Used in Operating Activities (in millions) | Year | Net Cash Used in Operating Activities | | :--- | :------------------------------------ | | 2019 | $3.5 | | 2018 | $2.9 | - In December 2018, Neonode completed a private placement, issuing 2,940,767 shares of common stock for $4.6 million in net proceeds, with participation from directors, management, and employees[220][259] - The company effected a 1-for-10 reverse stock split on October 1, 2018, and increased authorized common stock to 15,000,000 shares on June 11, 2019[222][223][224][349][350][351] - Neonode operates on a going concern basis but may require additional capital through equity investments or debt arrangements if operations do not become cash flow positive, with no assurance of obtaining such financing on reasonable terms[224][226][227][260][262] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is marked as 'Not applicable' in the report Item 8. Financial Statements and Supplementary Data This section presents Neonode's consolidated financial statements for the years ended December 31, 2019 and 2018, including the balance sheets, statements of operations, comprehensive loss, stockholders' equity, and cash flows, along with detailed notes. The independent registered public accounting firm issued an unqualified opinion on these financial statements Report of Independent Registered Public Accounting Firm KMJ Corbin & Company LLP issued an unqualified opinion on Neonode Inc.'s consolidated financial statements for 2019 and 2018, noting a change in lease accounting - KMJ Corbin & Company LLP, the independent registered public accounting firm, issued an unqualified opinion on Neonode Inc.'s consolidated financial statements for the years ended December 31, 2019 and 2018[233] - The report notes that the company changed the manner in which it accounts for leases in 2019, as discussed in Note 2 to the consolidated financial statements[234] Consolidated Balance Sheets The consolidated balance sheets present Neonode's financial position, showing total assets of $7.4 million and total stockholders' equity of $3.8 million as of December 31, 2019 Consolidated Balance Sheets (in thousands) | ASSETS | Dec 31, 2019 | Dec 31, 2018 | | :-------------------------------------- | :----------- | :----------- | | Cash | $2,357 | $6,555 | | Accounts receivable and unbilled revenues, net | $1,324 | $1,830 | | Projects in process | $8 | $- | | Inventory | $1,030 | $1,219 | | Prepaid expenses and other current assets | $715 | $890 |\ | Total current assets | $5,434 | $10,494 | | Investment in joint venture | $3 | $3 | | Property and equipment, net | $1,583 | $2,484 | | Operating lease right-of-use assets | $416 | $- | | Other assets | $- | $261 | | Total assets | $7,436 | $13,242 | | LIABILITIES AND STOCKHOLDERS' EQUITY| | | | Accounts payable | $555 | $501 | | Accrued payroll and employee benefits | $960 | $902 | | Accrued expenses | $541 | $265 | | Deferred revenues | $67 | $75 | | Current portion of finance lease obligations | $568 | $570 | | Current portion of operating lease obligations | $332 | $- | | Total current liabilities | $3,023 | $2,313 | | Finance lease obligations, net of current portion | $508 | $1,133 | | Operating lease obligations, net of current portion | $58 | $- | | Total liabilities | $3,589 | $3,446 | | Common stock | $9 | $9 | | Additional paid-in capital | $197,543 | $197,507 | | Accumulated other comprehensive loss | $(639) | $(456) | | Accumulated deficit | $(190,520) | $(185,222) | | Total Neonode Inc. stockholders' equity | $6,393 | $11,838 | | Noncontrolling interests | $(2,546) | $(2,042) | | Total stockholders' equity | $3,847 | $9,796 | | Total liabilities and stockholders' equity | $7,436 | $13,242 | Consolidated Statements of Operations The consolidated statements of operations detail Neonode's revenues, costs, operating expenses, and net loss for 2019 and 2018, showing a net loss of $5.3 million in 2019 Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | 2019 | 2018 | | :-------------------------------------- | :---------- | :---------- | | Revenues: | | | | License fees | $5,966 | $7,954 | | Sensor modules | $560 | $227 | | Non-recurring engineering | $120 | $357 | | Total revenues | $6,646 | $8,538 | | Cost of revenues: | | | | Sensor modules | $499 | $638 | | Non-recurring engineering | $184 | $283 | | Total cost of revenues | $683 | $921 | | Total gross margin | $5,963 | $7,617 | | Operating expenses: | | | | Research and development | $5,239 | $5,278 | | Sales and marketing | $2,158 | $1,995 | | General and administrative | $4,296 | $4,221 | | Total operating expenses | $11,693 | $11,494 | | Operating loss | $(5,730)| $(3,877)| | Other expense | | | | Interest expense | $(34) | $(49) | | Other expense | $- | $(3) | | Total other expense | $(34) | $(52) | | Loss before provision for income taxes| $(5,764)| $(3,929)| | Provision for income taxes | $38 | $13 | | Net loss including noncontrolling interests | $(5,802)| $(3,942)| | Less: net loss attributable to noncontrolling interests | $504 | $882 | | Net loss attributable to Neonode Inc. | $(5,298)| $(3,060)| | Loss per common share: | | | | Basic and diluted loss per share | $(0.60) | $(0.52) | | Basic and diluted – weighted average number of common shares outstanding | 8,844 | 5,884 | Consolidated Statements of Comprehensive Loss The consolidated statements of comprehensive loss present the net loss and other comprehensive income (loss), primarily foreign currency translation adjustments Consolidated Statements of Comprehensive Loss (in thousands) | Metric | 2019 | 2018 | | :-------------------------------------- | :---------- | :---------- | | Net loss including noncontrolling interests | $(5,802) | $(3,942) | | Other comprehensive income (loss): | | | | Foreign currency translation adjustments | $(183) | $(357) | | Comprehensive loss | $(5,985)| $(4,299)| | Less: Comprehensive loss attributable to noncontrolling interests | $504 | $882 | | Comprehensive loss attributable to Neonode Inc. | $(5,481)| $(3,417)| Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity detail changes in equity components, including stock option compensation, stock sales, and foreign currency adjustments - The consolidated statements of stockholders' equity show changes in Series B Preferred Stock, Common Stock, Additional Paid-in Capital, Accumulated Other Comprehensive Income (Loss), Accumulated Deficit, and Noncontrolling Interests for 2018 and 2019[247] - Key activities include an adjustment related to the adoption of ASC 606 revenue recognition in 2018, stock option compensation, conversion of Series B Preferred Stock to common stock, proceeds from common stock sales, and foreign currency translation adjustments[247] - Total stockholders' equity decreased from $9,796 thousand at December 31, 2018, to $3,847 thousand at December 31, 2019[247] Consolidated Statements of Cash Flows The consolidated statements of cash flows show net cash used in operating activities of $3.5 million in 2019, with a net decrease in cash of $4.2 million Consolidated Statements of Cash Flows (in thousands) | Cash flows from operating activities: | 2019 | 2018 | | :------------------------------------------------------------------ | :---------- | :---------- | | Net loss (including noncontrolling interests) | $(5,802) | $(3,942) | | Adjustments to reconcile net loss to net cash used in operating activities: | | | | Stock-based compensation expense | $- | $29 | | Bad debt expense | $105 | $- | | Write-off of prepaids | $414 | $- | | Depreciation and amortization | $855 | $1,008 | | Amortization of operating lease right-of-use assets | $404 | $- | | Loss on disposal of property and equipment | $- | $6 | | Changes in operating assets and liabilities: | | | | Accounts receivable | $397 | $481 | | Projects in process | $(8) | $1 | | Inventory | $124 | $(142) | | Prepaid expenses and other current assets | $(19) | $556 | | Accounts payable and accrued expenses | $454 | $41 | | Deferred revenues | $(429) | $(897) | | Operating lease obligations | $(12) | $- | | Net cash used in operating activities | $(3,517)| $(2,859)| | Cash flows from investing activities: | | | | Purchase of property and equipment | $(89) | $(236) | | Proceeds from sale of property and equipment | $- | $4 | | Net cash used in investing activities | $(89) | $(232) | | Cash flow from financing activities: | | | | Proceeds from issuance of common stock and warrants, net of offering costs | $36 | $4,620 | | Principal payments on finance lease obligations | $(535) | $(551) | | Net cash (used in) provided by financing activities | $(499) | $4,069 | | Effect of exchange rate changes on cash | $(93) | $(219) | | Net change in cash | $(4,198)| $759 | | Cash at beginning of year | $6,555 | $5,796 | | Cash at end of year