| Summary of significant accounting policies | 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode Inc. and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated balance sheet at June 30, 2015 and the unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2015 and cash flows for the six months ended June 30, 2015, include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan). The audited condensed consolidated balance sheet at December 31, 2014 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden) and Neonode Korea Ltd. (South Korea). The unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2014 and cash flows for the six months ended June 30, 2014 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.) and Neno User Interface Solutions AB (Sweden). Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires making estimates and assumptions that affect, at the date of the consolidated 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. Significant estimates include, but are not limited to, collectability of accounts receivable, the achievement of substantive milestones and vendor-specific objective evidence (“VSOE”) of fair value for purposes of revenue recognition (or deferral of revenue), recoverability of capitalized project costs and long-lived assets, the valuation allowance related to our deferred tax assets and the fair value of options and warrants issued for stock-based compensation. Concentration of Cash Balance Risks Cash balances are maintained at various banks in the U.S., Japan, Korea, Taiwan and Sweden. At times, deposits held with financial institutions in the U.S. may exceed the amount of insurance provided by the U.S. Federal Deposit Insurance Corporation, which provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts. The Japanese government provides insurance coverage up to 10,000,000 Yen per customer. The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. As of June 30, 2015, we had approximately $2.7 million in excess of insurance limits. Accounts Receivable and Allowance for Doubtful Accounts Our accounts receivable are 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. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. 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 $167,000 as of June 30, 2015 and December 31, 2014. 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 consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. Costs capitalized in projects in process were $725,000 and $200,000 as of June 30, 2015 and December 31, 2014, respectively. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows: Estimated useful lives
Computer equipment 3 years
Furniture and fixtures 5 years Equipment purchased under capital leases is amortized on a straight-line basis over the estimated useful life of the asset or the term of the lease, whichever is shorter. 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 consolidated statement of operations. Maintenance and repairs are charged to expense as incurred. Long-lived Assets We assess any impairment by estimating the future cash flow from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of June 30, 2015, 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 losses were $(49,000) and $(47,000) during the three and six months ended June 30, 2015, respectively, compared to translation gains of $30,000 and $65,000 during the same periods in 2014, respectively. Gains resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations and were $5,000 and $31,000 during the three and six months ended June 30, 2015, respectively, compared to $8,000 and $34,000 during the same periods in 2014, respectively. Concentration of Credit and Business Risks Our customers are located in U.S., Europe and Asia. As of June 30, 2015, two customers represented approximately 90% of the Company’s accounts receivable. As of December 31, 2014, three customers represented approximately 87% of the Company’s accounts receivable. Our net revenues for the three and six months ended June 30, 2015 were earned from twenty-one and twenty-seven customers, respectively. Customers who accounted for 10% or more of our net revenues during the three months ended June 30, 2015 are as follows:
· Autoliv Development AB – 31%
· Hewlett Packard Company – 28%
· Amazon – 11% Customers who accounted for 10% or more of our net revenues during the six months ended June 30, 2015 are as follows:
· Hewlett Packard Company – 29%
· Amazon – 19%
· Autoliv Development AB – 17% Our net revenues for the three and six months ended June 30, 2014 were earned from nineteen and twenty-two customers. Customers who accounted for 10% or more of our net revenues during the three months ended June 30, 2014 are as follows:
· Delphi Electronics and Safety – 14%
· Hewlett Packard Company – 12%
· Netronix Inc. – 11%
· KOBO Inc. – 15%
· Wave Group Ltd. – 11%
· Clarion Industries Co., Ltd. – 12% Customers who accounted for 10% or more of our net revenues during the six months ended June 30, 2014 are as follows:
· Leap Frog – 19%
· Kobo Inc. – 13%
· Netronix Inc. – 13%
· Sony Corporation. – 11% Revenue Recognition Licensing Revenues: We derive revenue from the licensing of internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP and royalties payable 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. We follow U.S. GAAP for revenue recognition as per unit royalty products are distributed or licensed by our customers. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of technology; (2) the customer distributes or licenses the products; (3) the customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. Our customers report to us the quantities of products distributed or licensed by them after the end of the reporting period stipulated in the contract, generally 30 to 45 days after the end of the month or quarter. We recognize licensing revenue in the period in which royalty reports are received, rather than the period in which the products are distributed or to which the license relates. Explicit return rights are not offered to customers. There have been no returns through June 30, 2015. Engineering Services: We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue. Generally, we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers. Engineering services are performed under a signed Statement of Work (“SOW”) with a customer. The deliverables and payment terms stipulated under the SOW provide guidance on the project revenue recognition. Revenues from contracts that are short-term in nature and related costs that are difficult to estimate are accounted for under the completed contract method. Revenues from contracts with substantive defined milestones that we have determined are reasonable, relevant to all the deliverables and payment terms in the SOW that are commensurate with the efforts required to achieve the milestones are recognized under the milestone recognition method. Estimated losses on all SOW projects are recognized in full as soon as they become evident. Deferred Revenues From time-to-time we receive pre-payments from our customers related to future services or future license fee revenues. We defer the license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the
engineering work has been completed and accepted by our customers. Advertising Advertising costs are expensed as incurred. Advertising costs for the three and six months ended June 30, 2015 amounted to approximately $8,000 and $28,000, respectively. Advertising costs for the three and six months ended June 30, 2014 amounted to approximately $23,000 and $129,000, respectively. Product Research and Development Research and development (“R&D”) costs are expensed as incurred. R&D costs consist mainly of personnel related costs in addition to some 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 stock 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, net of estimated forfeitures. We account for equity instruments issued to non-employees at their estimated fair value. The measurement date for the estimated fair value for the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached, or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instruments is primarily recognized over the term of the consulting agreement. The estimated fair value of the stock-based compensation is periodically re-measured and income or expense is recognized during the vesting term. 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. 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, 2015 and December 31, 2014. 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 to 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, 2015 and December 31, 2014, we had no unrecognized tax benefits. Net Loss per Share Net loss per share amounts have been computed based on the weighted average number of shares of common stock outstanding during the three and six months ended June 30, 2015 and 2014. 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, 2015 and 2014 exclude the potential common stock equivalents, as the effect would be anti-dilutive (See Note 8). Other Comprehensive Income (Loss) Our other comprehensive income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity in the consolidated balance sheets as accumulated other comprehensive income. 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 and comprehensive loss was 8.42 and 6.60 Swedish Krona to one U.S. Dollar for the three months ended June 30, 2015 and 2014, respectively. The weighted-average exchange rate for the condensed consolidated statements of operations and comprehensive loss was 8.37 and 6.53 Swedish Krona to one U.S. Dollar for the six months ended June 30, 2015 and 2014, respectively. The exchange rate for the condensed consolidated balance sheets was 8.31 and 7.80 Swedish Krona to one U.S. Dollar as of June 30, 2015 and December 31, 2014, respectively. The weighted-average exchange rate for the condensed consolidated statements of operations and comprehensive loss was 121.29 and 102.12 Japanese Yen to one U.S. Dollar for the three months ended June 30, 2015 and 2014, respectively. The weighted-average exchange rate for the condensed consolidated statements of operations and comprehensive loss was 120.23 and 102.47 Japanese Yen to one U.S. Dollar for the six months ended June 30, 2015 and 2014, respectively. The exchange rate for the condensed consolidated balance sheets was 122.72 and 119.93 Japanese Yen to one U.S. Dollar as of June 30, 2015 and December 31, 2014, respectively. The weighted-average exchange rate for the condensed consolidated statements of operations and comprehensive loss was 1,096.06 South Korean Won to one U.S. Dollar for the three months ended June 30, 2015. The weighted-average exchange rate for the condensed consolidated statements of operations and comprehensive loss was 1,098.02 South Korean Won to one U.S. Dollar for the six months ended June 30, 2015. The exchange rate for the condensed consolidated balance sheets was 1,126.89 and 1,096.73 South Korean Won to one U.S. Dollar as of June 30, 2015 and December 31, 2014, respectively. The weighted-average exchange rate for the condensed consolidated statements of operations and comprehensive loss was 30.78 Taiwan Dollar to one U.S. Dollar for the three months ended June 30, 2015. The weighted-average exchange rate for the condensed consolidated statements of operations and comprehensive loss was 31.17 Taiwan Dollar to one U.S. Dollar for the six months ended June 30, 2015. The exchange rate for the condensed consolidated balance sheet was 30.92 Taiwan Dollar to one U.S. Dollar as of June 30, 2015. Fair Value of Financial Instruments We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “ Revenue from Contracts with Customers (Topic 606)” In August 2014, the FASB issued ASU No. 2014-15, “ Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern |
