10-Q 1 f10q0919_neonodeinc.htm QUARTERLY REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019

☐ Transition report pursuant to section 13 or 15(d) of the Securities and Exchange Act of 1934

For the transition period from _______ to ________

Commission file number 1-35526

| NEONODE INC. |
| (Exact name of registrant as specified in its charter) |

Delaware |  | 94-1517641
(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

Storgatan 23C, 114 55 Stockholm, Sweden

(Address of principal executive offices and zip code)

| +46 (0) 8 667 17 17 |
| (Registrant’s telephone number, including area code) |

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, par value $0.001 per share |  | NEON |  | The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☐
Non-accelerated filer | ☐ | Smaller reporting company | ☒
| Emerging growth company | ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of November 4, 2019 was 8,811,154.

NEONODE INC.

Form 10-Q

For the Fiscal Quarter Ended September 30, 2019

TABLE OF CONTENTS

PART I | FINANCIAL INFORMATION |
| Item 1 | Financial Statements | 1
|  | Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 (Audited) | 1
|  | Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 | 2
|  | Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018 | 3
|  | Unaudited Condensed Consolidated Statements of Stockholders’ Equity | 4-5
|  | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 | 6
|  | Notes to the Unaudited Condensed Consolidated Financial Statements | 7
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27
| Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 35
| Item 4 | Controls and Procedures | 35
PART II | OTHER INFORMATION |
| Item 1 | Legal Proceedings | 36
| Item 1A | Risk Factors | 36
| Item 6 | Exhibits | 36
SIGNATURES |  | 37
EXHIBITS |  |

i

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NEONODE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

|  | September 30, |  |  | December 31, |
|  | 2019 |  |  | 2018 |
ASSETS |  | (Unaudited) |  |  | (Audited) |
Current assets: |  |  |  |  |  |
Cash |  | $ | 3,025 |  |  | $ | 6,555 |
Accounts receivable and unbilled revenue, net |  |  | 1,934 |  |  |  | 1,830 |
Projects in process |  |  | 7 |  |  |  | - |
Inventory |  |  | 1,104 |  |  |  | 1,219 |
Prepaid expenses and other current assets |  |  | 862 |  |  |  | 890 |
Total current assets |  |  | 6,932 |  |  |  | 10,494 |
Investment in joint venture |  |  | 3 |  |  |  | 3 |
Property and equipment, net |  |  | 1,704 |  |  |  | 2,484 |
Operating lease right-of-use assets |  |  | 581 |  |  |  | - |
Other assets |  |  | 290 |  |  |  | 261 |
Total assets |  | $ | 9,510 |  |  | $ | 13,242 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 498 |  |  | $ | 501 |
Accrued payroll and employee benefits |  |  | 828 |  |  |  | 902 |
Accrued expenses |  |  | 178 |  |  |  | 265 |
Deferred revenues |  |  | 54 |  |  |  | 75 |
Current portion of finance lease obligations |  |  | 552 |  |  |  | 570 |
Current portion of operating lease obligations |  |  | 413 |  |  |  | - |
Total current liabilities |  |  | 2,523 |  |  |  | 2,313 |
Finance lease obligations, net of current portion |  |  | 599 |  |  |  | 1,133 |
Operating lease obligations, net of current portion |  |  | 105 |  |  |  | - |
Total liabilities |  |  | 3,227 |  |  |  | 3,446 |
Commitments and contingencies |  |  |  |  |  |  |  |
Stockholders’ equity: |  |  |  |  |  |  |  |
Series B Preferred stock, 54,425 shares authorized with par value $0.001 per share; 0 and 82 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively. (In the event of dissolution, each share of Series B Preferred stock has a liquidation preference equal to par value of $0.001 per share over the shares of common stock) |  |  | - |  |  |  | - |
Common stock, 15,000,000 shares authorized with par value $0.001 per share; 8,811,154 and 8,800,313 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively. |  |  | 9 |  |  |  | 9 |
Additional paid-in capital |  |  | 197,507 |  |  |  | 197,507 |
Accumulated other comprehensive loss |  |  | (756 | ) |  |  | (456 | )
Accumulated deficit |  |  | (188,145 | ) |  |  | (185,222 | )
Total Neonode Inc. stockholders’ equity |  |  | 8,615 |  |  |  | 11,838 |
Noncontrolling interests |  |  | (2,332 | ) |  |  | (2,042 | )
Total stockholders’ equity |  |  | 6,283 |  |  |  | 9,796 |
Total liabilities and stockholders’ equity |  | $ | 9,510 |  |  | $ | 13,242 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |
License fees |  | $ | 1,213 |  |  | $ | 1,597 |  |  | $ | 4,622 |  |  | $ | 5,681 |
Sensor module |  |  | 95 |  |  |  | 39 |  |  |  | 368 |  |  |  | 176 |
Non-recurring engineering |  |  | 2 |  |  |  | 287 |  |  |  | 42 |  |  |  | 317 |
Total revenues |  |  | 1,310 |  |  |  | 1,923 |  |  |  | 5,032 |  |  |  | 6,174 |
Cost of revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sensor module |  |  | 65 |  |  |  | 57 |  |  |  | 121 |  |  |  | 191 |
Non-recurring engineering |  |  | (1 | ) |  |  | 282 |  |  |  | 115 |  |  |  | 283 |
Total cost of revenues |  |  | 64 |  |  |  | 339 |  |  |  | 236 |  |  |  | 474 |
Total gross margin |  |  | 1,246 |  |  |  | 1,584 |  |  |  | 4,796 |  |  |  | 5,700 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 1,167 |  |  |  | 1,113 |  |  |  | 3,878 |  |  |  | 3,993 |
Sales and marketing |  |  | 491 |  |  |  | 446 |  |  |  | 1,431 |  |  |  | 1,472 |
General and administrative |  |  | 777 |  |  |  | 959 |  |  |  | 2,658 |  |  |  | 3,209 |
Total operating expenses |  |  | 2,435 |  |  |  | 2,518 |  |  |  | 7,967 |  |  |  | 8,674 |
Operating loss |  |  | (1,189 | ) |  |  | (934 | ) |  |  | (3,171 | ) |  |  | (2,974 | )
Other expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense |  |  | 8 |  |  |  | 12 |  |  |  | 27 |  |  |  | 39 |
Total other expense |  |  | 8 |  |  |  | 12 |  |  |  | 27 |  |  |  | 39 |
Loss before provision for income taxes |  |  | (1,197 | ) |  |  | (946 | ) |  |  | (3,198 | ) |  |  | (3,013 | )
Provision for income taxes |  |  | 2 |  |  |  | 5 |  |  |  | 15 |  |  |  | 13 |
Net loss including noncontrolling interests |  |  | (1,199 | ) |  |  | (951 | ) |  |  | (3,213 | ) |  |  | (3,026 | )
Less: Net loss attributable to noncontrolling interests |  |  | 113 |  |  |  | 142 |  |  |  | 290 |  |  |  | 560 |
Net loss attributable to Neonode Inc. |  | $ | (1,086 | ) |  | $ | (809 | ) |  | $ | (2,923 | ) |  | $ | (2,466 | )
Loss per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted loss per share |  | $ | (0.12 | ) |  | $ | (0.14 | ) |  | $ | (0.33 | ) |  | $ | (0.42 | )
Basic and diluted – weighted average number of common shares outstanding |  |  | 8,811 |  |  |  | 5,859 |  |  |  | 8,804 |  |  |  | 5,859 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Net loss |  | $ | (1,199 | ) |  | $ | (951 | ) |  | $ | (3,213 | ) |  | $ | (3,026 | )
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | (145 | ) |  |  | 13 |  |  |  | (300 | ) |  |  | (417 | )
Comprehensive loss |  |  | (1,344 | ) |  |  | (938 | ) |  |  | (3,513 | ) |  |  | (3,443 | )
Less: Comprehensive loss attributable to noncontrolling interests |  |  | 113 |  |  |  | 142 |  |  |  | 290 |  |  |  | 560 |
Comprehensive loss attributable to Neonode Inc. |  | $ | (1,231 | ) |  | $ | (796 | ) |  | $ | (3,223 | ) |  | $ | (2,883 | )

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except for Series B Preferred Stock Shares Issued)

(Unaudited)

For the Quarter to Date periods ended September 30, 2018 through September 30, 2019

|  | Series B Preferred Stock Shares Issued |  |  | Series B Preferred Stock Amount |  |  | Common Stock Shares Issued |  |  | Common Stock Amount |  |  | Additional Paid-in Capital |  |  | Accumulated Other Comprehensive Income (Loss) |  |  | Accumulated Deficit |  |  | Total Neonode Inc. Stockholders’ Equity |  |  | Noncontrolling Interests |  |  | Total Stockholders’ Equity |
Balances, January 1, 2018 |  |  | 83 |  |  | $ | - |  |  |  | 5,859 |  |  | $ | 6 |  |  | $ | 192,861 |  |  | $ | (99 | ) |  | $ | (183,745 | ) |  | $ | 9,023 |  |  | $ | (1,160 | ) |  | $ | 7,863 |
Adjustment related to adoption of ASC 606 revenue recognition |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,583 |  |  |  | 1,583 |  |  |  | - |  |  |  | 1,583 |
Stock option and warrant compensation expense to employees and directors |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | - |  |  |  | 12 |  |  |  | - |  |  |  | 12 |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (94 | ) |  |  | - |  |  |  | (94 | ) |  |  | - |  |  |  | (94 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (693 | ) |  |  | (693 | ) |  |  | (207 | ) |  |  | (900 | )
Balances, March 31, 2018 |  |  | 83 |  |  | $ | - |  |  |  | 5,859 |  |  | $ | 6 |  |  | $ | 192,873 |  |  | $ | (193 | ) |  | $ | (182,855 | ) |  | $ | 9,831 |  |  | $ | (1,367 | ) |  | $ | 8,464 |
Stock option compensation expense to employees and directors |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | - |  |  |  | - |  |  |  | 18 |  |  |  | - |  |  |  | 18 |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (336 | ) |  |  | - |  |  |  | (336 | ) |  |  | - |  |  |  | (336 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (964 | ) |  |  | (964 | ) |  |  | (211 | ) |  |  | (1,175 | )
Balances, June 30, 2018 |  |  | 83 |  |  | $ | - |  |  |  | 5,859 |  |  | $ | 6 |  |  | $ | 192,891 |  |  | $ | (529 | ) |  | $ | (183,819 | ) |  | $ | 8,549 |  |  | $ | (1,578 | ) |  | $ | 6,971 |

4

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)

(In thousands, except for Series B Preferred Stock Shares Issued)

(Unaudited)

|  | Series B Preferred Stock Shares Issued |  |  | Series B Preferred Stock Amount |  |  | Common Stock Shares Issued |  |  | Common Stock Amount |  |  | Additional Paid-in Capital |  |  | Accumulated Other Comprehensive Income (Loss) |  |  | Accumulated Deficit |  |  | Total Neonode Inc. Stockholders’ Equity |  |  | Noncontrolling Interests |  |  | Total Stockholders’ Equity |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 13 |  |  |  | - |  |  |  | 13 |  |  |  | - |  |  |  | 13 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (810 | ) |  |  | (810 | ) |  |  | (142 | ) |  |  | (952 | )
Balances, September 30, 2018 |  |  | 83 |  |  | $ | - |  |  |  | 5,859 |  |  | $ | 6 |  |  | $ | 192,891 |  |  | $ | (516 | ) |  | $ | (184,629 | ) |  | $ | 7,752 |  |  | $ | (1,720 | ) |  | $ | 6,032 |
Conversion of series B Preferred Stock to Common Stock |  |  | (1 | ) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Proceeds from sale of Common Stock, net of offering costs |  |  | - |  |  |  | - |  |  |  | 2,941 |  |  |  | 3 |  |  |  | 4,616 |  |  |  | - |  |  |  | - |  |  |  | 4,619 |  |  |  | - |  |  |  | 4,619 |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 60 |  |  |  | - |  |  |  | 60 |  |  |  | - |  |  |  | 60 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (593 | ) |  |  | (593 | ) |  |  | (322 | ) |  |  | (915 | )
Balances, December 31, 2018 |  |  | 82 |  |  | $ | - |  |  |  | 8,800 |  |  | $ | 9 |  |  | $ | 197,507 |  |  | $ | (456 | ) |  | $ | (185,222 | ) |  | $ | 11,838 |  |  | $ | (2,042 | ) |  | $ | 9,796 |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (181 | ) |  |  | - |  |  |  | (181 | ) |  |  | - |  |  |  | (181 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (573 | ) |  |  | (573 | ) |  |  | (111 | ) |  |  | (684 | )
Balances, March 31, 2019 |  |  | 82 |  |  | $ | - |  |  |  | 8,800 |  |  | $ | 9 |  |  | $ | 197,507 |  |  | $ | (637 | ) |  | $ | (185,795 | ) |  | $ | 11,084 |  |  | $ | (2,153 | ) |  | $ | 8,931 |
Conversion of series B Preferred Stock to Common Stock |  |  | (2 | ) |  |  | - |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 26 |  |  |  | - |  |  |  | 26 |  |  |  | - |  |  |  | 26 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,264 | ) |  |  | (1,264 | ) |  |  | (66 | ) |  |  | (1,330 | )
Balances, June 30, 2019 |  |  | 80 |  |  | $ | - |  |  |  | 8,801 |  |  | $ | 9 |  |  | $ | 197,507 |  |  | $ | (611 | ) |  | $ | (187,059 | ) |  | $ | 9,846 |  |  | $ | (2,219 | ) |  | $ | 7,627 |
Conversion of series B Preferred Stock to Common Stock |  |  | (80 | ) |  |  | - |  |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (145 | ) |  |  | - |  |  |  | (145 | ) |  |  | - |  |  |  | (145 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,086 | ) |  |  | (1,086 | ) |  |  | (113 | ) |  |  | (1,199 | )
Balances, September 30, 2019 |  |  | - |  |  | $ | - |  |  |  | 8,811 |  |  | $ | 9 |  |  | $ | 197,507 |  |  | $ | (756 | ) |  | $ | (188,145 | ) |  | $ | 8,615 |  |  | $ | (2,332 | ) |  | $ | 6,283 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

|  | Nine months ended September 30, |
|  | 2019 |  |  | 2018 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net loss (including noncontrolling interests) |  | $ | (3,213 | ) |  | $ | (3,026 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Stock-based compensation expense |  |  | - |  |  |  | 29 |
Bad debt expense |  |  | 20 |  |  |  | - |
Depreciation and amortization |  |  | 650 |  |  |  | 785 |
Amortization of operating lease right-of-use assets |  |  | 298 |  |  |  | - |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable and unbilled revenue, net |  |  | (128 | ) |  |  | 866 |
Projects in process |  |  | (8 | ) |  |  | 1 |
Inventory |  |  | (8 | ) |  |  | (198 | )
Prepaid expenses and other current assets |  |  | (76 | ) |  |  | 116 |
Accounts payable and accrued expenses |  |  | (30 | ) |  |  | (91 | )
Deferred revenues |  |  | (16 | ) |  |  | (757 | )
Operating lease obligations |  |  | (362 | ) |  |  | - |
Net cash used in operating activities |  |  | (2,873 | ) |  |  | (2,275 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchase of property and equipment |  |  | (89 | ) |  |  | (184 | )
Net cash used in investing activities |  |  | (89 | ) |  |  | (184 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Principal payments on finance lease obligations |  |  | (403 | ) |  |  | (413 | )
Net cash used in financing activities |  |  | (403 | ) |  |  | (413 | )
Effect of exchange rate changes on cash |  |  | (165 | ) |  |  | (235 | )
Net decrease in cash |  |  | (3,530 | ) |  |  | (3,107 | )
Cash at beginning of period |  |  | 6,555 |  |  |  | 5,796 |
Cash at end of period |  | $ | 3,025 |  |  | $ | 2,689 |
Supplemental disclosure of cash flow information: |  |  |  |  |  |  |  |
Cash paid for income taxes |  | $ | 15 |  |  | $ | 13 |
Cash paid for interest |  | $ | 27 |  |  | $ | 39 |
Supplemental disclosure of non-cash investing and financing activities: |  |  |  |  |  |  |  |
Purchase of equipment with capital lease obligations |  | $ | - |  |  | $ | 169 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

NEONODE INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Interim Period Reporting

The accompanying unaudited interim condensed consolidated financial statements include all adjustments consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of results for a full fiscal year or any other period.

The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2019 and 2018 have been prepared by us, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

We adopted the new lease accounting standard effective January 1, 2019. We used the required modified retrospective approach for adoption of the new standard, which allowed us to begin reporting operating leases on the balance sheet as of January 1, 2019. See Notes 2 and 7 for further discussion.

Operations

Neonode Inc., collectively with its subsidiaries is referred to as “Neonode”, develops and licenses user interfaces and optical touch technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed the Neonode technology into devices that they produce and sell. We also manufacture and sell our sensor modules, which incorporate our technology, to customers as an integrated hardware solution to embed our technology in their products. In the fourth quarter of 2016, we started to manufacture and sell “AirBar” which is a Neonode branded consumer product that uses one of our embedded sensor modules.

Liquidity

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.1 million and $2.9 million and $0.8 million and $2.5 million for the three and nine months ended September 30, 2019 and 2018, respectively, and had an accumulated deficit of approximately $188.1 million and $185.2 million as of September 30, 2019 and December 31, 2018, respectively. In addition, operating activities used cash of approximately $2.9 million and $2.3 million for the nine months ended September 30, 2019 and 2018, respectively.

We expect that our revenues from license fees, sensor module, non-recurring engineering fees and AirBar sales will provide us with improved cash flows from operations for at least the next twelve months. In addition, we have improved the overall cost efficiency of our operations and intend to continue to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating loss.

The condensed consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business. Management evaluated the significance of the Company’s operating loss and determined that the Company’s current operating plan and sources of capital would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.

We have obtained capital through private placements in recent years and currently have the ability to raise capital pursuant to an effective shelf registration statement, which is described immediately below.

In the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate financing is not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition. In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

Shelf Registration Statement

In March 2017, we filed a $20 million shelf registration statement with the SEC that became effective on March 24, 2017. Subject to the availability of sufficient shares of authorized common stock, we may from time to time issue shares of our common stock under our shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in a prospectus supplement and any other offering materials, at the time of the offering. Our shelf registration statement will expire on March 24, 2020.

7

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 Propoint AB, located in Gothenburg, Sweden. Pronode Technologies AB was organized to sell engineering services within the automotive markets. All inter-company accounts and transactions have been eliminated in consolidation.

Neonode consolidates entities in which we have a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights, and variable interest entities (“VIEs”) in which Neonode is the primary beneficiary.

The condensed consolidated balance sheets at September 30, 2019 and December 31, 2018 and the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three and nine months ended September 30, 2019 and 2018 include our accounts and those of our wholly owned subsidiaries as well as Pronode Technologies AB.

Estimates and Judgments

The preparation of financial statements in conformity with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates and judgments.

Significant estimates and judgments include, but are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived assets for leases, determining whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets; and the fair value of options issued for stock-based compensation.

Cash

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 90 days or less to be cash equivalents.

Concentration of Cash Balance Risks

Cash balances are maintained at various banks in the U.S., Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions in the U.S., 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 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. At times, deposits held with financial institutions may exceed the amount of insurance provided.

8

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable is stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Should all efforts fail to recover the related receivable, we will write off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $19,000 and $149,000 as of September 30, 2019 and December 31, 2018, 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 condensed 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 $7,000 as of September 30, 2019. There were no costs capitalized in projects in process as of December 31, 2018.

Inventory

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”), and net realizable value. Net realizable value is the estimated selling prices 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.

As of September 30, 2019 and December 31, 2018, the Company’s inventory consists primarily of components that will be used in the manufacturing of our sensor modules. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

Raw materials, work-in-process, and finished goods are as follows (in thousands):

|  | September 30, |  |  | December 31, |
|  | 2019 |  |  | 2018 |
Raw materials |  | $ | 378 |  |  | $ | 246 |
Work-in-process |  |  | 204 |  |  |  | 220 |
Finished goods |  |  | 522 |  |  |  | 753 |
Ending inventory |  | $ | 1,104 |  |  | $ | 1,219 |

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Investment in Joint Venture

We have invested $3,000 for a 50% interest in Neoeye AB (“Neoeye”). We account for our investment using the equity method of accounting because the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the condensed consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of Neoeye. There have been no operations of Neoeye through September 30, 2019.

We review our investment in Neoeye to determine whether events or changes in circumstances indicate that the carrying amount may not be recoverable. The primary factors we consider in our determination are the financial condition, operating performance and near-term prospects of Neoeye. If a decline in value is deemed to be other than temporary, we would recognize an impairment loss.

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 Assets

A right-of-use asset represents a lessee’s right to use a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases for buildings and finance leases for manufacturing equipment.

Right-of-use assets are measured initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial direct costs, such as commissions paid to obtain a lease.

Right-of-use assets are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct costs not yet expensed.

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Long-lived Asset Recoverability

We assess the recoverability of long-lived assets by estimating the future cash flow from the associated assets 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 September 30, 2019, 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 $(145,000) and $(300,000) during the three and nine months ended September 30, 2019, respectively, compared to translation gains (losses) of $13,000 and $(417,000) during the same periods in 2018, 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 $56,000 and $170,000 during the three and nine months ended September 30, 2019, respectively, compared to $(13,000) and $(34,000) during the same periods in 2018, respectively.

Concentration of Credit and Business Risks

Our customers are located in the U.S., Europe and Asia.

As of September 30, 2019, four customers represented approximately 88% of the Company’s accounts receivable compared to 67% as of December 31, 2018.

Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2019 are as follows:

| ● | Hewlett Packard Company – 34%
| ● | Epson – 18%
| ● | Alpine – 20%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2019 are as follows:

| ● | Hewlett Packard Company – 39%
| ● | Epson – 15%
| ● | Alpine – 14%

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Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2018 are as follows:

| ● | Hewlett Packard Company – 33%
| ● | Epson – 16%
| ● | Faraday & Future – 15%
| ● | Canon – 10%
| ● | Bosh – 10%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2018 are as follows:

| ● | Hewlett Packard Company – 34%
| ● | Epson – 14%
| ● | Canon – 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, for example, a contract that includes products and related engineering services. We structure our contracts such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly defined in each contract.

Sales of license fees and sensor modules 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.

Licensing Revenues:

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 accurate estimates of those royalties.

Explicit return rights are not offered to customers. There have been no returns through September 30, 2019.

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Engineering Services:

For technology license or sensor module contracts that require modification or customization of the underlying technology to adapt that technology to customer use, we determine whether the technology license or sensor module, and engineering consulting services represent separate performance obligations. We perform our analysis on a contract-by-contract basis. If there are separate performance obligations, we determine the standalone selling price (“SSP”) of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied. We provide engineering consulting services to our customers under a signed Statement of Work (“SOW”). Deliverables and payment terms are specified in each SOW. We generally charge an hourly rate 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 unearned revenue 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 engineering services contracts that are short-term in nature are recorded when those services are complete and accepted by customers.

Revenues from engineering services contracts with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required to produce such deliverables are recognized as they are completed and accepted by customers.

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the three and nine months ended September 30, 2019 and 2018, no losses related to SOW projects were recorded.

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Optical Sensor Modules Revenues:

We earn revenue from sales of sensor modules hardware products to our OEM and Tier 1 supplier customers, who embed our hardware into their products, and from sales of branded consumer products (AirBar) that incorporate our sensor modules sold through distributors. 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 AirBar and sensor modules to our customers, we analyze the terms of distributor agreements to determine when control passes from us to our distributors. For sales of AirBar and sensor modules sold through distributors, revenues are recognized when our distributors obtain control over our products. Control passes to our distributors when we have a present right to payment for products sold to distributors, the distributors have legal title to and physical possession of products purchased from us, and the distributors have significant risks and rewards of ownership of products purchased.

Distributors participate in various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.

Under U.S. GAAP, companies may make reasonable aggregations and approximations of returns data to accurately estimate returns. Our 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 $14,000 as of September 30, 2019 and insignificant as of December 31, 2018. 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.

The following table presents disaggregated revenues by market for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

|  | Three months ended September 30, 2019 |  |  | Three months ended September 30, 2018 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
Net license revenues from automotive |  | $ | 400 |  |  |  | 31 | % |  | $ | 248 |  |  |  | 13 | %
Net license revenues from consumer electronics |  |  | 813 |  |  |  | 62 | % |  |  | 1,349 |  |  |  | 70 | %
Net revenues from sensor modules |  |  | 95 |  |  |  | 7 | % |  |  | 39 |  |  |  | 2 | %
Net revenues from non-recurring engineering |  |  | 2 |  |  |  | 0 | % |  |  | 287 |  |  |  | 15 | %
|  | $ | 1,310 |  |  |  | 100 | % |  | $ | 1,923 |  |  |  | 100 | %
|  | Nine months ended September 30, 2019 |  |  | Nine months ended September 30, 2018 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
Net license revenues from automotive |  | $ | 1,336 |  |  |  | 27 | % |  | $ | 1,151 |  |  |  | 19 | %
Net license revenues from consumer electronics |  |  | 3,286 |  |  |  | 65 | % |  |  | 4,530 |  |  |  | 73 | %
Net revenues from sensor modules |  |  | 368 |  |  |  | 7 | % |  |  | 176 |  |  |  | 3 | %
Net revenues from non-recurring engineering |  |  | 42 |  |  |  | 1 | % |  |  | 317 |  |  |  | 5 | %
|  | $ | 5,032 |  |  |  | 100 | % |  | $ | 6,174 |  |  |  | 100 | %

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Significant Judgments:

Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract is for a product and related engineering services fees for customizing that product for our customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. Judgment may also be required to determine the SSP for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations.

Judgment is also required to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us. Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal of any incremental revenue would occur.

Finally, judgment is required to determine the amount of unbilled license fees at the end of each reporting period.

Contract Balances:

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our customers.

The following table presents accounts receivable and deferred revenues as of September 30, 2019 and December 31, 2018 (in thousands):

|  | September 30, 2019 |  |  | December 31, 2018 |
Accounts receivable and unbilled revenue, net |  | $ | 1,934 |  |  | $ | 1,830 |
Deferred revenues |  |  | 54 |  |  |  | 75 |

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; which are generally classified as current. The Company sometimes receives advances or deposits from its customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.

We do not anticipate impairment of our contract asset related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance in that asset account. We will continue to monitor the timeliness of receipts from those customers, however, to assess whether the contract asset has been impaired.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Our allowance for doubtful accounts was approximately $19,000 and $149,000 as of September 30, 2019 and December 31, 2018, respectively.

15

Payment terms and conditions vary by the type of contract; however, payments generally occur 30-60 days after invoicing for license fees and sensor modules to our resellers and distributors. Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not include a significant financing component. Our intent is to provide our customers with consistent invoicing terms for the convenience of our customers, not to receive financing from our customers.

Costs to Obtain Contracts:

We record the incremental costs of obtaining a contract with a customer as an asset, if we expect the benefit of those costs to cover a period greater than one year. We currently have no incremental costs that must be capitalized.

We expense as incurred costs of obtaining a contract when the amortization period of those costs would have been less than or equal to one year.

Product Warranty

The following table summarizes the activity related to the product warranty liability (in thousands):

|  | September 30, 2019 |  |  | December 31, 2018 |
Balance at beginning of period |  | $ | 17 |  |  | $ | 35 |
Provisions for warranty issued |  |  | (3 | ) |  |  | (18 | )
Balance at end of period |  | $ | 14 |  |  | $ | 17 |

The Company accrues for warranty costs as part of its cost of sales of sensor modules based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 to 36 months from the customer receipt of the product.

Deferred Revenues

Deferred revenues consist primarily of prepayments for license fees, and other products or services for which we have been paid in advance and earn the revenue when we transfer control of the product or service. Deferred revenues may also include upfront payments for consulting services to be performed in the future, such as non-recurring engineering services.

We defer license fees until we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer has a right to use the license. Engineering development fee revenues are deferred until engineering services have been completed and accepted by our customers. We defer AirBar and sensor modules revenues until distributors sell the products to their end customers.

The following table presents our deferred revenues (in thousands):

|  | September 30, 2019 |  |  | December 31, 2018 |
Deferred License revenues |  | $ | 28 |  |  | $ | - |
Deferred AirBar revenues |  |  | - |  |  |  | 59 |
Deferred sensor modules revenues |  |  | 11 |  |  |  | 16 |
Deferred NRE revenues |  |  | 15 |  |  |  | - |
|  | $ | 54 |  |  | $ | 75 |

During the three and nine months ended September 30, 2019, the Company recognized revenues of approximately $0 and $75,000, respectively, related to contract liabilities outstanding at the beginning of the year.

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Advertising

Advertising costs are expensed as incurred. Advertising costs for the three and nine months ended September 30, 2019 amounted to approximately $18,000 and $66,000, respectively. Advertising costs for the three and nine months ended September 30, 2018 amounted to approximately $14,000 and $84,000 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

The Company recognizes noncontrolling interests as equity in the condensed consolidated financial statements separate from the parent company’s equity. Noncontrolling interests’ partners have less than 50% share of voting rights at any one of the subsidiary level companies. The amount of net income (loss) attributable to non-controlling interests is included in consolidated net income (loss) on the face of the condensed consolidated statements of operations. Changes in a parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. The Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated. Such gain or loss is measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Additionally, operating losses are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest partner.

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.
| (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 September 30, 2019 and December 31, 2018. 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 September 30, 2019 and December 31, 2018, we had no unrecognized tax benefits.

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Net Loss per Share

Net loss per share amounts has been computed based on the weighted average number of shares of common stock outstanding during the three and nine months ended September 30, 2019 and 2018. 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 nine months ended September 30, 2019 and 2018 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:

|  | Nine months ended September 30, |
|  | 2019 |  |  | 2018 |
Swedish Krona |  |  | 9.41 |  |  |  | 8.57 |
Japanese Yen |  |  | 109.11 |  |  |  | 109.69 |
South Korean Won |  |  | 1,162.54 |  |  |  | 1,090.03 |
Taiwan Dollar |  |  | 31.04 |  |  |  | 29.90 |

Exchange rate for the condensed consolidated balance sheets was as follows:

|  | As of |
|  | September 30, |  |  | December 31, |
|  | 2019 |  |  | 2018 |
Swedish Krona |  |  | 9.83 |  |  |  | 8.87 |
Japanese Yen |  |  | 108.11 |  |  |  | 109.69 |
South Korean Won |  |  | 1,198.98 |  |  |  | 1,113.63 |
Taiwan Dollar |  |  | 31.05 |  |  |  | 30.61 |

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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 February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02 (and several subsequent accounting standards updates), lessees are required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for that asset’s lease term. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

The effective date of the new lease standard (ASC 842) was January 1, 2019, and we adopted the new standard on that date. We used the modified retrospective approach, which allowed us to make our transition adjustments at January 1, 2019. We elected the optional transition method, which allows us to continue to use disclosures required by ASC 840, the prior standard, during 2019. As permitted by the transition method, we did not reassess existing leases.

We currently have a limited number of leased finance assets, all of which have been classified as finance leases under the new lease standard. We maintain a lease inventory for those leased assets; which are currently reported on our condensed consolidated balance sheets and we continue to report them on our condensed consolidated balance sheets under the new standard. We have reported two material operating leases (for the Kungsbacka manufacturing facility and the Stockholm corporate offices) on our condensed consolidated balance sheet beginning January 1, 2019, which resulted in recording operating lease right-of-use assets and operating lease obligations of approximately $0.9 million. We determined that no adjustment to equity was necessary related to implementation of the new lease standard.

Because of the small number of assets we lease, we did not need to make systems changes to comply with the new standard. We continue to track leased assets outside of our accounting systems. We implemented additional process controls effective January 1, 2019 to ensure that we properly evaluate our contracts to determine whether they may contain leased assets. We assessed the impact of the new lease accounting standard on our consolidated financial statements to facilitate our adoption of the new standard on January 1, 2019. We have not noted (nor do we expect to see) material changes in financial ratios, leasing practices, or tax reporting; however, we will continue to address impacts to our business.

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 ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, (“ASU 2019-04”), ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326)”, (“ASU 2019-05”), and ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses”, (“ASU 2018-19”). 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, ASU 2019-04, ASU 2019-05 and ASU 2018-19 was scheduled to become effective for fiscal years beginning after December 15, 2020, with early adoption permitted. On October 16, 2019, the FASB voted to delay implementation of the new credit losses standard for smaller reporting companies, among other organizations, until fiscal years beginning after December 15, 2022. In the future, we will evaluate the impact ASU 2016-13, ASU 2019-04, ASU 2019-05 and ASU 2018-19 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.

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In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements (Topic 740, among others)”, (“ASU 2018-09”), and in March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)”, (“ASU 2018-05”). The updates were issued to address the income tax accounting and SEC reporting implications of the Tax Cuts and Jobs Act, enacted December 22, 2017. The new legislation contained several key tax provisions that affected us, including the one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018, among other changes.

We were required to recognize the effect of the tax law changes in the period of enactment. Because we have negative accumulated foreign earnings, we are not subject to the one-time repatriation tax. We have re-measured our U.S. deferred tax assets and liabilities, which resulted in a reduction of our net deferred tax assets with a corresponding adjustment to our valuation allowance. As a result, no tax expense is recorded related to the enactment of the Tax Act. We consider the accounting of deferred tax re-measurement and one-time transition tax calculation to be complete.

3. Stockholders’ Equity

Common Stock

On September 27, 2018, the Company filed a certificate of amendment to its restated certificate of incorporate with the state of Delaware to effect the reverse stock split, effective October 1, 2018. The Company also filed a certificate of amendment to its restated certificate of incorporation to reduce the number of authorized shares of common stock from 100,000,000 to 10,000,000 shares. The filing did not affect the number of authorized preferred stock of 1,000,000 shares.

As a result of the reverse stock split, every ten shares of issued and outstanding common stock were converted into one share of common stock, without any change in the par value per share. No fractional shares were issued, therefore shareholders entitled to receive a fractional share in connection with the reverse stock split received a cash payment instead. There was no financial impact to the Company’s condensed consolidated financial statements. All shares and per share information in this Form 10-Q has been retroactively adjusted for all periods presented to reflect the reverse stock split, including reclassifying any amount equal to the reduction in par value of common stock to additional paid-in capital.

Effective June 11, 2019, the Company further amended its restated certificate of incorporation to increase the number of authorized shares of common stock to 15,000,000 shares.

Preferred Stock

On April 10, 2019, a holder of 2 shares of Series B Preferred stock converted into 264 shares of our common stock.

Effective July 1, 2019, the Company implemented a conversion of all outstanding shares of Series B Preferred Stock into shares of common stock. Each share of Series B Preferred Stock was automatically converted into 132.07 shares of common stock. No fractional shares were issued. In lieu of any fractional shares, the resulting number of shares of common stock was rounded up to the nearest whole number. Accordingly, 80 shares of Series B Preferred Stock were converted into 10,577 shares of common stock.

Warrants

As of September 30, 2019 and December 31, 2018, there were 1,116,368 warrants to purchase common stock outstanding.

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4. Stock-Based Compensation

The stock-based compensation expense for the nine months ended September 30, 2019 and 2018 reflects the estimated fair value of the vested portion of options granted to employees, directors and eligible consultants. Stock-based compensation expense in the accompanying condensed consolidated statements of operations is as follows (in thousands):

|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2019 |  |  | 2018 |  |  | 2019 |  |  | 2018 |
Sales and marketing |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 6 |
General and administrative |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 23 |
Total stock-based compensation expense |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | 29 |

There is no remaining unrecognized expense related to stock options as of September 30, 2019.

The estimated fair value of stock-based awards is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock options. The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term and forfeiture rate of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior, as well as expected behavior on outstanding options. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of our stock price. These factors could change in the future, which would affect fair values of stock options granted in such future periods and could cause volatility in the total amount of the stock-based compensation expense reported in future periods.

Stock Options

We have adopted equity incentive plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors. All employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants was based only on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

As of September 30, 2019, we had two equity incentive plans:

| ● | The 2006 Equity Incentive Plan; and
| ● | The 2015 Stock Incentive Plan.

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A summary of the combined activity under all of the stock option plans is set forth below:

|  | Number of Options Outstanding |  |  | Weighted Average Exercise Price |
Outstanding at January 1, 2019 |  |  | 99,800 |  |  | $ | 34.55 |
Cancelled |  |  | - |  |  |  | - |
Expired |  |  | (44,300 | ) |  |  | 42.50 |
Outstanding at September 30, 2019 |  |  | 55,500 |  |  | $ | 28.20 |

The aggregate intrinsic value of the 55,500 stock options that are outstanding, vested and expected to vest as of September 30, 2019 was $0.

For both the three and nine months ended September 30, 2019, we recorded $0 of compensation expense related to the vesting of stock options. For the three and nine months ended September 30, 2018, the corresponding amounts were $0 and $29,000, respectively. The fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the date of grant of the stock option.

During the three and nine months ended September 30, 2019, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.

Stock options granted under the 2006 and 2015 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

5. Commitments and Contingencies

Indemnities and Guarantees

Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of September 30, 2019 and December 31, 2018.

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of September 30, 2019 and December 31, 2018.

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Non-Recurring Engineering Development Costs

On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC. Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold. As of September 30, 2019, we had made no payments to TI under the NN1002 Agreement.

On December 4, 2014, we entered into an Analog Device Development Agreement (the “NN1003 Agreement”) with STMicroelectronics International N.V. (“STMicro”) pursuant to which STMicro agreed to integrate our intellectual property into an ASIC. The NN1003 ASIC only can be sold by STMicro exclusively to our licensees. Under the terms of the NN1003 Agreement, we agreed to reimburse STMicro up to $835,000 of nonrecurring engineering costs. As of September 30, 2019 we paid a total of $835,000 of the non-recurring engineering costs and all obligations related to the NN1003 Agreement have been satisfied.

Under the terms of the NN1003 Agreement, we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As of September 30, 2019, we had reimbursed for 1,832 units under the NN1003 Agreement.

Patent Assignment

On May 6, 2019, Neonode assigned a portfolio of patents to Aequitas Technologies LLC. The portfolio contains two patent families comprising nine U.S. patents, five non-U.S. patents and three pending U.S. patent applications. The assignment provides Neonode the right to share potential proceeds generated from a licensing and monetization program.

6. Segment Information

We have one reportable segment, which is comprised of the touch technology licensing and sensor module business. All of our sales for the three and nine months ended September 30, 2019 and 2018 were to customers located in the U.S., Europe and Asia. The Company reports revenues from external customers based on the country where the customer is located.

The following table presents net revenues by geographic area for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

|  | Three months ended September 30, 2019 |  |  | Three months ended September 30, 2018 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
United States |  | $ | 548 |  |  |  | 42 | % |  |  | 1,101 |  |  |  | 57 | %
Japan |  |  | 498 |  |  |  | 38 |  |  |  | 623 |  |  |  | 32 |
Germany |  |  | 106 |  |  |  | 8 |  |  |  | 195 |  |  |  | 10 |
China |  |  | 49 |  |  |  | 4 |  |  |  | (67 | ) |  |  | (3 | )
Taiwan |  |  | 13 |  |  |  | 1 |  |  |  | 49 |  |  |  | 3 |
India |  |  | 32 |  |  |  | 2 |  |  |  | - |  |  |  |  |
Sweden |  |  | 7 |  |  |  | 1 |  |  |  |  |  |  |  |  |
South Korea |  |  | 4 |  |  |  | - |  |  |  | - |  |  |  | - |
Switzerland |  |  | 52 |  |  |  | 4 |  |  |  | - |  |  |  | - |
Other |  |  | 1 |  |  |  | - |  |  |  | 22 |  |  |  | 1 |
|  | $ | 1,310 |  |  |  | 100 | % |  | $ | 1,923 |  |  |  | 100 | %

|  | Nine months ended September 30, 2019 |  |  | Nine months ended September 30, 2018 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
United States |  | $ | 2,510 |  |  |  | 50 | % |  |  | 3,033 |  |  |  | 49 | %
Japan |  |  | 1,515 |  |  |  | 30 |  |  |  | 2,119 |  |  |  | 34 |
Germany |  |  | 477 |  |  |  | 9 |  |  |  | 604 |  |  |  | 10 |
China |  |  | 177 |  |  |  | 4 |  |  |  | 130 |  |  |  | 2 |
Taiwan |  |  | 31 |  |  |  | 1 |  |  |  | 159 |  |  |  | 3 |
Singapore |  |  | 2 |  |  |  | - |  |  |  | - |  |  |  | - |
Sweden |  |  | 6 |  |  |  | - |  |  |  | 10 |  |  |  | - |
Canada |  |  | 7 |  |  |  | - |  |  |  | - |  |  |  | - |
South Korea |  |  | 8 |  |  |  | - |  |  |  | - |  |  |  | - |
Switzerland |  |  | 109 |  |  |  | 2 |  |  |  | - |  |  |  | - |
France |  |  | 152 |  |  |  | 3 |  |  |  | - |  |  |  | - |
India |  |  | 32 |  |  |  | 1 |  |  |  |  |  |  |  |  |
Spain |  |  | 6 |  |  |  | - |  |  |  |  |  |  |  |  |
Other |  |  | - |  |  |  | - |  |  |  | 119 |  |  |  | 2 |
|  | $ | 5,032 |  |  |  | 100 | % |  | $ | 6,174 |  |  |  | 100 | %

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The following table presents our total assets by geographic region for the periods ended (in thousands):

|  | September 30, 2019 |  |  | December 31, 2018 |
U.S. |  | $ | 4,490 |  |  | $ | 2,828 |
Sweden |  |  | 4,929 |  |  |  | 10,308 |
Asia |  |  | 91 |  |  |  | 106 |
Total |  | $ | 9,510 |  |  | $ | 13,242 |

7. Leases

We have operating leases for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms of one year to three years, and our two primary operating leases include options to extend the leases for one to three years; those operating leases also include options to terminate the leases within one year. Future renewal options that are not likely to be executed as of the balance sheet date are excluded from right-of-use assets and related lease liabilities.

Our operating leases represent building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility. Our corporate office lease is automatically renewed at a cost increase of 2% on a yearly basis, unless we provide written notice nine months prior to expiration date.

We report operating leased assets, as well as operating lease current and noncurrent obligations on our balance sheets for the right to use those buildings in our business. Our finance leases represent manufacturing equipment; we report the manufacturing equipment, as well as finance lease current and noncurrent obligations on our balance sheets for our manufacturing equipment.

Generally, interest rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate.

The components of lease expense were as follows (in thousands):

|  | Three Months Ended September 30, 2019 |  |  | Nine months Ended September 30, 2019 |
Operating lease cost (1) |  | $ | 145 |  |  | $ | 454 |
Finance lease cost: |  |  |  |  |  |  |  |
Amortization of leased assets |  | $ | 153 |  |  | $ | 471 |
Interest on lease liabilities |  |  | 8 |  |  |  | 26 |
Total finance lease cost |  | $ | 161 |  |  | $ | 497 |

| (1) | Includes short term lease costs of $27,000 and $93,000 for the three and nine months ended September 30, 2019, respectively.

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Supplemental cash flow information related to leases was as follows (in thousands):

|  | Three months ended September 30, |  |  | Nine months ended September 30, |
|  | 2019 |  |  | 2019 |
Cash paid for amounts included in leases: |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  |  | (109 | ) |  |  | (298 | )
Operating cash flows from finance leases |  |  | (8 | ) |  |  | (26 | )
Financing cash flows from finance leases |  |  | (131 | ) |  |  | (403 | )
Right-of-use assets obtained in exchange for lease obligations: |  |  |  |  |  |  |  |
Operating leases |  |  | - |  |  |  | - |
Finance leases |  |  | - |  |  |  | - |

Supplemental balance sheet information related to leases was as follows (in thousands):

|  | September 30, 2019 |
Operating leases |  |  |
Operating lease right-of-use assets |  | $ | 581 |
Current portion of operating lease obligations |  | $ | 413 |
Operating lease liabilities, net of current portion |  |  | 105 |
Total operating lease liabilities |  | $ | 518 |
Finance leases |  |  |  |
Property and equipment, at cost |  | $ | 3,180 |
Accumulated depreciation |  |  | (1,708 | )
Property and equipment, net |  | $ | 1,472 |
Current portion of finance lease obligations |  | $ | 552 |
Finance lease obligations, net of current portion |  |  | 599 |
Total finance lease liabilities |  | $ | 1,151 |

|  | Nine months Ended September 30, 2019 |
Weighted Average Remaining Lease Term |  |  |
Operating leases |  |  | 1.4 years |
Finance leases |  |  | 1.9 years |
Weighted Average Discount Rate |  |  |  |
Operating leases (2) |  |  | 5 | %
Finance leases |  |  | 2 | %

| (2) | Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.

A summary of future minimum payments under non-cancellable operating lease commitments as of September 30, 2019 is as follows (in thousands):

Years ending December 31, |  | Total |
2019 (remaining months) |  | $ | 84 |
2020 |  |  | 399 |
2021 |  |  | 56 |
|  |  | 539 |
Less imputed interest |  |  | (21 | )
Total lease liabilities |  |  | 518 |
Less current portion |  |  | (413 | )
|  | $ | 105 |

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The following is a schedule of minimum future rentals on the non-cancelable finance leases as of September 30, 2019 (in thousands):

Year ending December 31, |  | Total |
2019 (remaining months) |  | $ | 135 |
2020 |  |  | 556 |
2021 |  |  | 453 |
2022 |  |  | 35 |
Total minimum payments required: |  |  | 1,179 |
Less amount representing interest: |  |  | (28 | )
Present value of net minimum lease payments: |  |  | 1,151 |
Less current portion |  |  | (552 | )
|  | $ | 599 |

Disclosures related to periods prior to adoption of ASC 842

Minimum future lease payments under finance and operating lease obligations as of December 31, 2018 were as follows:

Year ending December 31, |  | Capital |  |  | Operating |
2019 |  | $ | 602 |  |  | $ | 457 |
2020 |  |  | 616 |  |  |  | 89 |
2021 |  |  | 502 |  |  |  | 3 |
2022 |  |  | 39 |  |  |  | - |
Total minimum payments required |  |  | 1,759 |  |  | $ | 549 |
Less amount representing interest |  |  | (56 | ) |  |  |  |
Present value of net minimum lease payments |  |  | 1,703 |  |  |  |  |
Less current portion |  |  | (570 | ) |  |  |  |
|  | $ | 1,133 |  |  |  |  |

8. Net Loss per Share

Basic net loss per common share for the three and nine months ended September 30, 2019 and 2018 was computed by dividing the net loss attributable to Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to Neonode Inc. by the weighted average number of shares of common stock and common stock equivalents outstanding.

Potential common stock equivalents of approximately 0 and 0 outstanding stock options and 348,000 and 350,000 outstanding stock warrants under the treasury stock method, and 0 and 11,000 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2019 and 2018, respectively, due to their anti-dilutive effect.

(in thousands, except per share amounts) |  | Three months ended September 30, |
|  | 2019 |  |  | 2018 |
BASIC AND DILUTED |  |  |  |  |  |
Weighted average number of common shares outstanding |  |  | 8,811 |  |  |  | 5,859 |
Net loss attributable to Neonode Inc. |  | $ | (1,086 | ) |  | $ | (809 | )
Net loss per share - basic and diluted |  | $ | (0.12 | ) |  | $ | (0.14 | )

(in thousands, except per share amounts) |  | Nine months ended September 30, |
|  | 2019 |  |  | 2018 |
BASIC AND DILUTED |  |  |  |  |  |
Weighted average number of common shares outstanding |  |  | 8,804 |  |  |  | 5,859 |
Net loss attributable to Neonode Inc. |  | $ | (2,923 | ) |  | $ | (2,466 | )
Net loss per share - basic and diluted |  | $ | (0.33 | ) |  | $ | (0.42 | )

9. Subsequent Events

We have evaluated subsequent events through the filing date of this Form 10-Q and determined that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as discussed in the accompanying notes.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some forward looking statements by the use of words such as “believe,” “anticipate,” “expect,” “intend,” “goal,” “plan,” and similar expressions. Forward looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to our limited experience manufacturing hardware devices, the uncertainty of growth in market acceptance for our technology, our history of losses since inception, our ability to remain competitive in response to new technologies, the costs to defend, as well as risks of losing, patents and intellectual property rights, our ability to realize revenue from patent monetization, a reliance on our future customers’ ability to develop and sell products that incorporate our technology, our customer concentration and dependence on a limited number of customers, the uncertainty of demand for our technology in certain markets, the length of a product development and release cycle, our ability to manage growth effectively, our dependence on key members of our management and development team, our ability to maintain the Nasdaq listing of our common stock, and our ability to obtain adequate capital to fund future operations, For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and in our publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the date of this Quarterly Report on Form 10-Q. Because actual events or results may differ materially from those discussed in or implied by forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. We do not undertake responsibility to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K.

Neonode Inc., collectively with its subsidiaries, is referred to in this Form 10-Q as “Neonode”, “we”, “us”, “our”, “registrant”, or “Company”.

Overview

Our Company develops optical touch and gesture solutions for human interaction with devices. We offer our core technology under the brand name “zForce”.

We license our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed our technology into products they develop, manufacture and sell. Since 2010 our licensing customers have sold approximately 72 million devices that use our technology.

In addition to our licensing business, we design and manufacture sensor modules that incorporate our zForce AIR technology. We sell our embedded sensors components to OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers for use in their products. We began shipping sensor modules in October 2017. We also sell our Neonode branded AirBar product incorporating one of our sensor modules through distributors.

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We derive revenues through technology licensing, selling embedded sensor modules and engineering consulting services. We mainly operate in the business-to-business (“B2B”) markets.

Licensing

As of September 30, 2019, we had entered into forty-two technology license agreements with global OEMs, ODMs and Tier 1 suppliers.

Our licensing customer base is primarily in the automotive, printer, specialized tablet and e-reader markets. Fourteen of our licensing customers are currently shipping products that embed our touch and gesture technology. We anticipate current and new customers will initiate product shipments throughout 2019 and in future years as they complete final product development and release cycles. Customer product development and release cycles typically take between 6 months to 36 months. We earn our license fees on a per unit basis when our customers ship products using our technology.

We also offer engineering consulting services to our licensing customers on a flat rate or hourly rate basis. Typically, our customers require engineering support during the development and initial manufacturing phase for their products using our technology.

Our plan is to continue with the licensing business along with selling embedded sensor modules. For some customers, the licensing business model is preferable to transitioning to purchase agreements using our sensor modules.

Sensor Modules

In 2015, we developed our zForce AIR. This optical sensing technology which enables touch interaction, gesture control and object detection led to the development of a series of sensor modules that provide our customers with various solutions in a sensor hardware component.

We utilize a robotic manufacturing process designed specifically for zForce AIR components. Industry specific sensor modules with a common technology platform provides hardware touch, gesture and object sensing solutions that, paired with our technology licensing platform, gives us a full range of options to enter and compete in key markets.

Our offerings include a consumer product, AirBar. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers. AirBar is powered by our sensor modules. In 2016 and 2017, we began shipping 15.6 inch, 13.3 inch and 14 inch AirBar to distributors and customers in the United States and Europe. We have no current plans to develop new Neonode branded products for the consumer markets.

In October 2017, we began selling embedded sensor modules to business customers in the industrial and consumer electronics markets. We received a purchase order for sensor modules of approximately $0.6 million from an industry-leading medical device OEM who will use our sensor module in a retrofit touch display system for an X-Ray machine. Delivery began in September 2019 as expected. Over time, we expect a significant portion of our revenues will be derived from sensor modules.

28

Results of Operations

A summary of our financial results is as follows (in thousands, except percentages):

|  | Three months ended |  |  |  |  |  | Nine months ended |  |  |  |
|  | September 30, |  |  | Variance in |  |  | September 30, |  |  | Variance in |
|  | 2019 |  |  | 2018 |  |  | $ |  |  | % |  |  | 2019 |  |  | 2018 |  |  | $ |  |  | % |
Revenue: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
License Fees |  | $ | 1,213 |  |  | $ | 1,597 |  |  | $ | (384 | ) |  |  | (24.0 | )% |  | $ | 4,622 |  |  | $ | 5,681 |  |  | $ | (1,059 | ) |  |  | (18.6 | )%
Percentage of revenue |  |  | 92.6 | % |  |  | 83.0 | % |  |  |  |  |  |  |  |  |  |  | 91.9 | % |  |  | 92.0 | % |  |  |  |  |  |  |  |
Sensor Modules |  | $ | 95 |  |  | $ | 39 |  |  | $ | 56 |  |  |  | 143.6 | % |  | $ | 368 |  |  | $ | 176 |  |  | $ | 192 |  |  |  | 109.1 | %
Percentage of revenue |  |  | 7.3 | % |  |  | 2.0 | % |  |  |  |  |  |  |  |  |  |  | 7.3 | % |  |  | 2.9 | % |  |  |  |  |  |  |  |
NRE |  | $ | 2 |  |  | $ | 287 |  |  | $ | (285 | ) |  |  | (99.3 | )% |  | $ | 42 |  |  | $ | 317 |  |  | $ | (275 | ) |  |  | (86.8 | )%
Percentage of revenue |  |  | 0.2 | % |  |  | 14.9 | % |  |  |  |  |  |  |  |  |  |  | 0.8 | % |  |  | 5.1 | % |  |  |  |  |  |  |  |
Total Revenue |  | $ | 1,310 |  |  | $ | 1,923 |  |  | $ | (613 | ) |  |  | (31.9 | )% |  | $ | 5,032 |  |  | $ | 6,174 |  |  | $ | (1,142 | ) |  |  | (18.5 | )%
Cost of Sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sensor Modules |  | $ | 65 |  |  | $ | 57 |  |  | $ | 8 |  |  |  | 14.0 | % |  | $ | 121 |  |  | $ | 191 |  |  | $ | (70 | ) |  |  | (36.6 | )%
Percentage of revenue |  |  | 5.0 | % |  |  | 3.0 | % |  |  |  |  |  |  |  |  |  |  | 2.4 | % |  |  | 3.1 | % |  |  |  |  |  |  |  |
NRE |  | $ | (1 | ) |  | $ | 282 |  |  | $ | (283 | ) |  |  | (100.4 | )% |  | $ | 115 |  |  | $ | 283 |  |  | $ | (168 | ) |  |  | (59.4 | )%
Percentage of revenue |  |  | (0.1 | )% |  |  | 14.7 | % |  |  |  |  |  |  |  |  |  |  | 2.3 | % |  |  | 4.6 | % |  |  |  |  |  |  |  |
Total Cost of Sales |  | $ | 64 |  |  | $ | 339 |  |  | $ | (275 | ) |  |  | (81.1 | )% |  | $ | 236 |  |  | $ | 474 |  |  | $ | (238 | ) |  |  | (50.2 | )%
Total Gross Margin |  | $ | 1,246 |  |  | $ | 1,584 |  |  | $ | (338 | ) |  |  | (21.3 | )% |  | $ | 4,796 |  |  | $ | 5,700 |  |  | $ | (904 | ) |  |  | (15.9 | )%
Operating Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  | $ | 1,167 |  |  | $ | 1,113 |  |  | $ | 54 |  |  |  | 4.9 | % |  | $ | 3,878 |  |  | $ | 3,993 |  |  | $ | (115 | ) |  |  | (2.9 | )%
Percentage of revenue |  |  | 89.1 | % |  |  | 57.9 | % |  |  |  |  |  |  |  |  |  |  | 77.1 | % |  |  | 64.7 | % |  |  |  |  |  |  |  |
Sales and marketing |  |  | 491 |  |  |  | 446 |  |  |  | 45 |  |  |  | 10.1 | % |  |  | 1,431 |  |  |  | 1,472 |  |  |  | (41 | ) |  |  | (2.8 | )%
Percentage of revenue |  |  | 37.5 | % |  |  | 23.2 | % |  |  |  |  |  |  |  |  |  |  | 28.4 | % |  |  | 23.8 | % |  |  |  |  |  |  |  |
General and administrative |  |  | 777 |  |  |  | 959 |  |  |  | (182 | ) |  |  | (19.0 | )% |  |  | 2,658 |  |  |  | 3,209 |  |  |  | (551 | ) |  |  | (17.2 | )%
Percentage of revenue |  |  | 59.3 | % |  |  | 49.9 | % |  |  |  |  |  |  |  |  |  |  | 52.8 | % |  |  | 52.0 | % |  |  |  |  |  |  |  |
Total Operating Expenses |  | $ | 2,435 |  |  | $ | 2,518 |  |  | $ | (83 | ) |  |  | (3.3 | )% |  | $ | 7,967 |  |  | $ | 8,674 |  |  | $ | (707 | ) |  |  | (8.2 | )%
Percentage of revenue |  |  | 185.9 | % |  |  | 130.9 | % |  |  |  |  |  |  |  |  |  |  | 158.3 | % |  |  | 140.5 | % |  |  |  |  |  |  |  |
Operating Loss |  | $ | (1,189 | ) |  | $ | (934 | ) |  | $ | (255 | ) |  |  | 27.3 | % |  | $ | (3,171 | ) |  | $ | (2,974 | ) |  | $ | (197 | ) |  |  | 6.6 | %
Percentage of revenue |  |  | (90.8 | )% |  |  | (48.6 | )% |  |  |  |  |  |  |  |  |  |  | (63.0 | )% |  |  | (48.2 | )% |  |  |  |  |  |  |  |
Other Expenses |  |  | 8 |  |  |  | 12 |  |  |  | (4 | ) |  |  | (33.3 | )% |  |  | 27 |  |  |  | 39 |  |  |  | (12 | ) |  |  | (30.8 | )%
Percentage of revenue |  |  | 0.6 | % |  |  | 0.6 | % |  |  |  |  |  |  |  |  |  |  | 0.5 | % |  |  | 0.6 | % |  |  |  |  |  |  |  |
(Benefits from) Provision for income taxes |  |  | 2 |  |  |  | 5 |  |  |  | (3 | ) |  |  | (60.0 | )% |  |  | 15 |  |  |  | 13 |  |  |  | 2 |  |  |  | 15.4 | %
Percentage of revenue |  |  | 0.2 | % |  |  | 0.3 | % |  |  |  |  |  |  |  |  |  |  | 0.3 | % |  |  | 0.2 | % |  |  |  |  |  |  |  |
Less: net loss attributable to noncontrolling interests |  |  | 113 |  |  |  | 142 |  |  |  | (29 | ) |  |  | (20.4 | )% |  |  | 290 |  |  |  | 560 |  |  |  | (270 | ) |  |  | (48.2 | )%
Percentage of revenue |  |  | 8.6 | % |  |  | 7.4 | % |  |  |  |  |  |  |  |  |  |  | 5.8 | % |  |  | 9.1 | % |  |  |  |  |  |  |  |
Net Loss attributable to Neonode Inc. |  |  | (1,086 | ) |  |  | (809 | ) |  |  | (277 | ) |  |  | 34.2 | % |  |  | (2,923 | ) |  |  | (2,466 | ) |  |  | (457 | ) |  |  | 18.5 | %
Percentage of revenue |  |  | (82.9 | )% |  |  | (42.1 | )% |  |  |  |  |  |  |  |  |  |  | (58,1 | )% |  |  | (39.9 | )% |  |  |  |  |  |  |  |
Net Loss attributable to Neonode Inc. per share |  | $ | (0.12 | ) |  | $ | (0.14 | ) |  | $ | 0.02 |  |  |  | (14.3 | )% |  | $ | (0.33 | ) |  | $ | (0.42 | ) |  | $ | (0.09 | ) |  |  | (21.4 | )%
Percentage of revenue |  |  | 0.0 | % |  |  | 0.0 | % |  |  |  |  |  |  |  |  |  |  | 0.0 | % |  |  | 0.0 | % |  |  |  |  |  |  |  |

29

Net Revenues

All of our sales for the three and nine months ended September 30, 2019 and 2018 were to customers located in the U.S., Europe and Asia.

Our net revenues for the three and nine months ended September 30, 2019 are $1.3 million and $5.0 million, respectively, and include revenues earned from technology license fees, NRE and module sales. Revenues for the three and nine months ended September 30, 2019 decreased by $0.6 million, or 32%, and $1.1 million, or 19%, year over year, respectively.

Our total license fees for the three month period ended September 30, 2019 decreased by $0.4 million, or 24%, primarily due to the adoption of a new technology platforms by an e-reader and a printer customer in the fourth quarter of 2018 resulting in a 96% decrease in total e-reader license fees and a 31% decrease in total printer license fees for the comparable quarters. The decrease in license fees from these two customers is partially offset by a 61% increase in license fees from our automotive customers.

In addition, non-recurring revenue for the third quarter 2019 decreased $0.3 million, or 99% due to the completion of major milestones related to an automotive entry system project in the third quarter of 2018. Revenues from sensor module sales increased $0.1 million, or 144%, compared to the three month period ended September 30 in 2018. The overall decrease in revenues for the comparable nine month periods is primarily due to the same customer activities.

We are currently engaged on numerous customer projects in automotive, military, printers, medical and other markets and expect future revenues to increase under both license fees and from sales of sensor modules.

The following table presents the license fee revenue distribution per market for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):

|  | Three months ended September 30, 2019 |  |  | Three months ended September 30, 2018 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
Printers |  | $ | 805 |  |  |  | 66 | % |  | $ | 1,159 |  |  |  | 73 | %
E-Readers and tablets |  |  | 8 |  |  |  | 1 | % |  |  | 190 |  |  |  | 11 | %
Automotive |  |  | 400 |  |  |  | 33 | % |  |  | 248 |  |  |  | 16 | %
|  | $ | 1,213 |  |  |  | 100 | % |  | $ | 1,597 |  |  |  | 100 | %

|  | Nine months ended September 30, 2019 |  |  | Nine months ended September 30, 2018 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
Printers |  | $ | 3,162 |  |  |  | 68 | % |  | $ | 3,830 |  |  |  | 68 | %
E-Readers and tablets |  |  | 124 |  |  |  | 3 | % |  |  | 700 |  |  |  | 12 | %
Automotive |  |  | 1,336 |  |  |  | 29 | % |  |  | 1,151 |  |  |  | 20 | %
|  | $ | 4,622 |  |  |  | 100 | % |  | $ | 5,681 |  |  |  | 100 | %

Gross Margin

Our combined total gross margin was 95% and 95% for the three and nine months ended September 30, 2019, respectively, and 82% and 92% for the three and nine months ended September 30, 2018, respectively. The increase in total gross margin in 2019 as compared to 2018 was primarily due to lower license fees and a decrease in NRE direct costs. For the three and nine months ended September 30, 2019, license fees accounted for 93% and 92%, respectively, of total revenue compared to 83% and 92% in the same periods in 2018. There were $2,000 and $42,000 of NRE revenues for the three and nine months ended September 30, 2019, respectively, compared to $287,000 and $317,000 in the same periods 2018. Gross margin on sensor module sales in the three and nine months ended September 30, 2019 was 32% and 67%, respectively, while for the same periods in 2018 was (46)% and (9)%, respectively.

Our cost of revenues includes the direct cost of production of certain customer prototypes, costs of engineering personnel, engineering consultants to complete the engineering design contracts and cost of goods sold for sensor modules includes fully burdened manufacturing costs, outsourced final assembly costs, and component costs of sensor modules.

30

Research and Development

Research and development (“R&D”) expenses for the three and nine months ended September 30, 2019 were $1.2 million and $3.9 million, respectively. For the same periods in 2018, the R&D expenses were $1.1 million and $4.0 million. The decrease was primarily related to lower staff expenses, partly offset by higher costs for scrapped material in 2019. R&D expenses primarily consist of personnel-related costs in addition to external consultancy costs, such as testing, certifying and measurements, along with costs related to developing and building new product prototypes. In April 2019 we signed a collaboration agreement with Finetek Co. Ltd. of Korea. According to the terms of the agreement Finetek will serve as a system integrator and future electronic manufacturing partner for Neonode zForce® technology.

Sales and Marketing

Sales and marketing expenses for the three and nine months ended September 30, 2019 were $0.5 million and $1.4 million, respectively. The sales and marketing costs for the same periods in 2018 were $0.5 million and $1.5 million. The expenses for the nine months ended September 30, 2019 were lower compared to the same period in 2018, primarily due to lower payroll and travel expenses. Included in sales and marketing expenses for the three and nine months ended September 30, 2018, is $0 and $6,000, respectively of non-cash stock-based compensation expense. There was no remaining unrecognized expense related to stock options as of September 30, 2019.

Our sales activities focus on OEM, ODM and Tier 1 customers who license our technology or purchase and embed our touch sensor modules into their products. Our customers then sell and market their products incorporating our technology to their customers. In February 2019, we entered into an agreement with CeCop for sales and marketing of AirBar products in Europe. In March 2019 we entered into an agreement with Convergence Promotions LLC to act as our North American sales and marketing partner to the industrial, medical, aerospace, military, robotics and consumer markets. In July 2019 we signed a distributor agreement with Serial Microelectronics (HK) Limited to promote and sell Neonode’s sensor products in China, Taiwan and Hong Kong through Serial’s extensive sales and distribution organization.

General and Administrative

General and administrative (“G&A”) expenses for the three and nine months ended September 30, 2019 were $0.8 million and $2.7 million, respectively. The G&A expenses for the three and nine months ended September 30, 2018 were $1.0 million and $3.2 million, respectively. The decrease was primarily due to lower payroll and consultancy expense. Included in G&A expenses for the three and nine months ended September 30, 2018, were $0 and $23,000, respectively of non-cash stock-based compensation expense consisting of stock options issued to employees and consultants. There were no non-cash stock-based compensation expenses during the three and nine months ended September 30, 2019.

Income Taxes

Our effective tax rate was (0)% and (0)% for the three and nine months ended September 30, 2019, respectively, and 0% and 0% for the three and nine months ended September 30, 2018, respectively. We recorded valuation allowances for the nine month periods ended September 30, 2019 and September 30, 2018 for deferred tax assets related to net operating losses due to the uncertainty of realization.

Net Loss

As a result of the factors discussed above, we recorded a net loss attributable to Neonode Inc. of $1.1 million and $2.9 million for the three and nine months ended September 30, 2019, respectively, and $0.8 million and $2.5 million, respectively, for the same periods in 2018.

Off-Balance Sheet Arrangements

We do not have any transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than operating leases incurred in the normal course of business. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support. We do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that are not reflected on the face of the condensed consolidated financial statements.

31

Contractual Obligations and Commercial Commitments

Non-Recurring Engineering Development Costs

On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC. Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold. As of September 30, 2019, we had made no payments to TI under the NN1002 Agreement.

On December 4, 2014, we entered into an Analog Device Development Agreement (the “NN1003 Agreement”) with STMicroelectronics International N.V. (“STMicro”) pursuant to which STMicro agreed to integrate our intellectual property into an ASIC. The NN1003 ASIC only can be sold by STMicro exclusively to our licensees. Under the terms of the NN1003 Agreement, we agreed to reimburse STMicro up to $835,000 of nonrecurring engineering costs. As of September 30, 2019 we paid a total of $835,000 of the non-recurring engineering costs and all obligations related to the NN1003 Agreement have been satisfied.

Operating Leases

We have two material operating leases. On July 1, 2014, Neonode Technologies AB entered into a lease for 7,007 square feet of office space located at Storgatan 23C, Stockholm, Sweden. The lease is automatically renewed at a cost increase of 2% on a yearly basis, unless written notice is provided three months prior to expiration date.

On December 1, 2015, Pronode Technologies AB entered into a lease agreement for 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka, Sweden. The lease expires on October 1, 2021 and must be terminated with nine months’ written notice before expiration or is otherwise renewed for another three years

For the three and nine months ended September 30, 2019, we recorded approximately $130,000 and $461,000, respectively, for rent expense for all leased properties compared to $165,000 and $523,000 for the same periods in 2018.

See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.

Finance Leases

In April 2014, we entered into a lease for certain specialized milling equipment. Under the terms of the lease agreement we are obligated to purchase the equipment at the end of the original six-year lease term for 10% of the original purchase price of the equipment. In accordance with relevant accounting guidance the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2014 when the equipment went into service. The implicit interest rate of the lease is 4% per annum.

Between the second and the fourth quarters of 2016, we entered into six leases for component production equipment. Under the terms of five of the lease agreements entered into during 2016, we are obligated to purchase the equipment at the end of the original three to five years lease terms for 5-10% of the original purchase price of the equipment. In accordance with relevant accounting guidance these five leases are classified as finance leases. The lease payments and depreciation periods began between September and November 2016 when the equipment went into service. The implicit interest rate of these five leases is currently approximately 3% per annum. The additional lease entered into during 2016 is a hire-purchase agreement that requires the equipment to be paid off after five years. In accordance with relevant accounting guidance the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2016 when the equipment went into service. The implicit interest rate of this lease is approximately 3% per annum.

In 2017, we entered into one lease for component production equipment. Under the terms of the lease agreement the lease will be renewed within one year of the end of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in May 2017 when the equipment went into service. The implicit interest rate of the lease is approximately 1.5% per annum.

In 2018, we entered into one lease for component production equipment. Under the terms of the agreement, the lease will be renewed within one year of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in August 2018 when the equipment went into service. The implicit interest rate of the lease is approximately 1.5% per annum.

See Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.

32

Liquidity and Capital Resources

Our liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things:

| ● | actual versus anticipated licensing and of sales of sensor modules with of our technology;
| ● | actual versus anticipated operating expenses;
| ● | timing of our OEM customer product shipments;
| ● | timing of payment for our technology licensing agreements or purchases of our sensor modules;
| ● | actual versus anticipated gross profit margin;
| ● | ability to raise additional capital, if necessary; and
| ● | ability to secure credit facilities, if necessary.

As of September 30, 2019, we had cash of $3.0 million compared to $6.6 million as of December 31, 2018.

Working capital (current assets less current liabilities) was $4.4 million as of September 30, 2019, compared to $8.2 million as of December 31, 2018.

Net cash used in operating activities for the nine months ended September 30, 2019 was $2.9 million and was primarily the result of a net loss of $3.2 million and offset by approximately $1.0 million in non-cash operating expenses, comprised primarily of depreciation and amortization of operating lease right-of-use assets.

Net cash used in operating activities for the nine months ended September 30, 2018 was $2.3 million and was primarily the result of a net loss of approximately $3.0 million and offset by approximately $0.8 million in non-cash operating expenses, comprised primarily of depreciation and amortization.

Accounts receivable and unbilled revenues increased by approximately $128,000 as of September 30, 2019 compared to December 31, 2018. This was due to the timing of the payments received from customers.

Inventory increased by approximately $8,000 during the nine months ended September 30, 2019 compared to December 31, 2018.

Deferred revenues decreased by approximately $16,000 during the nine months ended September 30, 2019 compared to December 31, 2018.

During the nine months ended September 30, 2019 and 2018, we purchased approximately $89,000 and $184,000, respectively, of property and equipment, primarily furniture and test equipment.

Net cash used in financing activities of $403,000 during the nine months ended September 30, 2019 was the result of principal payments on finance leases.

Net cash used in financing activities of $413,000 during the nine months ended September 30, 2018 was the result of principal payments on finance leases.

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.1 million and $2.9 million for the three and nine months ended September 30, 2019, respectively compared to $0.8 million and $2.5 million during the same periods in 2018, and had an accumulated deficit of approximately $188.1 million and $185.2 million as of September 30, 2019 and December 31, 2018, respectively. In addition, operating activities used cash of approximately $2.9 million and $2.3 million for the nine months ended September 30, 2019 and 2018, respectively.

33

On December 28, 2018, we entered into a Securities Purchase Agreement with foreign investors as part of a non-brokered private placement pursuant to which we issued a total of 2,940,767 shares of common stock at $1.60 per share for a purchase price of $4.6 million in net proceeds. The purchasers in the private placement included Neonode directors, Ulf Rosberg and Andreas Bunge, and members of management and certain employees of the Company, including former Chief Executive Officer, Hakan Persson, and former Chief Financial Officer, Lars Lindqvist. The Neonode directors and members of management and employees individually purchased an aggregate of approximately $2 million of common stock as part of the private placement. In addition, Peter Lindell, a major shareholder and (since September 2019) Neonode director, also purchased shares.

We expect that our revenues will increase, which will provide us with improved cash flows from operations for at least the next twelve months. In the event that we are unable to meet our revenue targets, we will have to explore alternative methods to conserve our cash position. Should we find it necessary to delay or scale back certain activities, our business, financial condition, and results of operations could be materially affected. While there is no assurance that the Company can meet its revenue targets, management anticipates that it can continue operations for at least the next twelve months.

In the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. Historically, we have been able to access the capital markets through sales of common stock and warrants to generate liquidity. Stockholders at our 2019 Annual Meeting of Stockholders approved an increase in our authorized amount of common stock to 15,000,000 shares. We currently have available approximately 5,000,000 shares of common stock and 1,000,000 shares of preferred stock that are not outstanding nor reserved for issuance.

If we do require capital in the future, no assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate financing is not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition. The issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

We currently have a $20 million effective shelf registration statement on file with the SEC. Subject to the availability of sufficient shares of authorized common stock, we may from time to time issue shares of our common stock under our shelf registration in amounts, at prices, and on terms to be announced when and if the securities are offered. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in a prospectus supplement and any other offering materials, at the time of the offering. Our shelf registration statement will expire on March 24, 2020.

The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. They are subject to foreign currency exchange rate risk. Any increase or decrease in the exchange rate of the U.S. Dollar compared to the Swedish Krona, Japanese Yen, South Korean Won or Taiwan Dollar will impact our future operating results.

34

Critical Accounting Policies

We adopted the new accounting standard for revenue recognition effective January 1, 2018.

Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract covers a product and related engineering services fees for customizing that product for our customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. Judgment may also be required to determine the stand-alone selling price for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations; however, we recently negotiated a contract that may include multiple performance obligations in the future.

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.

We adopted the new accounting standard for leases effective January 1, 2019. We used the modified retrospective approach, which allowed us to make our transition adjustments at January 1, 2019. We elected the optional transition method, which allows us to continue to use disclosures required by ASC 840, the prior standard, during 2019. As permitted by the transition method, we did not reassess existing leases.

See Note 2 – Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion of critical accounting policies and discussion of estimates.

There have been no other changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently involved in any material legal proceedings. However, from time to time, we may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including, but not limited to, employee, customer and vendor disputes.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 6. Exhibits

Exhibit # |  | Description
3.1 |  | Restated Certificate of Incorporation of Neonode Inc., dated November 7, 2018 (incorporated by reference to Exhibit 3.14 of the registrant’s quarterly report on Form 10-Q filed on November 8, 2018 (file no. 1-35526))
3.1.1 |  | Certificate of First Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.1 of the registrant’s quarterly report on Form 10-Q filed on August 14, 2019 (file no. 1-35526))
3.1.2 |  | Certificate of Second Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.2 of the registrant’s quarterly report on Form 10-Q filed on August 14, 2019 (file no. 1-35526))
3.2 |  | Bylaws (incorporated by reference to Exhibit 3.2 of the registrant’s quarterly report on Form 10-Q filed on November 8, 2018 (file no. 1-35526))
31.1 |  | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101. INS |  | XBRL Instance Document
101. SCH |  | XBRL Taxonomy Extension Schema Document
101. CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document
101. DEF |  | XBRL Taxonomy Extension Definition Linkbase Document
101. LAB |  | XBRL Taxonomy Extension Label Linkbase Document
101. PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| NEONODE INC.
Date: November 6, 2019 | By: | /s/ Maria Ek
|  | Maria Ek Interim President and Chief Executive Officer
|  | Chief Financial Officer,
|  | Vice President, Finance,
|  | Treasurer and Secretary
|  | (Principal Financial and Accounting Officer)

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