| Summary of Significant Accounting policies | 2. Summary of Significant Accounting Policies Principles of Consolidation The condensed consolidated
financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode Inc. and its wholly-owned subsidiaries,
as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies AB. The remaining 49% of Pronode Technologies
AB is owned by 2X Communication AB, located in Gothenburg, Sweden. Pronode Technologies AB was organized to manufacture and sell our touch
sensor modules (“TSMs”). All inter-company accounts and transactions have been eliminated in consolidation. Neonode consolidates entities
in which it has a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50%
of the voting rights. The condensed consolidated
balance sheets at June 30, 2022 and December 31, 2021 and the condensed consolidated statements of operations, comprehensive loss, stockholders’
equity and cash flows for the three and six months ended June 30, 2022 and 2021 include our accounts and those of our wholly-owned subsidiaries
as well as Pronode Technologies AB. Estimates and Judgments The preparation of financial
statements in conformity with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements,
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and
expenses. Actual results could differ from these estimates and judgments. Significant estimates and
judgments include, but are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations,
the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable
consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables;
determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived assets; for leases, determining
whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing
rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets; and the
fair value of options issued as stock-based compensation. Cash and Cash Equivalents We have not had any liquid
investments other than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Concentration of Cash Balance Risks Cash balances are maintained
at various banks in the United States, Japan, Taiwan and Sweden. For deposits held with financial institutions in the United States, the
U.S. Federal Deposit Insurance Corporation provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government
provides insurance coverage up to 1,050,000 Krona per customer and covers deposits in all types of accounts. For bank accounts of the
category held by Neonode, the Japanese government provides full insurance coverage. The Central Deposit Insurance Corporation in Taiwan
provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed
the amount of insurance provided. Accounts
Receivable and Allowance for Doubtful Accounts Accounts receivable is stated
at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make
required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer.
Should all efforts fail to recover the related receivable, we will write off the account. We also record an allowance for all customers
based on certain other factors including the length of time the receivables are past due and historical collection experience with customers.
Our allowance for doubtful accounts was zero and approximately $79,000 as of June 30, 2022 and December 31, 2021, respectively. Projects in Process Projects in process consist
of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering
labor costs and project-specific equipment costs. These costs are capitalized on our consolidated balance sheet as an asset and deferred
until revenue for each project is recognized in accordance with our revenue recognition policy. There were no costs capitalized to projects
in process as of June 30, 2022 and December 31, 2021. Inventory The Company’s inventory
consists primarily of components that will be used in the manufacturing of our TSMs. We classify inventory for reporting purposes as raw
materials, work-in-process, and finished goods. Inventory is stated at the
lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable value is the
estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Due to the low sell-through
of our AirBar products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials.
Management has further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location it
is stored. The AirBar inventory reserve was $0.3 million and $0.8 million as of June 30, 2022 and December 31, 2021, respectively. Raw materials, work-in-process,
and finished goods are as follows (in thousands):
June 30, December 31,
2022 2021
Raw materials $ 3,485 $ 1,446
Work-in-process - 10
Finished goods 915 1,064
$ 4,400 $ 2,520 Property and Equipment Property and equipment are
stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method
based upon estimated useful lives of the assets as follows: Estimated useful lives
Computer equipment 3 years
Furniture and fixtures 5 years
Equipment 7 years Equipment purchased under
a finance lease is recognized over the term of the lease if that lease term is shorter than the estimated useful life. Upon retirement or sale of
property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected
in the condensed consolidated statement of operations. Maintenance and repairs are charged to expense as incurred. Right-of-Use Asstes A right-of-use asset represents
a lessee’s right to use a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases
for buildings and finance leases for manufacturing equipment. Right-of-use assets are measured
initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial direct costs,
such as commissions paid to obtain a lease. Right-of-use assets are subsequently
measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct
costs not yet expensed. Long-lived Assets We assess the recoverability
of long-lived assets by estimating the future cash flows from the associated assets in accordance with relevant accounting guidance. If
the estimated undiscounted future cash flows related to these assets decreases or the useful life is shorter than originally estimated,
we may incur charges for impairment of these assets. As of June 30, 2022, we believe there was no impairment of our long-lived assets.
There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue,
which could result in impairment of long-lived assets in the future. Foreign Currency Translation and Transaction
Gains and Losses The functional currency of our foreign subsidiaries is the applicable
local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese
Yen, South Korean Won and Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for income statement accounts using a weighted-average exchange rate during the period. Gains or (losses)
resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Foreign currency translation
gains (losses) were $41,000 and $74,000 and $56,000 and $(110,000) during the three and six months ended June 30, 2022 and 2021, respectively.
Gains (losses) resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed
consolidated statements of operations and were $30,000 and $29,000 during the three and six months ended June 30, 2022, respectively,
compared to $(54,000) and $28,000 during the same periods in 2021, respectively. Concentration of Credit and Business Risks Our customers are located
in the United States, Europe and Asia. As of June 30, 2022, four
of our customers represented approximately 69% of our consolidated accounts receivable and unbilled revenues. As of December 31, 2021, four
of our customers represented approximately 76% of our consolidated accounts receivable and unbilled revenues. Customers who accounted for
10% or more of our net revenues during the three months ended June 30, 2022 are as follows: ● Hewlett-Packard Company – 24% ● Seiko Epson Corporation – 19% ● LG Electronics Inc. – 13% Customers who accounted for
10% or more of our net revenues during the six months ended June 30, 2022 are as follows: ● Hewlett-Packard Company – 28% ● Seiko Epson Corporation – 18% ● LG Electronics Inc. – 14% ● Alps Alpine – 10% Customers who accounted for
10% or more of our net revenues during the three months ended June 30, 2021 are as follows: ● Hewlett-Packard Company – 30% ● Seiko Epson Corporation – 17% ● LG Electronics Inc. – 14% Customers who accounted for
10% or more of our net revenues during the six months ended June 30, 2021 are as follows: ● Hewlett-Packard Company – 31% ● Seiko Epson Corporation – 14% ● LG Electronics Inc. – 13% Revenue Recognition We recognize revenue when
control of products is transferred to our customers, and when services are completed and accepted by our customers; the amount of revenue
we recognize reflects the consideration we expect to receive for those products or services. Our contracts with customers may include
combinations of products and services (e.g., a contract that includes products and related engineering services). We structure our contracts
such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly defined
in each contract. License fees and sales of
our AirBar and TSMs are on a per-unit basis. Therefore, we generally satisfy performance obligations as units are shipped to our customers.
Non-recurring engineering service performance obligations are satisfied as work is performed and accepted by our customers. We recognize revenue net of
allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat all
product shipping and handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods, therefore
we treat all shipping and handling charges as expenses. License Fees We earn revenue from licensing
our internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees
the right to incorporate our IP components in their products, with terms and conditions that vary by licensee. Fees under these agreements
may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating
the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support. For technology license arrangements
that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when
the license is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we
record unbilled license fees, using prior royalty revenue data by customer to make estimates of those royalties. Explicit return rights are
not offered to customers. There have been no returns through June 30, 2022. Product Sales We earn revenue from sales
of TSM hardware products to our original equipment manufacturers (“OEMs”), original design manufacturers (“ODMs”)
and Tier 1 supplier customers, who embed our hardware into their products, and from sales of branded consumer products that incorporate
our TSMs that are sold through distributors or directly to end users. These distributors are generally given business terms that allow
them to return unsold inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs.
Our sales agreements generally provide customers with limited rights of return and warranty provisions. The timing of revenue recognition
related to AirBar modules depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue
for AirBar modules sold point-of-sale (online sales and other direct sales to customers) when we provide the promised product to the customer. Because we generally use distributors
to provide TSMs and AirBars to our customers, we must analyze the terms of our distributor agreements to determine when control passes
from us to our distributors. For sales of TSMs and AirBars sold through distributors, we recognize revenues when our distributors obtain
control over our products. Control passes to our distributors when we have a present right to payment for products sold to the distributors,
the distributors have legal title to and physical possession of products purchased from us, and the distributors have significant risks
and rewards of ownership of products purchased. Distributors participate in
various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual
credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical
experience, our revenue could be adversely affected. Under U.S. GAAP, companies
may make reasonable aggregations and approximations of returns data to accurately estimate returns. Our TSM and AirBar returns and warranty
experience to date has enabled us to make reasonable returns estimates, which are supported by the fact that our product sales involve
homogenous transactions. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was
$61,000 as of June 30, 2022 and $69,000 as of December 31, 2021. If the actual future returns were to deviate from the historical data
on which the reserve had been established, our revenue could be adversely affected. Non-Recurring Engineering For technology license or
TSM contracts that require modification or customization of the underlying technology to adapt the technology to customer use, we determine
whether the technology license or TSM, and required engineering consulting services represent separate performance obligations. We perform
our analysis on a contract-by-contract basis. If there are separate performance obligations, we determine the standalone selling price
(“SSP”) of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied.
We provide engineering consulting services to our customers under a signed Statement of Work (“SOW”). Deliverables and payment
terms are specified in each SOW. We generally charge an hourly rate for engineering services, and we recognize revenue as engineering
services specified in contracts are completed and accepted by our customers. Any upfront payments we receive for future non-recurring
engineering services are recorded as contract liabilities until that revenue is earned. We believe that recognizing
non-recurring engineering services revenues as progress towards completion of engineering services and customer acceptance of those services
occurs best reflects the economics of those transactions, because engineering services as tracked in our systems correspond directly with
the value to our customers of our performance completed to date. Hours performed for each engineering project are tracked and reflect
progress made on each project and are charged at a consistent hourly rate. Revenues from non-recurring
engineering contracts that are short-term in nature are recorded when those services are complete and accepted by customers. Revenues from non-recurring
engineering contracts with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required
to produce such deliverables are recognized as they are completed and accepted by customers. Estimated losses on all SOW
projects are recognized in full as soon as they become evident. During the three and six months ended June 30, 2022 and 2021, no losses
related to SOW projects were recorded. The following tables present
the net revenues distribution by geographical area and market for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):
Three months ended Three months ended
Amount Percentage Amount Percentage
AMER
Net revenues from consumer electronics $ 365 99 % $ 569 97 %
Net revenues from distributors and other 2 1 % 15 3 %
$ 367 100 % $ 584 100 %
APAC
Net revenues from automotive $ 308 54 % $ 417 42 %
Net revenues from consumer electronics 243 42 % 292 30 %
Net revenues from distributors and other 23 4 % 277 28 %
$ 574 100 % $ 986 100 %
EMEA
Net revenues from automotive $ 166 51 % $ 90 60 %
Net revenues from medical 72 22 % 53 35 %
Net revenues from distributors and other 88 27 % 7 5 %
$ 326 100 % $ 150 100 %
Six months ended Six months ended
Amount Percentage Amount Percentage
AMER
Net revenues from consumer electronics $ 844 98 % $ 1,160 91 %
Net revenues from distributors and other 16 2 % 117 9 %
$ 860 100 % $ 1,277 100 %
APAC
Net revenues from automotive $ 664 55 % $ 822 45 %
Net revenues from consumer electronics 478 39 % 492 27 %
Net revenues from distributors and other 73 6 % 502 28 %
$ 1,215 100 % $ 1,816 100 %
EMEA
Net revenues from automotive $ 254 49 % $ 204 70 %
Net revenues from medical 136 27 % 74 25 %
Net revenues from distributors and other 120 24 % 14 5 %
$ 510 100 % $ 292 100 % Significant Judgments Our contracts with customers may include promises to transfer multiple
products and services to a customer, particularly when one of our customers contracts with us for a product and related engineering services
for customizing that product for our customer. Determining whether products and services are considered distinct performance obligations
that should be accounted for separately may require significant judgment. Judgment may also be required to determine the SSP for each
distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing
for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations;
however, we recently negotiated a contract that may include multiple performance obligations in the future. Judgment is also required
to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us.
Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability
when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional
information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal
of any incremental revenue would occur. Finally, judgment is required
to determine the amount of unbilled license fees at the end of each reporting period. Contract Balances Timing of revenue recognition
may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments
from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our
customers. The following table presents
accounts receivable and deferred revenues as of June 30, 2022 and December 31, 2021 (in thousands):
June 30, December 31,
Accounts receivable and unbilled revenue, net $ 1,095 $ 1,293
Contract liabilities (deferred revenues) 112 106 The timing of revenue recognition,
billings and cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits
or deferred revenue (contract liabilities) on the consolidated balance sheets. Generally, billing occurs subsequent to revenue recognition,
resulting in contract assets; contract assets are generally classified as current. The Company sometimes receives advances or deposits
from its customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current. These
assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. We do not anticipate impairment
of our contract assets related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance
in that asset account. We will continue to monitor the timeliness of receipts from those customers to assess whether the contract assets
have been impaired. Payment terms and conditions
vary by the type of contract; however, payments generally occur 30-60 days after invoicing for license fees and sensor modules to our
resellers and distributors. Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not
include a significant financing component. Our intent is to provide our customers with consistent invoicing terms for the convenience
of our customers, not to receive financing from our customers. Costs to Obtain Contracts We record the incremental
costs of obtaining a contract with a customer as a contract asset, if we expect the benefit of those costs to cover a period greater than
one year. We currently have no incremental costs that must be capitalized. We expense as incurred costs
of obtaining a contract when the amortization period of those costs would have been less than or equal to one year. Product Warranty The following table summarizes
the activity related to the product warranty liability (in thousands):
June 30, December 31,
Balance at beginning of period $ 36 $ 25
Provisions for warranty issued (5 ) 11
Balance at end of period $ 31 $ 36 The Company accrues for warranty
costs as part of its cost of sales of TSMs based on estimated costs. The Company’s products are generally covered by a warranty
for a period of 12 months from the customer receipt of the product. Contract liabilities Contract liabilities (deferred
revenues) consist primarily of prepayments for license fees, and other products or services that we have been paid in advance. We earn
the revenue when we transfer control of the product or service. Deferred revenues may also include upfront payments for consulting services
to be performed in the future, such as non-recurring engineering services. We defer license fees until
we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer
has a right to use the license. Non-recurring engineering fee revenues are deferred until engineering services have been completed and
accepted by our customers. The following table presents
our deferred revenues by source (in thousands):
June 30, December 31,
Deferred revenues license fees $ 28 $ 28
Deferred revenues products 61 70
Deferred revenues non-recurring engineering 23 8
$ 112 $ 106 During the three and six months ended June 30, 2022, the Company recognized
revenues of approximately $7,000 and $16,000, respectively, related to contract liabilities outstanding at the beginning of the year. Advertising Advertising costs are expensed
as incurred. Advertising costs for the three and six months ended June 30, 2022 and 2021 amounted to approximately $38,000 and $84,000
and $39,000 and $58,000, respectively. Research and Development Research and development (“R&D”)
costs are expensed as incurred. R&D costs consist primarily of personnel related costs in addition to external consultancy costs such
as testing, certifying and measurements. Stock-Based Compensation Expense We measure the cost of employee
services received in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award
on the grant date, and recognize the value as compensation expense over the period the employee is required to provide services in exchange
for the award, usually the vesting period. We account for equity instruments
issued to non-employees at their estimated fair value. When determining stock-based
compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes
option pricing model. Noncontrolling Interests We recognize any noncontrolling interest, also known as a minority
interest, as a separate line item in stockholders’ equity in the condensed consolidated financial statements. A noncontrolling interest
represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us. Generally, any interest that
holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest; however, there are other factors, such
as decision-making rights, that are considered as well. We include the amount of net income (loss) attributable to noncontrolling interests
in consolidated net income (loss) on the face of the condensed consolidated statements of operations. The Company provides either
in the condensed consolidated statement of stockholders’ equity, if presented, or in the notes to condensed consolidated financial
statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net
assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:
(1) Net income or loss;
(2) Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and
(3) Each component of other comprehensive income or loss. Income taxes We recognize deferred tax
liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements
or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax
assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets
is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded against net deferred
tax assets when, in our opinion, realization is uncertain based on the “more likely than not” criteria of the accounting guidance. Based on the uncertainty of
future pre-tax income, we fully reserved our net deferred tax assets as of June 30, 2022 and December 31, 2021. In the event we were to
determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase
income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus
income taxes paid or payable for the current period. We follow U.S. GAAP related
accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring
uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of June 30, 2022 and December
31, 2021, 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, 2022. 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, 2022 and 2021 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8). Other Comprehensive Income (Loss) Our other comprehensive income
(loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected
as a separate component of stockholders’ equity in the condensed consolidated balance sheets. Cash Flow Information Cash flows in foreign currencies
have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average
exchange rate for the condensed consolidated statements of operations was as follows:
Six months ended
2022 2021
Swedish Krona 9.59 8.41
Japanese Yen 123.07 107.73
South Korean Won 1,232.97 1,117.81
Taiwan Dollar 28.73 28.02 The exchange rate for the
condensed consolidated balance sheets was as follows:
As of
June 30, December 31,
2022 2021
Swedish Krona 10.21 9.03
Japanese Yen 135.63 115.12
South Korean Won 1,288.33 1,190.75
Taiwan Dollar 29.71 27.71 Fair Value of Financial Instruments We disclose the estimated
fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts
receivable, accounts payable and accrued expenses are deemed to approximate fair value due to their short maturities. New Accounting Pronouncements In September 2016, the FASB
issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, (“ASU
2016-13”), supplemented by subsequent accounting standards updates. The new standard requires entities to measure all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable
forecasts. ASU 2016-13, as amended, is scheduled to become effective for fiscal years beginning after December 15, 2023, with early adoption
permitted. In the future, we will evaluate the impact that ASU 2016-13, as amended, will have on our consolidated financial statements,
specifically regarding our trade receivables; however, we do not expect any significant impact from implementation of the new standard. |
