10-Q 1 f10q0620_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 June 30, 2020

☐ 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 August 11, 2020 was 10,782,999.

NEONODE INC.

Form 10-Q

For the Fiscal Quarter Ended June 30, 2020

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION | 1
| Item 1 | Financial Statements | 1
|  | Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019 (Audited) | 1
|  | Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019 | 2
|  | Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019 | 3
|  | Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the quarter to date periods ended June 30, 2019 through June 30, 2020 | 4
|  | Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 | 5
|  | Notes to Unaudited Condensed Consolidated Financial Statements | 6
| Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24
| Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 33
| Item 4 | Controls and Procedures | 33
PART II OTHER INFORMATION | 34
| Item 1 | Legal Proceedings | 34
| Item 1A | Risk Factors | 34
| Item 6 | Exhibits | 34
SIGNATURES | 35
EXHIBITS |  |

| i |

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NEONODE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

|  | June 30, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
ASSETS |  | (Unaudited) |  |  | (Audited) |
Current assets: |  |  |  |  |  |
Cash |  | $ | 1,773 |  |  | $ | 2,357 |
Accounts receivable and unbilled revenue, net |  |  | 738 |  |  |  | 1,324 |
Projects in process |  |  | - |  |  |  | 8 |
Inventory |  |  | 1,077 |  |  |  | 1,030 |
Prepaid expenses and other current assets |  |  | 562 |  |  |  | 715 |
Total current assets |  |  | 4,150 |  |  |  | 5,434 |
Investment in joint venture |  |  | 3 |  |  |  | 3 |
Property and equipment, net |  |  | 1,208 |  |  |  | 1,583 |
Operating lease right-of-use assets |  |  | 227 |  |  |  | 416 |
Total assets |  | $ | 5,588 |  |  | $ | 7,436 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 476 |  |  | $ | 555 |
Accrued payroll and employee benefits |  |  | 1,104 |  |  |  | 960 |
Accrued expenses |  |  | 320 |  |  |  | 541 |
Deferred revenues |  |  | 101 |  |  |  | 67 |
Short-term borrowing |  |  | 967 |  |  |  | - |
Short-term tax credits |  |  | 563 |  |  |  | - |
Current portion of finance lease obligations |  |  | 517 |  |  |  | 568 |
Current portion of operating lease obligations |  |  | 181 |  |  |  | 332 |
Total current liabilities |  |  | 4,229 |  |  |  | 3,023 |
Finance lease obligations, net of current portion |  |  | 393 |  |  |  | 508 |
Operating lease obligations, net of current portion |  |  | 20 |  |  |  | 58 |
Total liabilities |  |  | 4,642 |  |  |  | 3,589 |
Commitments and contingencies |  |  |  |  |  |  |  |
Stockholders’ equity: |  |  |  |  |  |  |  |
Common stock, 15,000,000 shares authorized, with par value of $0.001; 9,171,154 shares issued and outstanding at June 30, 2020 and December 31, 2019 |  |  | 9 |  |  |  | 9 |
Additional paid-in capital |  |  | 197,543 |  |  |  | 197,543 |
Accumulated other comprehensive loss |  |  | (662 | ) |  |  | (639 | )
Accumulated deficit |  |  | (193,142 | ) |  |  | (190,520 | )
Total Neonode Inc. stockholders’ equity |  |  | 3,748 |  |  |  | 6,393 |
Noncontrolling interests |  |  | (2,802 | ) |  |  | (2,546 | )
Total stockholders’ equity |  |  | 946 |  |  |  | 3,847 |
Total liabilities and stockholders’ equity |  | $ | 5,588 |  |  | $ | 7,436 |

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 June 30, |  |  | Six months ended June 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |
HMI Solutions |  | $ | 678 |  |  | $ | 1,469 |  |  | $ | 1,860 |  |  | $ | 3,411 |
HMI Products |  |  | 80 |  |  |  | 241 |  |  |  | 192 |  |  |  | 311 |
Total revenues |  |  | 758 |  |  |  | 1,710 |  |  |  | 2,052 |  |  |  | 3,722 |
Cost of revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
HMI Solutions |  |  | - |  |  |  | - |  |  |  | 1 |  |  |  | 5 |
HMI Products |  |  | 123 |  |  |  | 71 |  |  |  | 166 |  |  |  | 167 |
Total cost of revenues |  |  | 123 |  |  |  | 71 |  |  |  | 167 |  |  |  | 172 |
Total gross margin |  |  | 635 |  |  |  | 1,639 |  |  |  | 1,885 |  |  |  | 3,550 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  |  | 1,043 |  |  |  | 1,452 |  |  |  | 2,038 |  |  |  | 2,711 |
Sales and marketing |  |  | 648 |  |  |  | 491 |  |  |  | 1,193 |  |  |  | 940 |
General and administrative |  |  | 700 |  |  |  | 1,010 |  |  |  | 1,499 |  |  |  | 1,881 |
Total operating expenses |  |  | 2,391 |  |  |  | 2,953 |  |  |  | 4,730 |  |  |  | 5,532 |
Operating loss |  |  | (1,756 | ) |  |  | (1,314 | ) |  |  | (2,845 | ) |  |  | (1,982 | )
Other expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest expense |  |  | 7 |  |  |  | 9 |  |  |  | 14 |  |  |  | 19 |
Total other expense |  |  | 7 |  |  |  | 9 |  |  |  | 14 |  |  |  | 19 |
Loss before provision for income taxes |  |  | (1,763 | ) |  |  | (1,323 | ) |  |  | (2,859 | ) |  |  | (2,001 | )
Provision for income taxes |  |  | 3 |  |  |  | 7 |  |  |  | 19 |  |  |  | 13 |
Net loss including noncontrolling interests |  |  | (1,766 | ) |  |  | (1,330 | ) |  |  | (2,878 | ) |  |  | (2,014 | )
Less: Net loss attributable to noncontrolling interests |  |  | 154 |  |  |  | 66 |  |  |  | 256 |  |  |  | 177 |
Net loss attributable to Neonode Inc. |  | $ | (1,612 | ) |  | $ | (1,264 | ) |  | $ | (2,622 | ) |  | $ | (1,837 | )
Loss per common share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic and diluted loss per share |  | $ | (0.18 | ) |  | $ | (0.14 | ) |  | $ | (0.29 | ) |  | $ | (0.21 | )
Basic and diluted – weighted average number of common shares outstanding |  |  | 9,171 |  |  |  | 8,801 |  |  |  | 9,171 |  |  |  | 8,800 |

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 June 30, |  |  | Six months ended June 30, |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Net loss |  | $ | (1,766 | ) |  | $ | (1,330 | ) |  | $ | (2,878 | ) |  | $ | (2,014 | )
Other comprehensive income (loss): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | 64 |  |  |  | 26 |  |  |  | (23 | ) |  |  | (155 | )
Comprehensive loss |  |  | (1,702 | ) |  |  | (1,304 | ) |  |  | (2,901 | ) |  |  | (2,169 | )
Less: Comprehensive loss attributable to noncontrolling interests |  |  | 154 |  |  |  | 66 |  |  |  | 256 |  |  |  | 177 |
Comprehensive loss attributable to Neonode Inc. |  | $ | (1,548 | ) |  | $ | (1,238 | ) |  | $ | (2,645 | ) |  | $ | (1,992 | )

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 June 30, 2019 through June 30, 2020

|  | 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, 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 |
Common stock issued upon exercise of common stock warrants |  |  | - |  |  |  | - |  |  |  | 360 |  |  |  | - |  |  |  | 36 |  |  |  | - |  |  |  | - |  |  |  | 36 |  |  |  | - |  |  |  | 36 |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 117 |  |  |  | - |  |  |  | 117 |  |  |  | - |  |  |  | 117 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (2,375 | ) |  |  | (2,375 | ) |  |  | (214 | ) |  |  | (2,589 | )
Balances, December 31, 2019 |  |  | - |  |  | $ | - |  |  |  | 9,171 |  |  | $ | 9 |  |  | $ | 197,543 |  |  | $ | (639 | ) |  | $ | (190,520 | ) |  | $ | 6,393 |  |  | $ | (2,546 | ) |  | $ | 3,847 |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (87 | ) |  |  | - |  |  |  | (87 | ) |  |  | - |  |  |  | (87 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,010 | ) |  |  | (1,010 | ) |  |  | (102 | ) |  |  | (1,112 | )
Balances, March 31, 2020 |  |  | - |  |  | $ | - |  |  |  | 9,171 |  |  | $ | 9 |  |  | $ | 197,543 |  |  | $ | (726 | ) |  | $ | (191,530 | ) |  | $ | 5,296 |  |  | $ | (2,648 | ) |  | $ | 2,648 |
Foreign currency translation adjustment |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 64 |  |  |  | - |  |  |  | 64 |  |  |  | - |  |  |  | 64 |
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (1,612 | ) |  |  | (1,612 | ) |  |  | (154 | ) |  |  | (1,766 | )
Balances, June 30, 2020 |  |  | - |  |  | $ | - |  |  |  | 9,171 |  |  | $ | 9 |  |  | $ | 197,543 |  |  | $ | (662 | ) |  | $ | (193,142 | ) |  | $ | 3,748 |  |  | $ | (2,802 | ) |  | $ | 946 |

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

4

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

|  | Six months ended June 30, |
|  | 2020 |  |  | 2019 |
Cash flows from operating activities: |  |  |  |  |  |
Net loss (including noncontrolling interests) |  | $ | (2,878 | ) |  | $ | (2,014 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |  |  |
Bad debt expense |  |  | - |  |  |  | 19 |
Depreciation and amortization |  |  | 373 |  |  |  | 439 |
Amortization of operating lease right-of-use assets |  |  | 183 |  |  |  | 189 |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Accounts receivable and unbilled revenue, net |  |  | 588 |  |  |  | 24 |
Projects in process |  |  | 7 |  |  |  | (8 | )
Inventory |  |  | (42 | ) |  |  | (5 | )
Prepaid expenses and other current assets |  |  | 155 |  |  |  | 118 |
Accounts payable and accrued expenses |  |  | (169 | ) |  |  | 1 |
Deferred revenues |  |  | 33 |  |  |  | (14 | )
Operating lease obligations |  |  | (178 | ) |  |  | (224 | )
Net cash used in operating activities |  |  | (1,928 | ) |  |  | (1,475 | )
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchase of property and equipment |  |  | (7 | ) |  |  | (77 | )
Net cash used in investing activities |  |  | (7 | ) |  |  | (77 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Proceeds from short-term borrowings |  |  | 966 |  |  |  | - |
Proceeds from short-term tax credits |  |  | 542 |  |  |  | - |
Principal payments on finance lease obligations |  |  | (164 | ) |  |  | (272 | )
Net cash provided by (used in) financing activities |  |  | 1,344 |  |  |  | (272 | )
Effect of exchange rate changes on cash |  |  | 7 |  |  |  | (93 | )
Net decrease in cash |  |  | (584 | ) |  |  | (1.917 | )
Cash at beginning of period |  |  | 2,357 |  |  |  | 6,555 |
Cash at end of period |  | $ | 1,773 |  |  | $ | 4,638 |
Supplemental disclosure of cash flow information: |  |  |  |  |  |  |  |
Cash paid for income taxes |  | $ | 19 |  |  | $ | 13 |
Cash paid for interest |  | $ | 13 |  |  | $ | 19 |

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

5

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 six months ended June 30, 2020 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 six months ended June 30, 2020 and 2019 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, 2019.

Operations

Neonode Inc., collectively with its subsidiaries is referred to as “Neonode”, develops optical touch and gesture control solutions for human interaction with devices and remote sensing solutions for driver monitoring and cabin monitoring features in automotive and other applications.

Our operations from January 1, 2020 focused on three different business areas, human machine interface (“HMI”) Solutions, HMI Products and Remote Sensing Solutions. In HMI Solutions, Neonode offers customized optical touch and gesture control solutions for many different markets and segments. In HMI Products, the Company provides plug-and-play sensor modules that enable touch on any surface, in-air touch, and gesture control for a wide range of applications. In Remote Sensing Solutions, Neonode offers driver and cabin monitoring solutions for vehicles based on the Company’s flexible, scalable and hardware-agnostic software platform.

Liquidity

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.6 million and $2.6 million and $1.3 million and $1.8 million for the three and six months ended June 30, 2020 and 2019, respectively, and had an accumulated deficit of approximately $193.1 million and $190.5 million as of June 30, 2020 and December 31, 2019, respectively. In addition, operating activities used cash of approximately $1.9 million and $1.5 million for the six months ended June 30, 2020 and 2019, respectively.

On June 17, 2020, the Company entered into short-term loan facilities (the “Loan Agreements”) with entities beneficially owned by each of Ulf Rosberg and Peter Lindell, directors of Neonode (the “Directors”). Pursuant to the Loan Agreements, each Director made 16,145,000 SEK (Swedish Krona), which is approximately $1.7 million in U.S. dollars, principal amount available to the Company. As of June 30, 2020, the Company has made an initial drawdown of an aggregate of approximately $1.0 million under the Loan Agreements.

On August 5, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with institutional and accredited investors as part of a private placement (the “Private Placement”).

The closing of the Private Placement occurred on August 7, 2020.

Pursuant to the Securities Purchase Agreement, Neonode issued a total of 1,611,845 shares of common stock (the “Common Shares”) at a price of $6.50 per Common Share, and a total of 3,415 shares with a conversion price of $6.50 per share and a stated value of $1,000 of Series C-1 convertible preferred stock (the “Series C-1 Preferred Shares”) and Series C-2 convertible preferred stock (the “Series C-2 Preferred Shares”), for an aggregate purchase price of $13.9 million in gross proceeds.

The Series C-1 Preferred Shares and Series C-2 Preferred Shares are substantially the same, except the conversion of the Series C-2 Preferred Shares requires additional shareholder approval in accordance with Nasdaq listing rules. Ulf Rosberg and Peter Lindell, directors of Neonode, and Urban Forssell the Chief Executive Officer of Neonode (together, the “Insiders”) purchased an aggregate of $3.05 million of the Series C-2 Preferred Shares pursuant to the Securities Purchase Agreement.

Further, pursuant to the Securities Purchase Agreement, Neonode agreed to issue an additional 1,034 shares of Series C-2 Preferred Shares to the Directors, Ulf Rosberg and Peter Lindell, to repay an aggregate of $1.03 million of outstanding indebtedness owed to them under Loan Agreements.

The net proceeds of the Private Placement will be used for working capital purposes.

6

On August 6, 2020, in connection with the Private Placement, Neonode designated (i) 365 shares of its authorized and unissued preferred stock as Series C-1 Preferred Shares by filing a Series C-1 Certificate of Designation of Preferences, Rights and Limitations (the “Series C-1 Certificate of Designation”) with the Secretary of State of the State of Delaware and (ii) 4,084 shares of its authorized and unissued preferred stock as Series C-2 Preferred Shares by filing a Series C-2 Certificate of Designation of Preferences, Rights and Limitations (the “Series C-2 Certificate of Designation”) with the Secretary of State of the State of Delaware.

The Series C-1 Preferred Shares and Series C-2 Preferred Shares (together, the “Preferred Shares”) are convertible into 684,378 shares of Neonode common stock, subject to adjustment and limitations as provided in the Series C-1 Certificate of Designation and the Series C-2 Certificate of Designation. The Series C-1 Preferred Shares and the Series C-2 Preferred Shares have no voting rights, however, under certain circumstances provided therein, the Company may not alter, change or amend the Series C-1 Certificate of Designation and Series C-2 Certificate of Designation without the affirmative vote of a majority of the then outstanding Series C-1 Preferred Shares and Series C-2 Preferred Shares, respectively. The holders of the Preferred Shares are entitled to receive dividends at the rate per share of 5% per annum, payable quarterly and on the conversion date. In the event of any liquidation, dissolution or winding-up of the Company, the holders of the Preferred Shares will participate pari passu with the holders of the Company’s common stock, on an as-converted basis.

In connection with the Securities Purchase Agreement, Neonode entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which Neonode will file a registration statement with the SEC relating to the offer and sale by the holders of the Common Shares, and the shares of common stock underlying the Preferred Shares. Pursuant to the Registration Rights Agreement, Neonode is obligated to file the registration statement within 30 calendar days and to use reasonable best efforts to cause the registration statement to be declared effective within 75 calendar days or 105 calendar days in the case of a full review by the SEC. Failure to meet those and related obligations, or failure to maintain the effective registration of the Common Shares and the shares of common stock underlying the Preferred Shares will subject Neonode to payment for liquidated damages.

In connection with the Private Placement, Neonode paid a fee to a placement agent of $659,070.

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 cash position after the August 2020 Private Placement, current operating plan and sources of potential capital would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.

We expect our revenues from our three business areas will enable us to reduce our operating losses in coming years. In addition, we 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.

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 funds are 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of Neonode Inc. and its wholly owned subsidiaries, as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies AB. The remaining 49% of Pronode Technologies AB is owned by 2X Communication AB, located in Gothenburg, Sweden. Pronode Technologies AB was organized to manufacture and sell our sensor modules. All inter-company accounts and transactions have been eliminated in consolidation.

Neonode consolidates entities in which it has a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights.

The condensed consolidated balance sheets at June 30, 2020 and December 31, 2019 and the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three and six months ended June 30, 2020 and 2019 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.

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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 and Cash Equivalents

We have not had any liquid investments other than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original maturities of three months of 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.

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 $85,000 as of June 30, 2020 and December 31, 2019, 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 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 $0 and $8,000 as of June 30, 2020 and December 31, 2019, respectively.

Inventory

Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.

Due to the low sell-through of our AirBar products, management has decided to reserve work-in-process for AirBar components, as well as AirBar-related raw materials. Management has further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location it is stored.

To protect our manufacturing partner from losses in relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee covering the production of 20,000 AirBars. Excess inventory was purchased from our manufacturing partner in 2019 and has been fully reserved.

In total, the AirBar reserve was $0.7 million and $0.8 million as of June 30, 2020 and December 31, 2019.

The Company’s inventory consists primarily of components that will be used in the manufacturing of our sensor modules. We classify inventory for reporting purposes as raw materials, work-in-process, and finished goods.

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

|  | June 30, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
Raw materials |  | $ | 446 |  |  | $ | 396 |
Work-in-process |  |  | 180 |  |  |  | 186 |
Finished goods |  |  | 451 |  |  |  | 448 |
Ending inventory |  | $ | 1,077 |  |  | $ | 1,030 |

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Investment in Joint Venture

We invested $3,000 in a 50% interest in Neoeye AB. 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. We are not required to guarantee any obligations of the joint venture and there have been no operations of Neoeye through June 30, 2020.

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.

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 June 30, 2020, 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 $64,000 and $(23,000) and $26,000 and $(155,000) during the three and six months ended June 30, 2020 and 2019, 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 $(63,000) and $(14,000) during the three and six months ended June 30, 2020, respectively, compared to $(57,000) and $114,000 during the same periods in 2019, respectively.

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Concentration of Credit and Business Risks

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

As of June 30, 2020, four customers represented approximately 79% of our consolidated accounts receivable and unbilled revenues.

As of December 31, 2019, three customers represented approximately 72% of our consolidated accounts receivable and unbilled revenues.

Customers who accounted for 10% or more of our net revenues during the three months ended June 30, 2020 are as follows:

| ● | Epson – 35%
| ● | Hewlett Packard Company – 27%

| ● | Alpine – 12%

Customers who accounted for 10% or more of our net revenues during the six months ended June 30, 2020 are as follows:

| ● | Alpine – 17%
| ● | Epson – 24%
| ● | Hewlett Packard Company – 33%

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

| ● | Hewlett Packard Company – 45%
| ● | Epson – 11%
| ● | Alpine – 13%
| ● | Bosch – 11%

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

| ● | Hewlett Packard Company – 41%
| ● | Epson – 14%
| ● | Alpine – 12%
| ● | Bosch – 10%

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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 AirBar 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 fulfil the promise to transfer goods, therefore we treat all shipping and handling charges as expenses.

Revenues from our business areas derive from three different revenue streams, license fees, non-recurring engineering fees and the sale of sensor modules.

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 June 30, 2020.

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.

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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. During the three and six months ended June 30, 2020 and 2019, no losses related to SOW projects were recorded.

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 insignificant as of June 30, 2020 and 2019. 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.

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The following tables present disaggregated revenues by market for the three and six months ended June 30, 2020 and 2019 (dollars in thousands):

|  | Three months ended June 30, 2020 |  |  | Three months ended June 30, 2019 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
HMI Solutions |  |  |  |  |  |  |  |  |  |  |  |
Net revenues from automotive |  | $ | 140 |  |  |  | 21 | % |  | $ | 440 |  |  |  | 30 | %
Net revenues from consumer electronics |  |  | 538 |  |  |  | 79 | % |  |  | 1,029 |  |  |  | 70 | %
|  | $ | 678 |  |  |  | 100 | % |  | $ | 1,469 |  |  |  | 100 | %
HMI Products |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net revenues from automotive |  | $ | 7 |  |  |  | 9 | % |  | $ | - |  |  |  | - | %
Net revenues from medical |  |  | 47 |  |  |  | 59 | % |  |  | 40 |  |  |  | 17 | %
Net revenues from distributors and other |  |  | 26 |  |  |  | 32 | % |  |  | 201 |  |  |  | 83 | %
|  | $ | 80 |  |  |  | 100 | % |  | $ | 241 |  |  |  | 100 | %

|  | Six months ended June 30, 2020 |  |  | Six months ended June 30, 2019 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
HMI Solutions |  |  |  |  |  |  |  |  |  |  |  |
Net revenues from automotive |  | $ | 541 |  |  |  | 29 | % |  | $ | 936 |  |  |  | 27 | %
Net revenues from consumer electronics |  |  | 1,319 |  |  |  | 71 | % |  |  | 2,475 |  |  |  | 73 | %
|  | $ | 1,860 |  |  |  | 100 | % |  | $ | 3,411 |  |  |  | 100 | %
HMI Products |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net revenues from automotive |  | $ | 15 |  |  |  | 8 | % |  | $ | 1 |  |  |  | - | %
Net revenues from medical |  |  | 103 |  |  |  | 54 | % |  |  | 60 |  |  |  | 19 | %
Net revenues from distributors and other |  |  | 74 |  |  |  | 38 | % |  |  | 250 |  |  |  | 81 | %
|  | $ | 192 |  |  |  | 100 | % |  | $ | 311 |  |  |  | 100 | %

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.

Judgment is further 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.

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The following table presents accounts receivable and deferred revenues as of June 30, 2020 and December 31, 2019 (in thousands):

|  | June 30, 2020 |  |  | December 31, 2019 |
Accounts receivable and unbilled revenue |  | $ | 738 |  |  | $ | 1,324 |
Deferred revenues |  |  | 101 |  |  |  | 67 |

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 $85,000 as of June 30, 2020 and December 31, 2019.

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):

|  | June 30, 2020 |  |  | December 31, 2019 |
Balance at beginning of period |  | $ | 24 |  |  | $ | 17 |
Provisions for warranty issued |  |  | 10 |  |  |  | 7 |
Balance at end of period |  | $ | 34 |  |  | $ | 24 |

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.

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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.

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

|  | June 30, 2020 |  |  | December 31, 2019 |
Deferred revenues HMI Solutions |  | $ | 45 |  |  | $ | 37 |
Deferred revenues HMI Products |  |  | 56 |  |  |  | 30 |
|  | $ | 101 |  |  | $ | 67 |

During the three and six months ended June 30, 2020, the Company recognized revenues of approximately $6,000 and $32,000, respectively, related to contract liabilities outstanding at the beginning of the year.

Advertising

Advertising costs are expensed as incurred. Advertising costs for the three and six months ended June 30, 2020 and 2019 amounted to approximately $9,000 and $16,000 and $29,000 and $48,000, 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.

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The Company provides either in the condensed consolidated statement of stockholders’ equity, if presented, or in the notes to condensed consolidated financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:

| (1) | Net income or loss;
| (2) | Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and
| (3) | Each component of other comprehensive income or loss.

Income taxes

We recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based on the “more likely than not” criteria of the accounting guidance.

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of June 30, 2020 and December 31, 2019. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.

We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of June 30, 2020, and December 31, 2019, we had no unrecognized tax benefits.

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 six months ended June 30, 2020 and 2019, respectively. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the three and six months ended June 30, 2020 and 2019 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 9).

Other Comprehensive Income (Loss)

Our other comprehensive income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity in the condensed consolidated balance sheets.

Cash Flow Information

Cash flows in foreign currencies have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average exchange rate for the condensed consolidated statements of operations was as follows:

|  | Six months ended June 30, |
|  | 2020 |  |  | 2019 |
Swedish Krona |  |  | 9.68 |  |  |  | 9.31 |
Japanese Yen |  |  | 108.26 |  |  |  | 110.03 |
South Korean Won |  |  | 1,205.88 |  |  |  | 1,146.39 |
Taiwan Dollar |  |  | 30.01 |  |  |  | 30.97 |

Exchange rate for the consolidated balance sheets was as follows:

|  | As of |
|  | June 30, |  |  | December 31, |
|  | 2020 |  |  | 2019 |
Swedish Krona |  |  | 9.31 |  |  |  | 9.34 |
Japanese Yen |  |  | 107.81 |  |  |  | 108.66 |
South Korean Won |  |  | 1,201.06 |  |  |  | 1,154.56 |
Taiwan Dollar |  |  | 29.44 |  |  |  | 30.00 |

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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, accrued expenses and short-term borrowings and are deemed to approximate fair value due to their short maturities.

New Accounting Pronouncements

In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”), supplemented by subsequent accounting standards updates. The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13, as amended, is scheduled to become effective for fiscal years beginning after December 15, 2023, with early adoption permitted. In the future, we will evaluate the impact that ASU 2016-13, as amended, will have on our consolidated financial statements, specifically regarding our trade receivables; however, we do not expect any significant impact from implementation of the new standard.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Tax, which simplifies the accounting for income taxes. ASU 2019-12 will become effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact ASU 2019-12 will have on our consolidated financial statements.

Reclass of Presentation in our Condensed Consolidated Statements of Operations

Since January 1, 2020, we have allocated revenue to our new business areas - HMI Solutions, HMI Products and Remote Sensing Solutions - rather than by our revenue streams - license fees, sensor module sale and non-recurring engineering fees. The presentation in our condensed consolidated statements of operations has been changed accordingly. Revenues from HMI Solutions include license fees and non-recurring engineering fees while HMI Products include sensor module sales and non-recurring engineering fees. We believe that future revenues from Remote Sensing Solutions will include license fees and non-recurring engineering fees.

3. Short-Term Borrowings

During the six months ended June 30, 2020, the Company was granted a credit from the Swedish Tax Authority covering social charges and staff withholding taxes relating to January through March 2020 payroll, as part of Swedish governmental COVID-19 support. The total amount is $563,000 and the credit is for 12 months but can be repaid earlier if desired. There is a 1.25% annual non-deductible interest and a credit fee of 0.2% from the seventh month of the granted credit.

On June 17, 2020, the Company entered into short-term loan facilities (the “Loan Agreements”) with entities beneficially owned by each of Ulf Rosberg and Peter Lindell, directors of Neonode (the “Directors”). Pursuant to the Loan Agreements, each entity owned by the Director made approximately $1.7 million in U.S. dollars, principal amount available to the Company. Subsequent to entering into the Loan Agreements, the Company made an initial drawdown of an aggregate of approximately $1.0 million.

Each of the Loan Agreements provides for a credit fee of 0.75% per annum, calculated on a daily basis from the date of the Loan Agreement, and any outstanding amount incurs interest at a fixed rate of 3.25% per annum, calculated on a daily basis from the drawdown date. Drawdowns under the Loan Agreements will be unavailable upon the earlier to occur of the execution of a capital raise by Neonode or December 31, 2020. If the Company completes a capital raise before December 31, 2020, any outstanding amount under the Loan Agreements, including any credit fee and interest, becomes payable as soon as practicably possible after such capital raise. If a capital raise is not completed by December 31, 2020, or if the funds from the capital raise are insufficient to repay the full outstanding amount under the Loan Agreements, then the outstanding amount under the Loan Agreements, including any credit fee and interest, is due and payable on February 28, 2021.

On August 7, 2020, Neonode completed the above-mentioned capital raise and issued 1,034 shares of the Company’s Preferred Shares to the entities owned by the Directors, Ulf Rosberg and Peter Lindell, to repay the indebtedness and accrued interest. As a result, the related Loan Agreements were terminated in accordance with their terms.

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4. Stockholders’ Equity

Common Stock

During the three and six months ended June 30, 2020, there were no activities that affected common stock.

Preferred Stock

As of June 30, 2020, we had one class of preferred stock. There were no activities that affected preferred stock during the three and six months ended June 30, 2020.

On August 6, 2020, in connection with the closing of a private placement, the Company designated (i) 365 shares of its authorized and unissued preferred stock as Series C-1 Preferred Shares by filing a Series C-1 Certificate of Designation of Preferences, Rights and Limitations (the “Series C-1 Certificate of Designation”) with the Secretary of State of the State of Delaware and (ii) 4,084 shares of its authorized and unissued preferred stock as Series C-2 Preferred Shares by filing a Series C-2 Certificate of Designation of Preferences, Rights and Limitations (the “Series C-2 Certificate of Designation”) with the Secretary of State of the State of Delaware.

The Series C-1 Preferred Shares and Series C-2 Preferred Shares (together, the “Preferred Shares”) are convertible into 684,378 shares of Neonode common stock, subject to adjustment and limitations as provided in the Series C-1 Certificate of Designation and the Series C-2 Certificate of Designation.

The holders of the Preferred Shares are entitled to receive dividends at the rate per share of 5% per annum, payable quarterly and on the conversion date. In the event of any liquidation, dissolution or winding-up of the Company, the holders of the Preferred Shares will participate pari passu with the holders of the Company’s common stock, on an as-converted basis.

Warrants

As of June 30, 2020 and December 31, 2019, the Company had 756,368 warrants to purchase common stock outstanding.

5. Stock-Based Compensation

There was no stock-based compensation expense for the three and six months ended June 30, 2020 and 2019 and there is no remaining unrecognized expense related to stock options as of June 30, 2020.

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 June 30, 2020, we had two equity incentive plans:

| ● | The 2006 Equity Incentive Plan (the “2006 Plan”); and
| ● | The 2015 Stock Incentive Plan (the “2015 Plan”).

Both the 2006 Plan and the 2015 Plan have terminated with respect to additional awards. However, shares issuable pursuant to previously awarded stock options may still be exercised in accordance with their terms.

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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, 2020 |  |  | 52,500 |  |  | $ | 27.51 |
Cancelled |  |  | (1,000 | ) |  |  | 62.10 |
Outstanding at June 30, 2020 |  |  | 51,500 |  |  | $ | 26.84 |

The aggregate intrinsic value of the 51,500 stock options that are outstanding, vested and expected to vest as of June 30, 2020 was $0.

For the three and six months ended June 30, 2020 and 2019, we recorded no compensation expense related to the vesting of stock options. 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 six months ended June 30, 2020, 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.

6. 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 because 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 June 30, 2020 and December 31, 2019.

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 regarding 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 June 30, 2020 and December 31, 2019.

One of our manufacturing partners has previously purchased material for the final assembly of AirBars. To protect the manufacturer from losses in relation to AirBar production, we agreed to secure the value of the inventory in a bank guarantee. The initial guarantee was for $345,000 and valid until December 31, 2019. Since the sale of AirBars has been lower than expected, a major part of the inventory at the manufacturer remained unused when the due date of the bank guarantee neared.

In November 2019, we agreed to purchase the excess AirBar inventory for approximately $141,000 and in conjunction with this, the bank guarantee was decreased to $210,000 and is valid until December 31, 2020.

Management’s judgment is that the bank guarantee is a contingent guarantee and management will record a liability when it is probable we will have to purchase the inventory. As of August 14, 2020, management’s judgment is that we will sell the remaining AirBars during 2020 and thereby purchase the components and the assembly service from the manufacturing partner throughout the year. No liability has been recorded for the period ended June 30, 2020.

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Patent Assignment

On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LCC. 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 the Company the right to share potential proceeds generated from a licensing and monetization program. As per June 30, 2020 there has been no proceeds from the agreement.

On June 8, 2020, Neonode Smartphone LLC, a subsidiary of Aequitas Technologies LLC, filed patent infringement lawsuits against Apple Inc., and Samsung Electronics Co. Ltd. and Samsung Electronics America, Inc., respectively, in Western District of Texas, USA.

On July 11, 2020, Aequitas assigned 10 patents belonging to the one of the patent families back to Neonode as they decided not to enforce them.

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 application-specific integrated circuit (“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 June 30, 2020, we had made no payments to TI under the NN1002 Agreement.

7. 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 six months ended June 30, 2020 and 2019, respectively, 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 six months ended June 30, 2020 and 2019, respectively, (dollars in thousands):

|  | Three months ended June 30, 2020 |  |  | Three months ended June 30, 2019 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
United States |  | $ | 265 |  |  |  | 35 | % |  | $ | 898 |  |  |  | 53 | %
Japan |  |  | 360 |  |  |  | 48 | % |  |  | 417 |  |  |  | 24 | %
Germany |  |  | 24 |  |  |  | 3 | % |  |  | 185 |  |  |  | 11 | %
Switzerland |  |  | 52 |  |  |  | 7 | % |  |  | 40 |  |  |  | 2 | %
China |  |  | 15 |  |  |  | 2 | % |  |  | 53 |  |  |  | 3 | %
Taiwan |  |  | 9 |  |  |  | 1 | % |  |  | (22 | ) |  |  | -1 | %
Other |  |  | 33 |  |  |  | 4 | % |  |  | 139 |  |  |  | 8 | %
|  | $ | 758 |  |  |  | 100 | % |  | $ | 1,710 |  |  |  | 100 | %

|  | Six months ended June 30, 2020 |  |  | Six months ended June 30, 2019 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
United States |  | $ | 854 |  |  |  | 42 | % |  | $ | 1,962 |  |  |  | 53 | %
Japan |  |  | 834 |  |  |  | 41 | % |  |  | 1,017 |  |  |  | 27 | %
Germany |  |  | 144 |  |  |  | 7 | % |  |  | 371 |  |  |  | 10 | %
Switzerland |  |  | 107 |  |  |  | 5 | % |  |  | 57 |  |  |  | 2 | %
China |  |  | 49 |  |  |  | 2 | % |  |  | 128 |  |  |  | 3 | %
Taiwan |  |  | 9 |  |  |  | - | % |  |  | 18 |  |  |  | 0 | %
Other |  |  | 55 |  |  |  | 3 | % |  |  | 169 |  |  |  | 5 | %
|  | $ | 2,052 |  |  |  | 100 | % |  | $ | 3,722 |  |  |  | 100 | %

The following table presents our total assets by geographic region as of June 30, 2020 and December 31, 2019 (in thousands):

|  | June 30, 2020 |  |  | December 31, 2019 |
U.S. |  | $ | 1,041 |  |  | $ | 2,898 |
Sweden |  |  | 4,440 |  |  |  | 4,430 |
Asia |  |  | 107 |  |  |  | 108 |
Total |  | $ | 5,588 |  |  | $ | 7,436 |

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8. 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 three months to 2.25 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 corporate office lease is automatically renewed at a cost increase of 2% on a yearly basis unless we provide written notice three 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.

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 June 30, 2020 |  |  | Six Months Ended June 30, 2020 |
Operating lease cost (1) |  | $ | 123 |  |  | $ | 242 |
Finance lease cost: |  |  |  |  |  |  |  |
Amortization of leased assets |  | $ | 152 |  |  | $ | 303 |
Interest on lease liabilities |  |  | 5 |  |  |  | 12 |
Total finance lease cost |  | $ | 157 |  |  | $ | 315 |

| (1) | Includes short term lease costs of $27,000 and $51,000 for the three and six months ended June 30, 2020, respectively.

|  | Three Months Ended June 30, 2019 |  |  | Six Months Ended June 30, 2019 |
Operating lease cost (1) |  | $ | 153 |  |  | $ | 309 |
Finance lease cost: |  |  |  |  |  |  |  |
Amortization of leased assets |  | $ | 157 |  |  | $ | 318 |
Interest on lease liabilities |  |  | 8 |  |  |  | 18 |
Total finance lease cost |  | $ | 165 |  |  | $ | 336 |

| (1) | Includes short term lease costs of $32,000 and $66,000 for the three and six months ended June 30, 2019, respectively.

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

|  | Three Months Ended June 30, 2020 |  |  | Six Months Ended June 30, 2020 |
Cash paid for amounts included in leases: |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | (92 | ) |  | $ | (183 | )
Operating cash flows from finance leases |  |  | (5 | ) |  |  | (12 | )
Financing cash flows from finance leases |  |  | (32 | ) |  |  | (164 | )
Right-of-use assets obtained in exchange for lease obligations: |  |  |  |  |  |  |  |
Operating leases |  |  | - |  |  |  | - |

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|  | Three months ended June 30, |  |  | Six months ended June 30, |
|  | 2019 |  |  | 2019 |
Cash paid for amounts included in leases: |  |  |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | (67 | ) |  | $ | (189 | )
Operating cash flows from finance leases |  |  | (8 | ) |  |  | (18 | )
Financing cash flows from finance leases |  |  | (135 | ) |  |  | (272 | )
Right-of-use assets obtained in exchange for lease obligations: |  |  |  |  |  |  |  |
Operating leases |  |  | - |  |  |  | - |

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

|  | June 30, 2020 |  |  | December 31, 2019 |
Operating leases |  |  |  |  |  |
Operating lease right-of-use assets |  | $ | 227 |  |  | $ | 416 |
Current portion of operating lease obligations |  | $ | 181 |  |  | $ | 332 |
Operating lease liabilities, net of current portion |  |  | 20 |  |  |  | 58 |
Total operating lease liabilities |  | $ | 201 |  |  | $ | 390 |
Finance leases |  |  |  |  |  |  |  |
Property and equipment, at cost |  | $ | 3,360 |  |  | $ | 3,348 |
Accumulated depreciation |  |  | (2,280 | ) |  |  | (1,956 | )
Property and equipment, net |  | $ | 1,080 |  |  | $ | 1,392 |
Current portion of finance lease obligations |  | $ | 517 |  |  | $ | 568 |
Finance lease liabilities, net of current portion |  |  | 393 |  |  |  | 508 |
Total finance lease liabilities |  | $ | 910 |  |  | $ | 1,076 |

|  | June 30, 2020 |  |  | December 31, 2019 |
Weighted Average Remaining Lease Term |  |  |  |  |  |
Operating leases |  |  | 0.8 years |  |  |  | 1.2 years |
Finance leases |  |  | 1.1 years |  |  |  | 1.6 years |
Weighted Average Discount Rate: |  |  |  |  |  |  |  |
Operating leases (2) |  |  | 5 | % |  |  | 5 | %
Finance leases |  |  | 2 | % |  |  | 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 June 30, 2020 is as follows (in thousands):

Years ending December 31, |  | Total |
2020 (remaining months) |  | $ | 146 |
2021 |  |  | 59 |
|  |  | 205 |
Less imputed interest |  |  | (4 | )
Total lease liabilities |  | $ | 201 |

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The following is a schedule of minimum future rentals on the non-cancellable finance leases as of June 30, 2020 (in thousands):

Year ending December 31, |  | Total |
2020 (remaining months) |  | $ | 175 |
2021 |  |  | 666 |
2022 |  |  | 79 |
2023 |  |  | 8 |
Total minimum payments required: |  |  | 928 |
Less amount representing interest: |  |  | (18 | )
Present value of net minimum lease payments: |  |  | 910 |
Less current portion |  |  | (517 | )
|  | $ | 393 |

9. Net Loss per Share

Basic net loss per common share for the three and six months ended June 30, 2020 and 2019 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 0 million and 0.3 million 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 six months ended June 30, 2020 and 2019, respectively, due to their anti-dilutive effect.

(in thousands, except per share amounts) |  | Three months ended June 30, |
|  | 2020 |  |  | 2019 |
BASIC AND DILUTED |  |  |  |  |  |
Weighted average number of common shares outstanding |  |  | 9,171 |  |  |  | 8,801 |
Net loss attributable to Neonode Inc. |  | $ | (1,612 | ) |  | $ | (1,264 | )
Net loss per share - basic and diluted |  | $ | (0.18 | ) |  | $ | (0.14 | )

(in thousands, except per share amounts) |  | Six months ended June 30, |
|  | 2020 |  |  | 2019 |
BASIC AND DILUTED |  |  |  |  |  |
Weighted average number of common shares outstanding |  |  | 9,171 |  |  |  | 8,880 |
Net loss attributable to Neonode Inc. |  | $ | (2,622 | ) |  | $ | (1,837 | )
Net loss per share - basic and diluted |  | $ | (0.29 | ) |  | $ | (0.21 | )

10. 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 elsewhere in the accompanying notes.

The extent of COVID-19’s effect on the Company's operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape. The Company is constantly analyzing the potential impacts to all of its business areas. At this time, it is not possible to determine the magnitude of the overall impact of COVID-19 on the Company. The situation could have a material adverse effect on the Company’s condensed consolidated balance sheets, liquidity, and condensed consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows. The pandemic has, however, created an increased interest in the Company’s technology, which allows germ-free contactless touch on any surface.

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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 the impact of the COVID-19 pandemic, our history of losses since inception, our dependence on a limited number of customers, our reliance on our customers’ ability to develop and sell products that incorporate our touch technology, the length of a product development and release cycle, our and our customers’ reliance on component suppliers, the difficulty in verifying royalty amounts owed to us, our limited experience manufacturing hardware devices, our ability to remain competitive in response to new technologies, our dependence on key members of our management and development team, the costs to defend, as well as risks of losing, patents and intellectual property rights, our ability to obtain adequate capital to fund future operations, our ability to terminate our registration as a U.S. public company, and the future status of our common stock listing on the Nasdaq Stock Market and potential listing on the Nasdaq Stockholm. 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 this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 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, 2019 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 provides advanced optical sensing solutions for human-machine interface (“HMI”) and remote sensing solutions for driver and cabin monitoring features in automotive and other application areas.

We mainly operate in the business-to-business (“B2B”) markets.

HMI Solutions

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 HMI Solutions customers have sold approximately 76 million devices that use our technology and within this business area we derive revenues through technology licensing and engineering consulting services.

As of June 30, 2020, we had thirty-six valid technology license agreements with global OEMs, ODMs and Tier 1 suppliers.

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Our licensing customer base is primarily in the automotive and printer industries. Fifteen 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 2020 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.

HMI Products

In addition to our technical solutions business, we design and manufacture sensor modules that incorporate our patented technology. We sell our embedded sensors components to OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers for use in their products. Within this business area we derive revenues through selling embedded sensor modules and engineering consulting services.

We utilize a robotic manufacturing process designed specifically for our 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.

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

In October 2017, we began selling embedded sensor modules to business customers in the industrial and consumer electronics markets. Over time, we expect a significant portion of our revenues will be derived from the HMI Products business area.

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.

Remote Sensing Solutions

With this newly formed business area, we intend to address the demand for cost-effective driver and cabin monitoring systems. We have developed a software platform for driver and cabin monitoring that is flexible, scalable and hardware-agnostic, and uses computationally efficient machine-learning algorithms. Within this business area we expect to derive revenues through technology licensing and engineering consulting services.

Impact of COVID-19

In December 2019, a novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Our near term growth and overall business is being adversely impacted and we expect will continue to be adversely impact by COVID-19 and the related global economic slowdown. Although we anticipate potential additional demand in our contactless touch products, we expect COVID-19 will have negative effects on our customers’ businesses and their sales volumes. We are experiencing challenges in obtaining deliveries of components needed to manufacture our sensor modules and we may have difficulties delivering our products to our customers in time and at a reasonable cost. Our operations have been impacted as we paused business-related travel and our employees work remotely. The extent of COVID-19’s impact on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape. To mitigate the financial effects of the COVID-19 pandemic, we have undertaken cost-reduction measures. In particular, we have implemented a Swedish government-backed program of short-term layoffs that has resulted in the reduction of staff working hours by 20%. We are monitoring the impact of the COVID-19 pandemic and we may take further actions in response. There is a risk that we will not be successful in mitigating COVID-19’s impact on our business, and our sales may not increase in line with our expectations and our operating margins could fluctuate or decline.

25

Results of Operations

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

|  | Three months ended June 30, |  |  | 2020 vs 2019 |
|  | 2020 |  |  | 2019 |  |  | Variance in Dollars |  |  | Variance in Percent |
Revenue: |  |  |  |  |  |  |  |  |  |  |  |
HMI Solutions |  | $ | 678 |  |  | $ | 1,469 |  |  | $ | (791 | ) |  |  | (53.8 | )%
Percentage of revenue |  |  | 89.4 | % |  |  | 85.9 | % |  |  |  |  |  |  |  |
HMI Products |  | $ | 80 |  |  | $ | 241 |  |  | $ | (161 | ) |  |  | (66.8 | )%
Percentage of revenue |  |  | 10.6 | % |  |  | 14.1 | % |  |  |  |  |  |  |  |
Total Revenue |  | $ | 758 |  |  | $ | 1,710 |  |  | $ | (952 | ) |  |  | (55.7 | )%
Cost of Sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
HMI Solutions |  | $ | - |  |  | $ | - |  |  | $ | - |  |  |  | (0 | )%
Percentage of revenue |  |  | 0.0 | % |  |  | 0.0 | % |  |  |  |  |  |  |  |
HMI Products |  | $ | 123 |  |  | $ | 71 |  |  | $ | 52 |  |  |  | 73.2 | %
Percentage of revenue |  |  | 16.2 | % |  |  | 4.2 | % |  |  |  |  |  |  |  |
Total Cost of Sales |  | $ | 123 |  |  | $ | 71 |  |  | $ | 52 |  |  |  | 73.2 | %
Total Gross Margin |  | $ | 635 |  |  | $ | 1,639 |  |  | $ | (1,004 | ) |  |  | (61.3 | )%
Operating Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  | $ | 1,043 |  |  | $ | 1,452 |  |  | $ | (409 | ) |  |  | (28.2 | )%
Percentage of revenue |  |  | 137.6 | % |  |  | 84.9 | % |  |  |  |  |  |  |  |
Sales and marketing |  |  | 648 |  |  |  | 491 |  |  |  | 157 |  |  |  | 32 | %
Percentage of revenue |  |  | 85.5 | % |  |  | 28.7 | % |  |  |  |  |  |  |  |
General and administrative |  |  | 700 |  |  |  | 1,010 |  |  |  | (310 | ) |  |  | (30.7 | )%
Percentage of revenue |  |  | 92.3 | % |  |  | 59.1 | % |  |  |  |  |  |  |  |
Total Operating Expenses |  | $ | 2,391 |  |  | $ | 2,953 |  |  | $ | (562 | ) |  |  | (19.0 | )%
Percentage of revenue |  |  | 315.4 | % |  |  | 172.7 | % |  |  |  |  |  |  |  |
Operating Loss |  | $ | (1,756 | ) |  | $ | (1,314 | ) |  | $ | (442 | ) |  |  | 33.6 | %
Percentage of revenue |  |  | (231,7 | )% |  |  | (76.8 | )% |  |  |  |  |  |  |  |
Interest expense |  |  | 7 |  |  |  | 9 |  |  |  | (2 | ) |  |  | (22.2 | )%
Percentage of revenue |  |  | 0.9 | % |  |  | 0.5 | % |  |  |  |  |  |  |  |
Provision for income taxes |  |  | 3 |  |  |  | 7 |  |  |  | (4 | ) |  |  | (57.1 | )%
Percentage of revenue |  |  | 0.4 | % |  |  | 0.4 | % |  |  |  |  |  |  |  |
Less: net loss attributable to noncontrolling interests |  | $ | 154 |  |  | $ | 66 |  |  | $ | 88 |  |  |  | 133.3 | %
Percentage of revenue |  |  | 20.3 | % |  |  | 3.9 | % |  |  |  |  |  |  |  |
Net loss attributable to Neonode Inc. |  | $ | (1,612 | ) |  | $ | (1,264 | ) |  | $ | (348 | ) |  |  | 27.5 | %
Percentage of revenue |  |  | (212.7 | )% |  |  | (73.9 | )% |  |  |  |  |  |  |  |
Net loss per share attributable to Neonode Inc. |  | $ | (0.18 | ) |  | $ | (0.14 | ) |  | $ | (0.04 | ) |  |  | 28.6 | %
Percentage of revenue |  |  | 0.0 | % |  |  | 0.0 | % |  |  |  |  |  |  |  |

26

|  | Six months ended June 30, |  |  | 2020 vs 2019 |
|  | 2020 |  |  | 2019 |  |  | Variance in Dollars |  |  | Variance in Percent |
Revenue: |  |  |  |  |  |  |  |  |  |  |  |
HMI Solutions |  | $ | 1,860 |  |  | $ | 3,411 |  |  | $ | (1,551 | ) |  |  | (45.5 | )%
Percentage of revenue |  |  | 90.6 | % |  |  | 91.6 | % |  |  |  |  |  |  |  |
HMI Products |  | $ | 192 |  |  | $ | 311 |  |  | $ | (119 | ) |  |  | (38.3 | )%
Percentage of revenue |  |  | 9.4 | % |  |  | 8.4 | % |  |  |  |  |  |  |  |
Total Revenue |  | $ | 2,052 |  |  | $ | 3,722 |  |  | $ | (1,670 | ) |  |  | (44.9 | )%
Cost of Sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
HMI Solutions |  | $ | 1 |  |  | $ | 5 |  |  | $ | (4 | ) |  |  | (80.0 | )%
Percentage of revenue |  |  | (0.0 | )% |  |  | 0.1 | % |  |  |  |  |  |  |  |
HMI Products |  | $ | 166 |  |  | $ | 167 |  |  | $ | (1 | ) |  |  | (0.6 | )%
Percentage of revenue |  |  | 8.1 | % |  |  | 4.5 | % |  |  |  |  |  |  |  |
Total Cost of Sales |  | $ | 167 |  |  | $ | 172 |  |  | $ | (5 | ) |  |  | (2.9 | )%
Total Gross Margin |  | $ | 1,885 |  |  | $ | 3,550 |  |  | $ | (1,665 | ) |  |  | (46.9 | )%
Operating Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Research and development |  | $ | 2,038 |  |  | $ | 2,711 |  |  | $ | (673 | ) |  |  | (24.8 | )%
Percentage of revenue |  |  | 99.3 | % |  |  | 72.8 | % |  |  |  |  |  |  |  |
Sales and marketing |  |  | 1,193 |  |  |  | 940 |  |  |  | 253 |  |  |  | 26.9 | %
Percentage of revenue |  |  | 58.1 | % |  |  | 25.3 | % |  |  |  |  |  |  |  |
General and administrative |  |  | 1,499 |  |  |  | 1,881 |  |  |  | (382 | ) |  |  | (20.3 | )%
Percentage of revenue |  |  | 73.1 | % |  |  | 50.5 | % |  |  |  |  |  |  |  |
Total Operating Expenses |  | $ | 4,730 |  |  | $ | 5,532 |  |  | $ | (802 | ) |  |  | (14.5 | )%
Percentage of revenue |  |  | 230.5 | % |  |  | 148.6 | % |  |  |  |  |  |  |  |
Operating Loss |  | $ | (2,845 | ) |  | $ | (1,982 | ) |  | $ | (863 | ) |  |  | 43.5 | %
Percentage of revenue |  |  | (138.6 | )% |  |  | (53.3 | )% |  |  |  |  |  |  |  |
Interest expense |  |  | 14 |  |  |  | 19 |  |  |  | (5 | ) |  |  | (26.3 | )%
Percentage of revenue |  |  | 0.7 | % |  |  | 0.5 | % |  |  |  |  |  |  |  |
Provision for income taxes |  |  | 19 |  |  |  | 13 |  |  |  | 6 |  |  |  | 46.2 | %
Percentage of revenue |  |  | 0.9 | % |  |  | 0.3 | % |  |  |  |  |  |  |  |
Less: net loss attributable to noncontrolling interests |  | $ | 256 |  |  | $ | 177 |  |  | $ | 79 |  |  |  | 44.6 | %
Percentage of revenue |  |  | 12.5 | % |  |  | 4.8 | % |  |  |  |  |  |  |  |
Net Loss attributable to Neonode Inc. |  | $ | (2,622 | ) |  | $ | (1,837 | ) |  | $ | (785 | ) |  |  | 42.7 | %
Percentage of revenue |  |  | (127.8 | )% |  |  | (49.4 | )% |  |  |  |  |  |  |  |
Net Loss per share attributable to Neonode Inc. |  | $ | (0.29 | ) |  | $ | (0.21 | ) |  | $ | (0.08 | ) |  |  | 38.1 | %
Percentage of revenue |  |  | 0.0 | % |  |  | 0.0 | % |  |  |  |  |  |  |  |

27

Net Revenues

All of our sales for the three and six months ended June 30, 2020 and 2019 were to customers located in the U.S., Europe and Asia.

Since January 1, 2020, we have allocated revenues to three different business areas. Revenues allocated to HMI Solutions consist of license fees and non-recurring engineering revenues allocated thereto while revenues allocated to HMI Products are derived from the sale of sensor modules and non-recurring engineering revenues allocated thereto. We expect future revenues within our Remote Sensing Solutions business area to be derived from license fees and non-recurring engineering revenues.

The decrease of 55.7% and 44.9% in total net revenues for the three- and six-month period in 2020 as compared to the same period in 2019 was primarily related to lower license revenues within our business area HMI Solutions. The decrease in revenues was also the result of lower estimates for unbilled license fees. In accordance with our revenue recognition policy, we record unbilled license fees using prior royalty revenue data. For the three months ended June 30, 2020, due to the uncertainty in the global economy, we recorded lower estimated license fees than in the same period in 2019.

The following tables present the net revenues distribution per business area and revenue stream for the three and six months ended June 30, 2020 and 2019 (dollars in thousands):

|  | Three months ended June 30, 2020 |  |  | Three months ended June 30, 2019 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
HMI Solutions |  |  |  |  |  |  |  |  |  |  |  |
License fees |  | $ | 674 |  |  |  | 99 | % |  | $ | 1,467 |  |  |  | 100 | %
Non-recurring engineering |  |  | 4 |  |  |  | 1 | % |  |  | 2 |  |  |  | - | %
|  | $ | 678 |  |  |  | 100 | % |  | $ | 1,469 |  |  |  | 100 | %
HMI Products |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sensor modules |  | $ | 65 |  |  |  | 81 | % |  | $ | 223 |  |  |  | 93 | %
Non-recurring engineering |  |  | 15 |  |  |  | 19 | % |  |  | 18 |  |  |  | 7 | %
|  | $ | 80 |  |  |  | 100 | % |  | $ | 241 |  |  |  | 100 | %

|  | Six months ended June 30, 2020 |  |  | Six months ended June 30, 2019 |
|  | Amount |  |  | Percentage |  |  | Amount |  |  | Percentage |
HMI Solutions |  |  |  |  |  |  |  |  |  |  |  |
License fees |  | $ | 1,843 |  |  |  | 99 | % |  | $ | 3,409 |  |  |  | 100 | %
Non-recurring engineering |  |  | 17 |  |  |  | 1 | % |  |  | 2 |  |  |  | - | %
|  | $ | 1,860 |  |  |  | 100 | % |  | $ | 3,411 |  |  |  | 100 | %
HMI Products |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sensor modules |  | $ | 164 |  |  |  | 85 | % |  | $ | 273 |  |  |  | 88 | %
Non-recurring engineering |  |  | 28 |  |  |  | 15 | % |  |  | 38 |  |  |  | 12 | %
|  | $ | 192 |  |  |  | 100 | % |  | $ | 311 |  |  |  | 100 | %

28

Gross Margin

Our combined total gross margin was 84% and 92% for the three and six months ended June 30, 2020 and 96% and 95% for the three and six months ended June 30, 2019, respectively. The decrease in total gross margin in 2020 as compared to 2019 was primarily due to higher costs relating to write off of inventory in 2020. For the three and six months ended June 30, 2020, revenues from HMI Solutions business area accounted for 89% and 91% of total revenue compared to 86% and 92% in the same periods in 2019 and revenues from HMI Products business area accounted for 11% and 9% of total revenue compared to 14% and 8% in the same periods 2019. There were no revenues from our Remote Sensing Solutions business area for the three or six months ended June 30, 2019 and 2020.

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.

Research and Development

Research and development (“R&D”) expenses for the three and six months ended June 30, 2020 were $1.0 million and $2.0 million, respectively. For the same periods in 2019, the R&D expenses were $1.5 million and $2.7 million.

The decrease was primarily related to lower staff expenses for the six months ended June 30, 2020 and a large number of scrapped inventory during the three months ended June 30, 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.

Sales and Marketing

Sales and marketing expenses for the six months ended June 30, 2020 were $0.6 million and $1.2 million, respectively. The sales and marketing costs for the same periods in 2019 were $0.5 million and $0.9 million. The increase was primarily due to higher staff expenses due to a reallocation of employees to the marketing function.

Our sales activities focus on OEM, ODM and Tier 1 customers who will license our technology or purchase and embed our touch sensor modules into their products. Our customers will then sell and market their products incorporating our technology to their customers. We expect to expand our HMI Solutions and Product sales and marketing activities in 2020 and future years to capture market share in our target markets.

General and Administrative

General and administrative (“G&A”) expenses for the three and six months ended June 30, 2020 were $0.7 million and $1.5 million, respectively. The G&A expenses for the three and six months ended June 30, 2019 were $1.0 million and $1.9 million, respectively. The decrease was primarily due to lower staff expenses and lower costs for patents which for the six months ended June 30, 2019 included the assignment of a portfolio of patents to Aequitas Technologies LLC.

Income Taxes

Our effective tax rate was 0% and (1)% for the three and six months ended June 30, 2020, respectively, and (1)% and (1)% for the three and six months ended June 30, 2019, respectively. The negative tax rate in the three and six months ended June 30, 2020 and June 30, 2019 is due to withholding taxes from sales. We recorded valuation allowances for the three and six-month periods ended June 30, 2020 and June 30, 2019 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 $1.6 million and $2.6 million for the three and six months ended June 30, 2020, respectively, and $1.3 million and $1.8 million for the same periods in 2019.

29

Off-Balance Sheet Arrangements

We have a bank guarantee of $210,000 for AirBar packaging material held at a manufacturing partner. We do not have any other transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than the 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 is not reflected on the face of the consolidated financial statements.

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 June 30, 2020, we had made no payments to TI under the NN1002 Agreement.

Operating Leases

On August 22, 2016, we entered into a lease of office space located at 2880 Zanker Road, San Jose, CA 95134. The lease will be renewed in August 2020 but only as a postbox at a lower cost.

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 agreement was renegotiated and renewed in December 2019 and is valid through November 2020. It is extended on a yearly basis unless written notice 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 is valid through December 9, 2020 and can be terminated with nine months’ written notice before the termination date.

In January 2015, our subsidiary Neonode Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea. The lease may be cancelled with 2 months’ notice.

On December 1, 2015, Neonode Taiwan Ltd. entered into a lease agreement located at Rm. 2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan. The lease is renewed monthly.

On September 1, 2019 we entered into a lease of office space located at NishiShinjuku Takagi Building, 1203 NishiShinjuku, Shinjukuku, Tokyo, Japan. The lease is valid through August 31, 2021 and is extended on a yearly basis unless written notice three months prior to expiration date.

For the three and six months ended June 30, 2020, we recorded approximately $142,000 and $281,000, respectively, for rent expense for all leased properties compared to $155,000 and $331,000 for the same periods in 2019.

See Note 8 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions.

30

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 June 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 8 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.

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 of our technology;
| ● | actual versus anticipated sales of sensor products, including AirBar;
| ● | actual versus anticipated operating expenses;
| ● | timing of our OEM customer product shipments;
| ● | timing of payment for our technology licensing agreements;
| ● | actual versus anticipated gross profit margin; and
| ● | ability to raise additional capital, if necessary.

As of June 30, 2020, we had cash of $1.8 million compared to $2.4 million as of December 31, 2019.

Working capital (current assets less current liabilities) was $(0.1) million as of June 30, 2020, compared to $2.4 million as of December 31, 2019.

Net cash used in operating activities for the six months ended June 30, 2020 was $1.9 million and was primarily the result of a net loss of $2.9 million and approximately $0.4 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets.

Net cash used in operating activities for the six months ended June 30, 2019 was $1.5 million and was primarily the result of a net loss of $2.0 million and offset by approximately $0.6 million in non-cash operating expenses, comprised primarily of depreciation and amortization of operating lease right-of-use assets.

Accounts receivable and unbilled revenues decreased by approximately $0.6 million as of June 30, 2020 compared to December 31, 2019. This was due to estimated lower revenues.

31

Inventory increased by approximately $47,000 during the six months ended June 30, 2020 compared to December 31, 2019.

Deferred revenues increased by approximately $34,000 during the six months ended June 30, 2020 compared to December 31, 2019, primarily due to prepayments from customers for non-recurring engineering.

During the six months ended June 30, 2020 we purchased approximately $7,000 of property and equipment, primarily furniture and test equipment.

Net cash provided by financing activities of $1.3 million during the six months ended June 30, 2020 was the result of short-term borrowings of $966,000 and short-term tax credits of $542,000, offset by principal payments on finance leases of $164,000.

Net cash used in financing activities of $272,000 during the six months ended June 30, 2019 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 $1.6 million and $2.6 million and $1.3 million and $1.8 million for the three and six months ended June 30, 2020 and 2019, respectively, and had an accumulated deficit of approximately $193.1 million and $190.5 million as of June 30, 2020 and December 31, 2019, respectively. In addition, operating activities used cash of approximately $1.9 million and $1.5 million for the six months ended June 30, 2020 and 2019, respectively.

On June 17, 2020, the Company entered into short-term loan facilities (the “Loan Agreements”) with Ulf Rosberg and Peter Lindell, directors of Neonode (the “Directors”). Pursuant to the Loan Agreements, each Director made 16,145,000 SEK (Swedish Krona), which is approximately $1.7 million in U.S. dollars, principal amount available to the Company. As of June 30, 2020, the Company had made an initial drawdown of an aggregate of approximately $1.0 million.

On August 5, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with institutional and accredited investors as part of a private placement (the “Private Placement”).

The closing of the Private Placement occurred on August 7, 2020.

Pursuant to the Securities Purchase Agreement, Neonode issued a total of 1,611,845 shares of common stock (the “Common Shares”) at a price of $6.50 per Common Share, and a total of 3,415 shares with a conversion price of $6.50 per share and a stated value of $1,000 of Series C-1 convertible preferred stock (the “Series C-1 Preferred Shares”) and Series C-2 convertible preferred stock (the “Series C-2 Preferred Shares”), for an aggregate purchase price of $13.9 million in gross proceeds.

The Series C-1 Preferred Shares and Series C-2 Preferred Shares are substantially the same, except the conversion of the Series C-2 Preferred Shares requires additional shareholder approval in accordance with Nasdaq listing rules. Ulf Rosberg and Peter Lindell, directors of Neonode, and Urban Forssell the Chief Executive Officer of Neonode (together, the “Insiders”) purchased an aggregate of $3.05 million of the Series C-2 Preferred Shares pursuant to the Securities Purchase Agreement.

Further, pursuant to the Securities Purchase Agreement, Neonode agreed to issue an additional 1,034 shares of Series C-2 Preferred Shares to Ulf Rosberg and Peter Lindell to repay an aggregate of $1.03 million of outstanding indebtedness owed to them under Loan Agreements described above.

The net proceeds of $13.1 million attributable to the Private Placement will be used for working capital purposes.

On August 6, 2020, in connection with the Private Placement, Neonode designated (i) 365 shares of its authorized and unissued preferred stock as Series C-1 Preferred Shares by filing a Series C-1 Certificate of Designation of Preferences, Rights and Limitations (the “Series C-1 Certificate of Designation”) with the Secretary of State of the State of Delaware and (ii) 4,084 shares of its authorized and unissued preferred stock as Series C-2 Preferred Shares by filing a Series C-2 Certificate of Designation of Preferences, Rights and Limitations (the “Series C-2 Certificate of Designation”) with the Secretary of State of the State of Delaware.

The Series C-1 Preferred Shares and Series C-2 Preferred Shares (together, the “Preferred Shares”) are convertible into 684,378 shares of Neonode common stock, subject to adjustment and limitations as provided in the Series C-1 Certificate of Designation and the Series C-2 Certificate of Designation. The Series C-1 Preferred Shares and the Series C-2 Preferred Shares have no voting rights, however, under certain circumstances provided therein, the Company may not alter, change or amend the Series C-1 Certificate of Designation and Series C-2 Certificate of Designation without the affirmative vote of a majority of the then outstanding Series C-1 Preferred Shares and Series C-2 Preferred Shares, respectively. The holders of the Preferred Shares are entitled to receive dividends at the rate per share of 5% per annum, payable quarterly and on the conversion date. In the event of any liquidation, dissolution or winding-up of the Company, the holders of the Preferred Shares will participate pari passu with the holders of the Company’s common stock, on an as-converted basis.

In connection with the Securities Purchase Agreement, Neonode entered into a Registration Rights Agreement (the “Registration Rights Agreement”) pursuant to which Neonode will file a registration statement with the SEC relating to the offer and sale by the holders of the Common Shares, and the shares of common stock underlying the Preferred Shares. Pursuant to the Registration Rights Agreement, Neonode is obligated to file the registration statement within 30 calendar days and to use reasonable best efforts to cause the registration statement to be declared effective within 75 calendar days or 105 calendar days in the case of a full review by the SEC. Failure to meet those and related obligations, or failure to maintain the effective registration of the Common Shares and the shares of common stock underlying the Preferred Shares will subject Neonode to payment for liquidated damages.

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In connection with the Private Placement, Neonode paid a fee to a placement agent of $659,070.

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.

We aim to grow our revenues in all business areas and 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.

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. Our management believes it could raise capital through public or private offerings if needed to provide us with sufficient liquidity.

No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are 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, no assurance can be given that stockholders will approve an increase in the number of our authorized shares of common stock. If funds and sufficient authorized shares 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.

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.

Critical Accounting Policies

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.

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, 2019.

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 Chief Executive Officer and Chief 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 June 30, 2020. Based upon that evaluation, our Chief Executive Officer and Chief 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

Except as described below in this Item 1A, 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, 2019.

We face risks related to the impact of the COVID-19 pandemic and the related protective public health measures.

The novel strain of the coronavirus identified in China in December 2019 (“COVID-19”) has globally spread throughout other areas such as Asia, Europe, and North America and has resulted in authorities imposing, and businesses and individuals implementing, numerous unprecedented measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders, and shutdowns. These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners. The ultimate impact and efficacy of government measures and potential future measures is currently unknown. In addition, the continued spread of COVID-19, or the occurrence of other epidemics could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and further adversely impact our business, results of operations and financial condition.

Moreover, many risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.

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)
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 August 14, 2019)
3.1.C.1 |  | Certificate of Designation of Preferences, Rights and Limitations of Series C-1 5% Convertible Preferred Stock, dated August 6, 2020 (incorporated by reference to Exhibit 3.1.C.1 of the registrant’s current report on Form 8-K filed August 10, 2020)
3.1.C.2 |  | Certificate of Designation of Preferences, Rights and Limitations of Series C-2 5% Convertible Preferred Stock, dated August 6, 2020 (incorporated by reference to Exhibit 3.1.C.2 of the registrant’s current report on Form 8-K filed August 10, 2020)
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 August 14, 2019)
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))
10.1 |  | Loan Agreement dated June 17, 2020 between Neonode Technologies AB and UMR Invest AB (incorporated by reference to Exhibit 10.1 of the registrant’s current report on Form 8-K filed June 22, 2020)
10.2 |  | Loan Agreement dated June 17, 2020 between Neonode Technologies AB and Cidro Holding AB (incorporated by reference to Exhibit 10.2 of the registrant’s current report on Form 8-K filed June 22, 2020)
10.3 |  | Securities Purchase Agreement, dated as of August 5, 2020 (incorporated by reference to Exhibit 10.1 of the registrant’s current report on Form 8-K filed August 10, 2020)
10.4 |  | Registration Rights Agreement, dated as of August 5, 2020 (incorporated by reference to Exhibit 10.2 of the registrant’s current report on Form 8-K filed August 10, 2020)
31.1 |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
31.2 |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
32 |  | Certifications 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

| * | Filed herewith

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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: August 14, 2020 | By: | /s/ Maria Ek
|  | Maria Ek
|  | Chief Financial Officer,
|  | Vice President, Finance,
|  | Treasurer and Secretary
|  | (Principal Financial and Accounting Officer)

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