Neonode Inc. 10-K

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is quoted on the Nasdaq Stock Market under the symbol NEON. Holders As of March 3, 2021, there were 62 stockholders of record of our common stock. This does not include the number of shareholders that hold shares in “street name” through banks, brokers and other financial institutions. Securities Authorized for Issuance Under Equity Compensation Plans See Part III, Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” for information relating to our equity compensation plans. Recent Sale of Unregistered Securities and Use of Proceeds None. Purchases of Equity Securities By the Issuer and Affiliated Purchasers None. ITEM 6. SELECTED FINANCIAL DATA Not Applicable ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report. Overview We develop advanced optical sensing solutions for contactless touch, touch, gesture sensing, and in-cabin monitoring. We market and sell our contactless touch, touch, and gesture products and solutions using our zForce technology platform, and our in-cabin monitoring solutions using our MultiSensing technology platform. In 2010, we began licensing to OEMs and Tier 1 suppliers who embed our technology into products they develop, manufacture and sell. Since 2010, our licensing customers have sold approximately 79 million devices that use our technology. In October 2017, we augmented our licensing business and began manufacturing and shipping sensor modules that incorporate our technology. We sell these embedded sensors modules to OEMs, ODM’s and Tier 1 suppliers for use in their products. To reduce time to market, we started selling AirBar in the fourth quarter of 2016, a Neonode branded consumer product, which incorporates one of our sensor modules to enable laptop touchscreen functionalities, through distributors and directly to consumers. We have no current plans to develop new Neonode branded products for the consumer markets. As of December 31, 2020 and 2019, respectively, we had entered into forty-two technology license agreements with global OEMs and Tier 1 suppliers. During the year ended December 31, 2020, we had fourteen customers using our touch technology in products that were being shipped to their customers. The majority of our license fees earned in 2020 and 2019 were from customer shipments of printers. As of December 31, 2020, we had entered into eight agreements with value added resellers (“VARs”) for integration of our sensor modules in the products they offer to global OEMs, ODMs and Tier 1 suppliers. In addition to this, we distribute our embedded sensor modules through Digi-Key Corporation and Serial Microelectronics HK Ltd. As of December 31, 2020, our two distributors sold and shipped 5,397 sensor modules and related development kits. We anticipate our future revenue will be generated by a combination of royalties from our existing and new license customers plus sales of our sensor modules. 16 During 2020 and 2019, we continued to focus our efforts on maintaining our current licensing customers and achieving design wins for new products both with current and future customers. We made investments enhancing the design of selected embedded sensor modules and setting-up partner networks for sales and distribution. We intend to continue expanding our sensor module product offerings in 2021, including new sensor modules for delivery to our key markets. We expect that over time the sales of sensor modules may constitute the majority of our revenue. In 2020, we participated in a Swedish governmental program designed to support businesses during the COVID-19 pandemic. Under the program, we received tax credits, which were later repaid, reduced social charges and subsidies to staff during a four month period of reduced working hours. See Note 6 to our consolidated financial statements for additional details. Critical Accounting Policies and Estimates Our 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 (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB, one of our wholly owned subsidiaries. The non-controlling interests are reported below net loss including non-controlling interests under the heading “Net loss attributable to non-controlling interests” in the consolidated statements of operations, below comprehensive loss under the heading “Comprehensive income loss attributable to non-controlling interests” in the consolidated statements of comprehensive loss and shown as a separate component of stockholders’ equity in the consolidated balance sheets. See “Non-controlling Interests” for further discussion. All inter-company accounts and transactions have been eliminated in consolidation. The consolidated balance sheets at December 31, 2020 and 2019 and the consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years ended 2020 and 2019 include our accounts and those of our wholly owned subsidiaries as well as Pronode Technologies AB (Sweden). The accounting policies affecting our financial condition and results of operations are more fully described in Note 2 to our consolidated financial statements. Certain of our accounting policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which inherently contain some degree of uncertainty. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. The historical experience and assumptions form the basis for making judgments about the reported carrying values of assets and liabilities and the reported amounts of revenue and expenses that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following are critical accounting policies and related judgments and estimates used in the preparation of our consolidated financial statements. Estimates The preparation of financial statements in conformity with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates and judgments. Significant estimates and judgments include, but are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived asset; 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. 17 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 fulfill the promise to transfer goods. Therefore, we treat all shipping and handling charges as expenses. Licensing Revenues: We earn revenue from licensing our internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components into their products, with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when the license is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we record unbilled license fees, using prior royalty revenue data by customer to make estimates of those royalties. Explicit return rights are not offered to customers. There have been no returns through December 31, 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 revenue from non-recurring engineering services as progress towards completion of engineering services and customer acceptance of those services occurs best reflects the economics of those transactions, because engineering services as tracked in our systems correspond directly with the value to our customers of our performance completed to date. Hours performed for each engineering project are tracked and reflect progress made on each project and are charged at a consistent hourly rate. Revenues from engineering services contracts that are short-term in nature are recorded when those services are complete and accepted by customers. 18 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 year ended December 31, 2020, we recorded $47,000 of losses and during the year ended December 31, 2019, there were no losses related to SOW projects recorded. Sensor Modules Revenues: We earn revenue from sales of sensor modules hardware products to our OEM, ODM and Tier 1 supplier customers, who embed our hardware into their products, and from sales of branded consumer products that incorporate our sensor modules that are sold through distributors or directly to end users. These distributors are generally given business terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. Our sales agreements generally provide customers with limited rights of return and warranty provisions. The timing of revenue recognition related to AirBar modules depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue for AirBar modules sold point-of-sale (online sales and other direct sales to customers) when we provide the promised product to the customer. Because we generally use distributors to provide AirBar and sensor modules to our customers, however, 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 and Module 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 $78,000 as of December 31, 2020 and was insignificant as of December 31, 2019. The warranty reserve is recorded as an accrued expense and cost of sales and was $25,000 as of December 31, 2020 and insignificant as of December 31, 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. Accounts Receivable and Allowance for Doubtful Accounts Our 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. Inventory Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out method (“FIFO”) valuation method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. In 2020, after a comprehensive evaluation of our AirBar business we recorded a $28,000 write-down for obsolete or slow moving AirBar component and finished goods inventory which is included in our cost of goods sold. 19 As of December 31, 2020, our inventory consists primarily of components that will be used in the manufacturing of our sensor modules. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods. Investment in Joint Venture We invested $3,000, a 50% interest in Neoeye AB, which was sold in November 2020. We accounted for our investment using the equity method of accounting since the investment provided us the ability to exercise significant influence, but not control, over the investee. We were not required to guarantee any obligations of the Joint Venture and there have been no operations of Neoeye AB during 2020. Projects in Process Projects in process consist of costs incurred during 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. There were no costs capitalized in projects in process as of December 31, 2020 and $8,000 as of December 31, 2019. 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 depreciated 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 consolidated statement of operations. Maintenance and repairs are charged to expense as incurred. Long-Lived Assets We assess any impairment by estimating the future cash flows from the associated asset in accordance with relevant accounting guidance. If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of December 31, 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. Research and Development Research and development (“R&D”) costs are expensed as incurred. R&D costs consist mainly of personnel related costs in addition to some external consultancy costs such as testing, certifying and measurements. Stock-Based Compensation Expense We measure the cost of employee services received in exchange for an award of equity instruments, including 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, net of estimated forfeitures. 20 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. Non-controlling Interests We recognize any non-controlling interest, also known as a minority interest, as a separate line item in equity in the consolidated financial statements. A non-controlling interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us. Generally, any interest that holds less than 50% of the outstanding voting shares is deemed to be a non-controlling interest; however, there are other factors, such as decision-making rights, that are considered as well. We include the amount of net income (loss) attributable to non-controlling interests in consolidated net income (loss) on the face of the consolidated statements of operations. We provide either in the consolidated statement of stockholders’ equity, if presented, or in the notes to 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 non-controlling 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. 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 or the 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). Gains or (losses) resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations and were $(252,000) and $105,000 during the years ended December 31, 2020 and 2019, respectively. Foreign currency translation gains (losses) were $235,000 and $(183,000) during the years ended December 31, 2020 and 2019, respectively. Net Loss per Share Net loss per share amounts have been computed based on the weighted-average number of shares of common stock outstanding during the years ended December 31, 2020 and 2019. 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 years ended December 31, 2020 and 2019 exclude the potential common stock equivalents, as the effect would be anti-dilutive. Other Comprehensive Income (Loss) Our other comprehensive income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity in the consolidated balance sheets as accumulated other comprehensive loss. 21 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 rates for the consolidated statements of operations were as follows: Years ended December 31, 2020 2019 Swedish Krona 9.21 9.46 Japanese Yen 106.73 109.01 South Korean Won 1,179.20 1,165.70 Taiwan Dollar 29.45 30.90 Exchange rates for the consolidated balance sheets were as follows: As of December 31, 2020 2019 Swedish Krona 8.22 9.34 Japanese Yen 103.23 108.66 South Korean Won 1,088.59 1,154.56 Taiwan Dollar 28.09 30.00 Deferred Revenues Deferred revenues consist primarily of prepayments for license fees, and other products or services for which we have been paid in advance, and earn the revenue when we transfer control of the product or service. Deferred revenues may also include upfront payments for consulting services to be performed in the future, such as non-recurring engineering services. We defer license fees until we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer has a right to use the license. Engineering development fee revenues are deferred until engineering services have been completed and accepted by our customers. We defer sensor modules revenues until distributors sell the products to their end customers. The following table presents our deferred revenues by source (in thousands); Years ended December 31, 2020 2019 Deferred license fees revenues $ 28 $ 28 Deferred NRE revenues 22 20 Deferred AirBar revenues 10 6 Deferred sensor modules revenues 78 13 $ 138 $ 67 22 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. Results of Operations A summary of our financial results for the years ended December 31, is as follows (in thousands, except percentages): 2020 2019 Variance in Dollars Variance in Percent Revenue: HMI Solutions $ 4,985 $ 6,047 $ (1,062 ) (17.6 )% Percentage of revenue 83.3 % 91.0 % HMI Products 999 599 400 66.8 % Percentage of revenue 16.7 % 9.0 % Total Revenue $ 5,984 $ 6,646 $ (662 ) (10.0 )% Cost of Sales: HMI Solutions $ 254 $ 5 $ 249 4,980.0 % Percentage of revenue 4.2 % 0.1 % HMI Products 824 678 146 21.5 % Percentage of revenue 13.8 % 10.2 % Total Cost of Sales $ 1,078 $ 683 $ 395 57.8 % Total Gross Margin $ 4,906 $ 5,963 $ (1,057 ) (17.7 )% Operating Expense: Research and Development $ 4,139 $ 5,239 $ (1,100 ) (21.0 )% Percentage of revenue 69.2 % 78.8 % Sales and Marketing 2,534 2,158 376 17.4 % Percentage of revenue 42.3 % 32.5 % General and Administrative 4,424 4,296 128 3.0 % Percentage of revenue 73.9 % 64.6 % Total Operating Expenses $ 11,097 $ 11,693 $ (596 ) (5.1 )% Percentage of revenue 185.4 % 175.9 % Operating Loss $ (6,191 ) $ (5,730 ) $ (461 ) 8.0 % Percentage of revenue (103.5 )% (86.2 )% Other Expenses (32 ) (34 ) 2 (5.9 )% Percentage of revenue (0.5 )% (0.5 )% Net Loss attributable to Neonode Inc. $ (5,605 ) $ (5,298 ) $ (307 ) 5.8 % Percentage of revenue (93.7 )% (79.7 )% Net Loss attributable to Neonode Inc. Per Share $ (0.56 ) $ (0.60 ) $ 0.04 (6.7 )% 23 Revenues All of our sales for the years ended December 31, 2020 and 2019 were to customers located in the United States, Europe and Asia. The decrease in total net revenues by 10.0% for the year ended December 31, 2020 as compared to 2019 was primarily caused by lower licensing revenues, offset by higher sensor modules sales. The following tables present the net revenues distribution per business area and revenue stream for the years ended December 31, 2020 and 2019 (dollars in thousands): 2020 2019 Amount Percentage Amount Percentage HMI Solutions License fees $ 4,618 93 % $ 5,966 99 % Non-recurring engineering 367 7 % 81 1 % Total $ 4,985 100 % $ 6,047 100 % HMI Products Sensor modules $ 951 95 % $ 560 93 % Non-recurring engineering 48 5 % 39 7 % Total $ 999 100 % $ 599 100 % 2020 2019 Amount Percentage Amount Percentage HMI Solutions Net revenues from automotive $ 1,603 32 % $ 1,839 31 % Net revenues from consumer electronics 3,037 61 % 4,133 68 % Net revenues from military avionics 345 7 % 75 1 % Total $ 4,985 100 % $ 6,047 100 % HMI Products Net revenues from medical $ 195 20 % $ 55 9 % Net revenues from distributors 599 60 % 34 6 % Net revenues from other 205 20 % 510 85 % Total $ 999 100 % $ 599 100 % 24 The following table presents revenues by market and revenues from NRE for the years ended December 31, 2020 and 2019 (dollars in thousands): 2020 Amount Percentage Revenues from Automotive $ 1,603 27 % Revenues from Consumer electronics 3,015 50 % Revenues from Sensor modules 950 16 % Revenues from NRE 410 7 % Other revenue 6 0 % Total $ 5,984 100 % 2019 Amount Percentage Revenues from Automotive $ 1,839 28 % Revenues from Consumer electronics 4,127 62 % Revenues from Sensor modules 560 8 % Revenues from NRE 120 2 % Total $ 6,646 100 % License fees were the majority of our total revenue in the past three years and decreased by 23% in 2020 as compared to 2019, primarily due to a 27% decrease in license fees earned from our customer within consumer electronics and 13% decrease in license fees earned from our automotive customers. The decrease is related to the generally slower sales due to the COVID-19 pandemic in combination with declining volumes from aging customer contracts. An increasing portion of our revenues for 2020 was attributable to embedded sensor modules, which we began selling in October 2017. We sold $950,000 and $560,000 of sensor modules in 2020 and 2019, respectively. 25 While our revenues from license fees in 2020 were negatively impacted by the COVID-19 pandemic, as the demand for our customer products decreased, revenues from our sensor module sales were positively impacted in 2020 due to the increased demand for contactless touch that they enable. Revenues from NRE increased 247% in 2020 as compared to 2019 due to prototype projects within the military & avionics market. In 2020, 84% of total NRE fees were earned from military & avionics compared to 62% in 2019. 88% of our NRE revenues derived from our HMI Solutions business area in 2020 compared to 68% in 2019. We expect to continue to earn NRE fees in 2021 and future years from all three of our business areas. Gross Margin Our combined total gross margin was 82% in 2020 compared to 90% in 2019. The decrease in total gross margin in 2020 as compared to 2019 was primarily due to lower license revenues with 100% gross margin and increased sales of sensor modules with lower margins. There were also higher costs relating to write-down of slow moving and obsolete inventory in 2020. For the year ended December 31, 2020, revenues from our HMI Solutions business area accounted for 83% of total revenue compared to 91% in the same period in 2019 and revenues from our HMI Products business area accounted for 17% of total revenue compared to 9% in the same period 2019. There were no revenues from our Remote Sensing Solutions business area for the years ended December 31, 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 Product R&D expenses for 2020 were 69% of total revenue compared to 79% in 2019. R&D in 2020 decreased 21% compared to 2019 primarily due to lower staff expenses in 2020, primarily as a result of the Swedish governmental COVID-19 support program. There were 25 employees and two consultants in our Research and Development department as of December 31, 2020 compared to 27 employees and seven consultants as of December 31, 2019. Our R&D groups are primarily tasked with developing technology and software platforms to support our sensor modules and our customer integration activities for both our sensor hardware and license agreements. Sales and Marketing Sales and marketing expenses for 2020 were 42% of total revenue compared to 32% in 2019. Sales and marketing expenses in 2020 increased 17% compared to 2019 primarily related to higher staff expenses in 2020. We had six employees and seven consultants in our sales and marketing department as of December 31, 2020 compared to six employees and six consultants as of December 31, 2019. There is approximately $32,000 of stock-based compensation expense included in sales and marketing expenses for the year ended December 31, 2020 compared to none for the year ended December 31, 2019. Our sales activities focus on OEM, ODM and Tier 1 customers, directly or through VARs, who license our technology or purchase and embed our touch sensor modules into their products. 26 General and Administrative General and administrative (“G&A”) expenses were 74% of revenue in 2020 compared to 65% in 2019. Total G&A expenses in 2020 increased 3% from 2019. The increase was primarily related to a one-time litigation expense, partly offset by lower staff expenses. As of December 31, 2020, we had eight full-time employees and no consultants in our G&A department fulfilling management and accounting responsibilities compared to nine full-time employees and one consultant as of December 31, 2019. There is approximately $42,000 of non-cash stock-based compensation included in G&A expenses for the year ended December 31, 2020 compared to none for the year ended December 31, 2019. Interest Expense Interest expense for the year ended December 31, 2020 was $27,000 compared to $34,000 for the year ended December 31, 2019. The interest expense for both 2020 and 2019 was mainly related to finance leases. 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 or the 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). Gains or (losses) resulting from foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations and were $(252,000) and $(105,000) during the years ended December 31, 2020 and 2019, respectively. Foreign currency translation gains or (losses) were $235,000 and $(183,000) during the years ended December 31, 2020 and 2019, respectively. Income Taxes Our effective tax rate was 0% for the year ended December 31, 2020 and 0% in the year ended 2019. We recorded valuation allowances in 2020 and 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 of $5.6 million for the year ended December 31, 2020, compared to a net loss of $5.3 million for the year ended December 31, 2019. Contractual Obligation and Off-Balance Sheet Arrangements We previously agreed to secure the value of inventory purchased by one of our AirBars manufacturing partners. At December 31, 2020, the guaranteed amount was decreased from $210,000 to $100,000. 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. Operating Leases We did not renew our lease for the office space located at 2880 Zanker Road, San Jose, CA 95134 in August 2020 and Neonode Inc. now operates through a virtual office. 27 On December 1, 2020, Neonode Technologies AB entered into a lease for 6,684 square feet of office space located at Karlavägen 100, Stockholm, Sweden. The lease agreement is valid through November 2022. It is extended on a yearly basis unless written notice nine 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 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 was terminated on December 18, 2020 and we now only have a virtual office in South Korea. 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 years ended December 31, 2020 and 2019, we recorded approximately $585,000 and $649,000, respectively, for rent expense. Equipment Subject to Finance Lease 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. On July 1, 2020 the lease contract was extended for one year. The implicit interest rate of the extended lease period is 9.85% per annum. Between the second and fourth quarters of 2016, we entered into six leases for component production equipment. Under the terms of five of the lease agreements we are obligated to purchase the equipment at the end of the original 3 5-year lease terms for 5-10% of the original purchase price of the equipment. In accordance with relevant accounting guidance the 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 the leases is currently approximately 3% per annum. One of the leases is a hire-purchase agreement where the equipment is required 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 the lease is currently approximately 3% per annum. In 2017, we entered into a 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 currently approximately 1.5% per annum. In 2018, we entered into a 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 currently approximately 1.5% per annum. 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 two million ASICs sold. As of December 31, 2020, we had made no payments to TI under the NN1002 Agreement. 28 On December 4, 2014, we entered into an Analog Device Development Agreement (the “NN1003 Agreement”) with STMicroelectronics International N.V. (“STMicro”) pursuant to which STMicro agreed to integrate our intellectual property into an ASIC. The NN1003 ASIC can only be sold by STMicro exclusively to our licensees. Under the terms of the NN1003 Agreement, we agreed to reimburse STMicro up to $835,000 of non-recurring engineering costs. As of December 31, 2020 we have paid a total of $835,000 of the non-recurring engineering costs. 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: ● licensing of our technology; ● purchases of our sensor products, including AirBar; ● operating expenses; ● timing of our OEM customer product shipments; ● timing of payment for our technology licensing agreements; ● gross profit margin; and ● ability to raise additional capital, if necessary. As of December 31, 2020, we had cash of $10.5 million, as compared to $2.4 million as of December 31, 2019. Working capital (current assets less current liabilities) was $10.4 million as of December 31, 2020, compared to working capital of $2.4 million as of December 31, 2019. Net cash used in operating activities for the year ended December 31, 2020 of $5.8 million was primarily the result of a net loss including noncontrolling interests of approximately $6.3 million. Cash used to fund net losses is offset by approximately $1.3 million in non-cash operating expenses, mainly comprised of depreciation, amortization and stock based compensations. Accounts receivable and unbilled revenues increased by approximately $394,000 as of December 31, 2020 compared to December 31, 2019. Inventory increased by approximately $91,000 as of December 31, 2020 compared to December 31, 2019. Accounts payable and accrued expenses increased approximately $444,000 as of December 31, 2020 compared to December 31, 2019. Net cash used in operating activities for the year ended December 31, 2019 of $3.5 million was primarily the result of (i) a net loss including noncontrolling interests of approximately $5.8 million and (ii) approximately $0.5 million in net cash provided in changes in operating assets and liabilities, primarily accounts receivable, inventory, prepaid expenses and other current assets, accounts payable and accrued expenses, and deferred revenues. Cash used to fund net losses is offset by approximately $1.8 million in non-cash operating expenses, mainly comprised of depreciation and amortization and stock-based compensation. Accounts receivable and unbilled revenues decreased approximately $397,000 as of December 31, 2019 compared with December 31, 2018. During 2019, we were successful in collecting cash from sales to our customers substantially in accordance with our standard payment terms to those customers. Accounts payable and accrued expenses increased approximately $454,000 as of December 31, 2019 compared to December 31, 2018. Deferred revenue decreased approximately $429,000 during 2019. Net cash provided by financing activities during the year ended December 31, 2020 of $13.6 million was mainly the result of issuance of common stock, partly offset by principal payments on finance leases. 29 Net cash used by financing activities during the year ended December 31, 2019 of $0.5 million was mainly the result of principal payments on finance leases. In the years ended December 31, 2020 and 2019, we purchased $60,000 and $89,000, respectively, of fixed assets, consisting primarily of engineering equipment. Loan agreements with Directors Rosberg and Lindell On June 17, 2020, we entered into short-term loan facilities (the “Loan Agreements”) with two entities beneficially owned respectively by each of Ulf Rosberg and Peter Lindell, Directors of Neonode. 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. The Company made an initial drawdown of an aggregate of approximately $1.0 million under the Loan Agreements. See Note 6 to our consolidated financial statements for additional details on the Loan Agreements. August 2020 Private Placement On August 7, 2020, we closed a private placement (the “August 2020 Private Placement”) with certain institutional and accredited investors. We issued a total of 1,611,845 shares of common stock at a price of $6.50 per share, and a total of 365 shares of Series C-1 Preferred Stock and 3,050 shares of Series C-2 Preferred Stock, each with a conversion price of $6.50 per share and a stated value of $1,000 per share, for approximately $13.9 million in gross proceeds. The net proceeds from the private placement are being used for working capital purposes. Ulf Rosberg and Peter Lindell, directors of Neonode, and Urban Forssell, our Chief Executive Officer, purchased an aggregate of $3.05 million of the Series C-2 Preferred Stock in the August 2020 Private Placement. We issued 517 shares of Series C-2 Preferred Stock to UMR Invest AB, an entity beneficially owned by Ulf Rosberg, in satisfaction of the outstanding indebtedness and accrued interest under the Loan Agreement with UMR Invest AB. Cidro Förvaltning AB, an entity associated with Mr. Lindell purchased 517 shares of Series C-2 Preferred Stock. Following the closing, we used the proceeds from the sale of Series C-2 Preferred Stock to Cidro Förvaltning AB to satisfy the outstanding indebtedness and accrued interest under the Loan Agreement with Cidro Holding AB. As a result of the repayments to each of UMR Invest AB and Cidro Holding AB, the Loan Agreements terminated in accordance with their terms. Pursuant to the terms and the provisions of the Securities Purchase Agreement, all 365 shares of Series C-1 Preferred Stock and 4,084 shares of Series C-2 Preferred Stock (together, the “Series C Preferred Shares”) were converted into 684,378 shares of Neonode common stock on September 24 and 29, 2020, respectively. Prior to their conversion, the holders of the Series C Preferred Shares were entitled to receive dividends at the rate per share of 5% per annum, totaling $33,000. As of December 31, 2020, all of the preferred dividends have been paid. We entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the investors in the August 2020 Private Placement, pursuant to which we filed a registration statement with the Securities and Exchange Commission (the “SEC”) relating to the offer and sale by the holders of the shares of common stock sold in the private placement, and the shares of common stock issuable upon conversion of the Series C Preferred Shares. The registration statement was declared effective by the SEC on September 18, 2020. Failure to maintain the effectiveness of the registration statement will subject us to payment for liquidated damages. In connection with the August 2020 Private Placement, we incurred total offering costs of $879,000. Future Sources of Liquidity 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, however, 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 needed. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 30