Neonode Inc. 10-Q

Item 1. Financial Statements NEONODE INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) March 31, December 31, 2024 2023 (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 14,274 $ 16,155 Accounts receivable and unbilled revenues, net 1,072 917 Inventory 487 610 Prepaid expenses and other current assets 760 938 Total current assets 16,593 18,620 Property and equipment, net 294 340 Operating lease right-of-use assets, net 34 54 Total assets $ 16,921 $ 19,014 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 491 $ 440 Accrued payroll and employee benefits 1,021 941 Accrued expenses 205 354 Contract liabilities 82 10 Current portion of finance lease obligations 29 33 Current portion of operating lease obligations 34 54 Total current liabilities 1,862 1,832 Finance lease obligations, net of current portion 12 19 Total liabilities 1,874 1,851 Commitments and contingencies Stockholders’ equity: Common stock, 25,000,000 shares authorized, with par value of $ 0.001 ; 15,359,481 shares issued and outstanding at March 31, 2024 and December 31, 2023 15 15 Additional paid-in capital 235,160 235,158 Accumulated other comprehensive loss ( 430 ) ( 396 ) Accumulated deficit ( 219,698 ) ( 217,614 ) Total stockholders’ equity 15,047 17,163 Total liabilities and stockholders’ equity $ 16,921 $ 19,014 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 March 31, 2024 2023 Revenues: License fees $ 773 $ 1,148 Products 200 102 Non-recurring engineering 41 3 Total revenues 1,014 1,253 Cost of revenues: Products 380 47 Non-recurring engineering 17 - Total cost of revenues 397 47 Total gross margin 617 1,206 Operating expenses: Research and development 895 802 Sales and marketing 816 592 General and administrative 1,160 1,384 Total operating expenses 2,871 2,778 Operating loss ( 2,254 ) ( 1,572 ) Other income: Interest income, net 180 158 Total other income 180 158 Loss before provision for income taxes ( 2,074 ) ( 1,414 ) Provision for income taxes 10 11 Net loss $ ( 2,084 ) $ ( 1,425 ) Loss per common share: Basic and diluted loss per share $ ( 0.14 ) $ ( 0.09 ) Basic and diluted – weighted average number of common shares outstanding 15,359 15,209 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 March 31, 2024 2023 Net loss $ ( 2,084 ) $ ( 1,425 ) Other comprehensive income: Foreign currency translation adjustments ( 34 ) 35 Other comprehensive loss $ ( 2,118 ) $ ( 1,390 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 NEONODE INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) (Unaudited) For the three months ended March 31, 2024 and 2023 Common Stock Shares Issued Common Stock Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Balances, December 31, 2023 15,359 $ 15 $ 235,158 $ ( 396 ) $ ( 217,614 ) $ 17,163 Stock-based compensation - - 2 - - 2 Foreign currency translation adjustment - - - ( 34 ) - ( 34 ) Net loss - - - - ( 2,084 ) ( 2,084 ) Balances, March 31, 2024 15,359 $ 15 $ 235,160 $ ( 430 ) $ ( 219,698 ) $ 15,047 Common Stock Shares Issued Common Stock Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Balances, December 31, 2022 14,456 $ 14 $ 227,235 $ ( 340 ) $ ( 207,491 ) $ 19,418 Stock-based compensation - - 18 - - 18 Issuance of shares for cash, net of offering costs 903 1 7,865 - - 7,866 Foreign currency translation adjustment - - - 35 - 35 Net loss - - - - ( 1,425 ) ( 1,425 ) Balances, March 31, 2023 15,359 $ 15 $ 235,118 $ ( 305 ) $ ( 208,916 ) $ 25,912 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) Three months ended March 31, 2024 2023 Cash flows from operating activities: Net loss $ ( 2,084 ) $ ( 1,425 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 2 18 Depreciation and amortization 27 17 Amortization of operating lease right-of-use assets 17 16 Inventory impairment loss 278 - Changes in operating assets and liabilities: Accounts receivable and unbilled revenue, net ( 170 ) ( 491 ) Inventory ( 253 ) ( 11 ) Prepaid expenses and other current assets 136 66 Accounts payable, accrued payroll and employee benefits, and accrued expenses 76 133 Contract liabilities 73 ( 5 ) Operating lease obligations ( 17 ) ( 16 ) Net cash used in operating activities ( 1,915 ) ( 1,698 ) Cash flows from financing activities: Proceeds from issuance of common stock, net of offering costs - 7,866 Principal payments on finance lease obligations ( 9 ) ( 28 ) Net cash (used in) provided by financing activities ( 9 ) 7,838 Effect of exchange rate changes on cash and cash equivalents 43 25 Net change in cash and cash equivalents ( 1,881 ) 6,165 Cash and cash equivalents at beginning of period 16,155 14,816 Cash and cash equivalents at end of period $ 14,274 $ 20,981 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 10 $ 11 Cash paid for interest $ 1 $ 2 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 period presented. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of results for a full fiscal year or any other period. The accompanying condensed consolidated financial statements for the three months ended March 31, 2024 and 2023 have been prepared by us, pursuant to the rules and regulations of the United States 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 United States (“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, 2023. Operations Neonode Inc., which is collectively with its subsidiaries referred to as “Neonode” or the “Company” in this report, develops advanced optical sensing solutions for contactless touch, touch, gesture sensing, and object detection and machine perception solutions using advanced machine learning algorithms to detect and track persons and objects in video streams for cameras and other types of imagers. We market and sell our contactless touch, touch, and gesture sensing, and object detection products and solutions based on our zForce technology platform, and our scene analysis solutions based on our MultiSensing technology platform. We offer our solutions to customers in many different markets and segments including, but not limited to, office equipment, automotive, industrial automation, medical, military and avionics. With the new, sharpened strategy, announced in December 2023, we focus solely on the licensing business. This allows customers to license our unique and advanced technology to create bespoke products and solutions that bring value to end customers. Liquidity We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $ 2.1 million and $ 1.4 million for the three months ended March 31, 2024 and March 31, 2023, respectively and had an accumulated deficit of approximately $ 219.7 million and $ 217.6 million as of March 31, 2024 and December 31, 2023, respectively. In addition, operating activities used cash of approximately $ 1.9 million and $ 1.7 million for the three months ended March 31, 2024 and 2023, respectively. The condensed consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business. Management evaluated the significance of the Company’s operating loss and determined that the Company’s current operating plan and sources of potential capital (including the Company’s ATM Facility, as defined and described below) would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern. During the three months ended March 31, 2023, the Company sold an aggregate of 903,716 shares of its common stock under the at-the-market facility with aggregate net proceeds to the Company of $ 7,866,000 , after payment of commissions to B. Riley Securities (as defined below), the agent for the ATM Facility, and other expenses of $ 244,000 . During the three months ended March 31, 2024, we sold no shares pursuant to the ATM Facility. 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 has evaluated the significance of the Company’s operating loss and has determined that the Company’s current operating plan and sources of potential capital (including the Company’s at-the-market facility described above) are sufficient to alleviate concerns about the Company’s ability to continue as a going concern. 6 In the future, we may require additional sources of capital 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 to us on acceptable terms, or at all, we may be unable to adequately fund our business plans, which could have a negative effect on our business, results of operations and financial condition. If funds are available through the issuance of equity or debt securities, 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 on us that could impair our ability to engage in certain business transactions. We expect revenues 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. 2. Summary of Significant Accounting Policies Principles of Consolidation The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode Inc. and its intercompany subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The condensed consolidated balance sheets at March 31, 2024 and December 31, 2023 and the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three months ended March 31, 2024 and 2023 include our accounts and those of our intercompany subsidiaries. Estimates and Judgments The preparation of financial statements in conformity with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates and judgments. Significant estimates and judgments include, but are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived assets; for leases, determining whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets; and the fair value of options issued as stock-based compensation. 7 Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Concentration of Cash Balance Risks Cash and cash equivalents balances are maintained at various banks in the United States, Japan, Taiwan and Sweden. For deposits held with financial institutions in the United States, the U.S. Federal Deposit Insurance Corporation provides basic deposit coverage with limits up to $ 250,000 per owner. The Swedish government provides insurance coverage up to 1,050,000 Krona per customer and covers deposits in all types of accounts. For bank accounts of the category held by Neonode, the Japanese government provides full insurance coverage. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount of insurance provided. Accounts Receivable and Credit Losses Accounts receivable is stated at net realizable value. We estimate and record a provision for expected credit losses related to our financial instruments, including our trade receivables. We consider historical collection rates, the current financial status of our customers, macroeconomic factors, and other industry-specific factors when evaluating for current expected credit losses. Forward-looking information is also considered in the evaluation of current expected credit losses. However, because of the short time to the expected receipt of accounts receivable, we believe that the carrying value, net of expected losses, approximates fair value and therefore, we rely more on historical and current analysis of such financial instruments, including our trade receivables. Further, we consider macroeconomic factors and the status of the technology industry to estimate if there are current expected credit losses within our trade receivables based on the trends and our expectation of the future status of such economic and industry-specific factors. Also, specific allowance amounts are established based on review of outstanding invoices to record the appropriate provision for customers that have a higher probability of default. The accounts receivable balance on our consolidated balance sheet as of March 31, 2024 was $ 1.1 million, net of approximately $ 30,000 of allowances. The following table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected at March 31, 2024: Balance at January 1, 2024 $ 30,000 Change in expected credit losses - Write-offs, net of recoveries - Balance at March 31, 2024 $ 30,000 Inventory The Company’s inventory consists of components that will be used in the manufacturing of our touch sensor modules (“TSMs”). We classify inventory for reporting purposes as raw materials, work-in-process, and finished goods. Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. With the new, sharpened strategy, announced in December 2023, the Company focuses solely on the licensing business. Consequently, we will phase out the TSM product business through licensing of the TSM technology to strategic partners or outsourcing. Management has decided to impair TSM related inventories which are expected to remain after production ends in 2024. The TSM inventory impairment was $ 3.6 million for the year ended December 31, 2023 and another $ 0.3 million in the three months ended March 31, 2024. In December 2023, management decided to dispose of the fully reserved AirBar inventory. 8 Raw materials, work-in-process, and finished goods are as follows (in thousands): March 31, December 31, 2023 2022 Raw materials $ 80 $ 319 Work-in-process 237 192 Finished goods 170 99 Ending inventory $ 487 $ 610 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 10 years Depreciation of 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 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. Right-of-use assets are measured initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial direct costs, such as commissions paid to obtain a lease. Right-of-use assets are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct costs not yet expensed. Long-lived Assets We assess 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 March 31, 2024, 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. 9 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 $( 34,000 ) and $ 35,000 during the three months ended March 31, 2024 and 2023, 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 $ 5,000 and $( 5,000 ) during the three months ended March 31, 2024 and 2023, respectively. Concentration of Credit and Business Risks Our customers are located in the United States, Europe, Oceania and Asia. As of March 31, 2024, four of our customers represented approximately 64.8 % of our consolidated accounts receivable and unbilled revenues. As of December 31, 2023, four of our customers represented approximately 76.4 % of our consolidated accounts receivable and unbilled revenues. Customers who accounted for 10.0% or more of our net revenues during the three months ended March 31, 2024 are as follows: ● Hewlett-Packard Company – 24.8 % ● Alps Alpine – 18.4 % ● Seiko Epson – 15.7 % Customers who accounted for 10.0% or more of our net revenues during the three months ended March 31, 2023 are as follows: ● Hewlett-Packard Company – 30.7 % ● Seiko Epson – 20.2 % ● Alps Alpine – 14.7 % ● LG – 13.7 % Revenue Recognition We recognize revenue when control of products is transferred to our customers, and when services are completed and accepted by our customers; the amount of revenue we recognize reflects the consideration we expect to receive for those products or services. Our contracts with customers may include combinations of products and services (e.g., a contract that includes products and related engineering services). We structure our contracts such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly defined in each contract. License fees and sales of our TSMs are on a per-unit basis. Therefore, we generally satisfy performance obligations as units are shipped to our customers. Non-recurring engineering service performance obligations are satisfied as work is performed and accepted by our customers. We recognize revenue net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat all product shipping and handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods, therefore we treat all shipping and handling charges as expenses. 10 License Fees We earn revenue from licensing our internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products, with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when the license is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we record unbilled license fees, using prior royalty revenue data by customer to make estimates of those royalties. Explicit return rights are not offered to customers. There have been no returns through March 31, 2024. Product Sales We earn revenue from sales of TSM hardware products to our Original Equipment Manufacturer (“OEM”), Original Design Manufacturer (“ODM”) and Tier 1 supplier customers, who embed our hardware into their products, and from sales of branded consumer products that incorporate our TSMs that are sold through distributors or directly to end users. These distributors are generally given business terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. Our sales agreements generally provide customers with limited rights of return and warranty provisions. Because we generally use distributors to provide TSMs to our customers, we must analyze the terms of our distributor agreements to determine when control passes from us to our distributors. For sales of TSMs sold through distributors, we recognize revenues when our distributors obtain control over our products. Control passes to our distributors when we have a present right to payment for products sold to the distributors, the distributors have legal title to and physical possession of products purchased from us, and the distributors have significant risks and rewards of ownership of products purchased. Distributors participate in various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected. Under U.S. GAAP, companies may make reasonable aggregations and approximations of returns data to accurately estimate returns. Our TSM 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 $ 7,000 as of March 31, 2024 and $ 8,000 as of December 31, 2023. The warranty reserve is recorded as an accrued expense and cost of sales and was $ 31,000 as of March 31, 2024 and $ 30,000 as of December 31, 2023. 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. 11 Non-Recurring Engineering For technology license or TSM contracts that require modification or customization of the underlying technology to adapt the technology to customer use, we determine whether the technology license or TSM, and required engineering consulting services represent separate performance obligations. We perform our analysis on a contract-by-contract basis. If there are separate performance obligations, we determine the standalone selling price (“SSP”) of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied. We provide engineering consulting services to our customers under a signed Statement of Work (“SOW”). Deliverables and payment terms are specified in each SOW. We generally charge an hourly rate for engineering services, and we recognize revenue as engineering services specified in contracts are completed and accepted by our customers. Any upfront payments we receive for future non-recurring engineering services are recorded as unearned revenue until that revenue is earned. We believe that recognizing non-recurring engineering services revenues as progress towards completion of engineering services and customer acceptance of those services occurs best reflects the economics of those transactions, because engineering services as tracked in our systems correspond directly with the value to our customers of our performance completed to date. Hours performed for each engineering project are tracked and reflect progress made on each project and are charged at a consistent hourly rate. Revenues from non-recurring engineering contracts that are short-term in nature are recorded when those services are complete and accepted by customers. Revenues from non-recurring engineering contracts with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required to produce such deliverables are recognized as they are completed and accepted by customers. Estimated losses on all SOW projects are recognized in full as soon as they become evident. During the three months ended March 31, 2024 and 2023, we recorded no losses. The following tables present the net revenues distribution by geographical area and market for the three months ended March 31, 2024 and 2023 (dollars in thousands): Three months ended March 31, 2024 Three months ended March 31, 2023 Amount Percentage Amount Percentage North America Net revenues from Automotive $ - - % $ - - % Net revenues from IT & Industrial 338 100.0 % 471 100.0 % $ 338 100.0 % $ 471 100.0 % Asia Pacific Net revenues from Automotive $ 248 51.7 % $ 356 56.2 % Net revenues from IT & Industrial 232 48.3 % 278 43.8 % $ 480 100.0 % $ 634 100.0 % Europe, Middle East and Africa Net revenues from Automotive $ 89 45.4 % $ 89 60.1 % Net revenues from IT & Industrial 107 54.6 % 59 39.9 % $ 196 100.0 % $ 148 100.0 % 12 Significant Judgments Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when one of our customers contracts with us for a product and related engineering services 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; however, we recently negotiated a contract that may include multiple performance obligations in the future. Judgment is also required to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us. Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal of any incremental revenue would occur. Finally, judgment is required to determine the amount of unbilled license fees at the end of each reporting period. Contract Balances Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our customers. The following table presents accounts receivable and deferred revenues as of March 31, 2024 and December 31, 2023 (in thousands): March 31, 2024 December 31, 2023 Accounts receivable and unbilled revenue, net $ 1,072 $ 917 Contract liabilities (deferred revenues) $ 82 $ 10 The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits or deferred revenue (contract liabilities) on the consolidated balance sheets. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets; contract assets are generally classified as current. The Company sometimes receives advances or deposits from its customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. We do not anticipate impairment of our contract assets related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance in that asset account. We will continue to monitor the timeliness of receipts from those customers to assess whether the contract assets have been impaired. The allowance for credit losses 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. 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. 13 Costs to Obtain Contracts We record the incremental costs of obtaining a contract with a customer as a contract asset if we expect the benefit of those costs to cover a period greater than one year. We currently have no incremental costs that must be capitalized. We expense as incurred costs of obtaining a contract when the amortization period of those costs would have been less than or equal to one year. Product Warranty The following table summarizes the activity related to the product warranty liability (in thousands): March 31, 2024 December 31, 2023 Balance at beginning of period $ 30 $ 49 Provisions for (adjustments to) warranty issued 1 ( 19 ) Balance at end of period $ 31 $ 30 The Company accrues for warranty costs as part of its cost of sales of TSMs based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 months from the customer receipt of the product included as a component of accrued expenses on the condensed consolidated balance sheet. Contract Liabilities Contract liabilities (deferred revenues) consist primarily of prepayments for license fees, and other products or services that we have been paid in advance. We earn the revenue when we transfer control of the product or service. Deferred revenues may also include upfront payments for consulting services to be performed in the future, such as non-recurring engineering services. We defer license fees until we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer has a right to use the license. Non-recurring engineering fee revenues are deferred until engineering services have been completed and accepted by our customers. The following table presents our deferred revenues by source (in thousands): March 31, 2024 December 31, 2023 Deferred revenues license fees $ 75 $ 2 Deferred revenues products 7 8 Deferred revenues non-recurring engineering - - $ 82 $ 10 During the three months ended March 31, 2024, the Company recognized revenues of approximately $ 2,000 related to contract liabilities outstanding at the beginning of the year. Advertising Advertising costs are expensed as incurred. Advertising costs for the three months ended March 31, 2024 and 2023 amounted to approximately $ 175,000 and $ 54,000 , respectively. 14 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. 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 March 31, 2024 and December 31, 2023. 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 March 31, 2024 and December 31, 2023, we had no unrecognized tax benefits. Net Loss per Share Net loss per share amounts have been computed based on the weighted average number of shares of common stock outstanding during the three months ended March 31, 2024 and 2023. 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 months ended March 31, 2024 and 2023 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8). 15 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 as accumulated other comprehensive income (loss) in the accompanying 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 rates for the condensed consolidated statements of operations were as follows: Three months ended March 31, 2024 2023 Swedish Krona 10.39 10.46 Japanese Yen 148.45 132.34 South Korean Won 1,330.38 1,276.12 The exchange rates for the condensed consolidated balance sheets were as follows: As of March 31, December 31, 2024 2023 Swedish Krona 10.66 10.07 Japanese Yen 151.19 141.03 South Korean Won 1,349.53 1,294.53 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 and cash equivalents, accounts receivable, accounts payable and accrued expenses, are deemed to approximate fair value due to their short maturities. Recent Accounting Pronouncements In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 requires, among other updates, enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker. The ASU also clarifies that entities with a single reportable segment are subject to both new and existing reporting requirements under Topic 280. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective adoption. Early adoption is permitted. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , which updates several disclosures regarding the accounting for income taxes. ASU 2023-09 will become effective for public business entities for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact ASU 2023-09 will have on our consolidated financial statements. 16 3. Stockholders’ Equity At-the-Market Facility On May 10, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley Securities”) with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from time to time, in our sole discretion, issue and sell through B. Riley Securities, acting as sales agent, up to $ 25 million of shares of our common stock. Pursuant to the Sales Agreement, we may sell the shares through B. Riley Securities by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended. B. Riley Securities will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us (including any price or size limits or other customary parameters or conditions we may impose). We will pay B. Riley Securities a commission of 3.0 % of the gross sales price per share sold under the Sales Agreement. We are not obligated to sell any shares under the Sales Agreement. The offering of shares pursuant to the Sales Agreement will terminate upon the earlier to occur of (i) the issuance and sale, through B. Riley Securities, of all of the shares subject to the Sales Agreement and (ii) termination of the Sales Agreement in accordance with its terms. Subsequent to the filing of our Form 10-K on February 28, 2024, the aggregate market value of our outstanding common stock held by non-affiliates was approximately $ 26.7 million. Pursuant to General Instruction I.B.6 of Form S-3, since the aggregate market value of our outstanding common stock held by non-affiliates was below $ 75.0 million at the time of such Form 10-K filing, the aggregate amount of securities that we are permitted to offer and sell was reduced to $ 8,901,792 , which was equal to one-third of the aggregate market value of our common stock held by non-affiliates as of February 27, 2024. Common Stock As of March 31, 2024 and December 31, 2023, our Restated Certificate of Incorporation, as amended, authorized us to issue up to 25,000,000 shares of common stock, par value $ 0.001 per share. During the three months ended March 31, 2024, no shares were sold under the ATM Facility. During the three months ended March 31, 2023, we sold an aggregate of 903,716 shares of our common stock under the ATM Facility with aggregate net proceeds to us of $ 7,866,000 , after payment of commissions to B. Riley Securities and other expenses of $ 244,000 . Preferred Stock As of March 31, 2024 and December 31, 2023, our Restated Certificate of Incorporation, as amended, authorized us to issue up to 1,000,000 shares of preferred stock, par value $ 0.001 per share. There were no transactions in our preferred stock during the three months ended March 31, 2024 and 2023. No shares of preferred stock were issued and outstanding as of March 31, 2024 and December 31, 2023. 17 4. Stock-Based Compensation We have adopted equity incentive plans for which stock options and restricted stock awards are available for grants to employees, consultants and directors. Except for certain options granted to certain Swedish employees, 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. Vesting for all outstanding option grants is based solely on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments. Stock Options and Long-Term Incentive Plan During the year ended December 31, 2020, our stockholders approved the 2020 Stock Incentive Plan (“2020 Plan”) which replaced our 2015 Stock Incentive Plan (the “2015 Plan”), which in turn replaced our Neonode Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Although no new awards may be made under the 2006 Plan or 2015 Plan, the 2015 Plan is still operative for awards previously granted under such plan. There are no awards outstanding under the 2006 Plan. Under the 2020 Plan, 750,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2020 Plan are set by our compensation committee at its discretion. In 2020 we established the 2020 long-term incentive program (the “2020 LTIP”) to provide eligible persons with the opportunity to acquire an equity interest, or otherwise increase their equity interest, in the Company as an incentive for them to remain in the service of the Company. Through the 2020 LTIP, eligible employees of Neonode may waive between 50.0 to 67.0 % of future unearned bonuses that may be awarded to them under the Company’s annual bonus arrangement in exchange for the grant of shares of the Company’s common stock. On August 12, 2021, we issued 12,830 shares of common stock to a key employee pursuant to the 2020 Plan and through the 2020 LTIP. The shares were immediately vested but subject to a two-year lock-up period after issuance. In the event the participant’s employment with the Company is terminated by the participant during the two-year lock-up period, the Company will repurchase the shares at a price equal to 30.0 % of the lower of market value at issuance and the termination date. The Company has reported and paid Swedish social charges of $ 21,000 for the issued shares but only 30.0 % of the stock-based compensation (totaling $ 25,000 ) was recognized immediately in the consolidated statements of operations for the year ended December 31, 2021, with the remainder to be recognized ratably over the two-year lock-up period. On December 29, 2021, we issued 14,735 shares of common stock to key employees pursuant to the 2020 Plan and through the 2020 LTIP. The shares were immediately vested but subject to a two-year lock-up period after issuance. In the event the participant’s employment with Neonode is terminated by the participant during the two-year lock-up period, the Company will repurchase the shares at a price equal to 30.0 % of the lower of market value at issuance and termination date. Neonode has reported and paid Swedish social charges of $ 46,000 for the issued shares but only 30.0 % of the stock-based compensation (totaling $ 38,000 ) was recognized immediately in the consolidated statements of operations for the year ended December 31, 2021, with the remainder to be recognized ratably over the two-year lock-up period. On May 20, 2022, we issued 4,000 shares of common stock to a director pursuant to the 2020 Plan. The shares were immediately vested but subject to a two-year lock-up period after issuance. In the event the participant’s employment with the Company is terminated by the participant during the two-year lock-up period, the Company will repurchase the shares at a price equal to 30.0 % of the lower of market value at issuance and the termination date. The Company has reported and paid Swedish social charges of $ 5,000 for the issued shares but only 30.0 % of the stock-based compensation (totaling $ 5,000 ) was recognized immediately in the consolidated statements of operations for the year ended December 31, 2022, with the remainder to be recognized ratably over the two-year lock-up period. 18 For the three months ended March 31, 2024 and 2023, we recognized $ 2,000 and $ 18,000 , respectively, of stock-based compensation for the amortization of the 2020 Plan over the respective lock-up periods. As of March 31, 2024 and December 31, 2023 we had no outstanding options. For the three months ended March 31, 2024 and 2023, we recorded no compensation expense related to the vesting of stock options. During the three months ended March 31, 2024, 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, 2015 and 2020 Plans are exercisable over a maximum term of 10 years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant. 5. Commitments and Contingencies Legal The Company is subject to legal proceedings and claims that may arise in the ordinary course of business. The Company is not aware of any pending or threatened litigation matters at this time that would have a material impact on the operations of the Company. 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 any 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 March 31, 2024 and December 31, 2023. 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 March 31, 2024 and December 31, 2023. Patent Assignment On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC (“Aequitas”), an unrelated third party. The assignment provides the Company the right to share the potential net proceeds to Aequitas generated from possible licensing and monetization program that Aequitas may enter into. Under the terms of the assignment, net proceeds means gross proceeds less out of pocket expenses and legal fees paid by Aequitas. The Company’s share would also be net of the Company’s own fees and expenses, including a brokerage fee payable by the Company in connection with the original assignment to Aequitas. On June 8, 2020, Neonode Smartphone LLC, an unrelated third party that is a subsidiary of Aequitas (“Aequitas Sub”), filed complaints against Apple and Samsung in the Western District of Texas for infringing two patents. The case against Apple was subsequently transferred to the Northern District of California. In December 2022, the Patent Trial and Appeal Board invalidated one of the two patents, which Aequitas Sub is appealing. On August 2, 2023, the United States District Court for the Western District of Texas entered judgment in favor of Samsung. Aequitas Sub has filed an appeal to change this decision to the Federal Circuit and an oral hearing is scheduled to be held on June 6, 2024. The case against Apple is still pending in the United States District Court for the Northern District of California. 19 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 2,000,000 ASICs sold. As of March 31, 2024, we had made no payments to TI under the NN1002 Agreement. 6. Segment Information We have one reportable segment, which is comprised of the technology licensing and products business. We report 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 months ended March 31, 2024 and 2023, respectively (dollars in thousands): Three months ended March 31, 2024 Three months ended March 31, 2023 Amount Percentage Amount Percentage Japan $ 391 38.6 % $ 449 35.8 % United States 338 33.3 % 471 37.6 % France 79 7.8 % 172 13.7 % South Korea 69 6.8 % - - % Germany 64 6.3 % 111 8.9 % Sweden 54 5.3 % - - % Other 19 1.9 % 50 4.0 % $ 1,014 100.0 % $ 1,253 100.0 % The following table presents our total assets by geographic region as of March 31, 2024 and December 31, 2023 (in thousands): March 31, 2024 December 31, 2023 United States $ 13,817 $ 16,084 Sweden 3,064 2,888 Asia 40 42 Total $ 16,921 $ 19,014 7. Leases We have operating leases for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms of three months to 1.5 years. These 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 consolidated balance sheet date are excluded from right-of-use assets and related lease liabilities. Our operating leases represent building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility. Our Stockholm corporate office lease has a remaining lease term of under one year and both of our leases are automatically renewed at a cost increase of 2.0 % on an annual basis, unless we provide written notice nine months prior to the respective expiration dates. We report operating lease right-of-use assets, as well as current and noncurrent operating lease obligations on our condensed consolidated 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 current and noncurrent finance lease obligations on our condensed consolidated balance sheets for our manufacturing equipment. Generally, interest rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate. 20 The components of lease expense were as follows (in thousands): Three Months Ended March 31, 2024 2023 Operating lease cost (1) $ 136 $ 127 Finance lease cost: Amortization of leased assets $ 28 $ 3 Interest on lease liabilities 1 2 Total finance lease cost $ 29 $ 5 (1) Includes short-term lease costs of $ 117,000 and $ 108,000 for the three months ended March 31, 2024 and 2023, respectively. Supplemental cash flow information related to leases was as follows (in thousands): Three Months Ended March 31, 2024 2023 Cash paid for amounts included in leases: Operating cash flows from operating leases $ ( 17 ) $ ( 16 ) Operating cash flows from finance leases ( 1 ) ( 2 ) Financing cash flows from finance leases ( 9 ) ( 28 ) Right-of-use assets obtained in exchange for lease obligations: Operating leases - - Finance leases - - Supplemental balance sheet information related to leases was as follows (in thousands): As of March 31, 2024 As of December 31, 2023 Operating leases Operating lease right-of-use assets $ 34 $ 54 Current portion of operating lease obligations $ 34 $ 54 Operating lease liabilities, net of current portion - - Total operating lease liabilities $ 34 $ 54 Finance leases Property and equipment, at cost $ 2,564 $ 2,714 Accumulated depreciation ( 2,368 ) ( 2,523 ) Property and equipment, net $ 196 $ 191 Current portion of finance lease obligations $ 29 $ 33 Finance lease liabilities, net of current portion 12 19 Total finance lease liabilities $ 41 $ 52 Three Months Ended March 31, 2024 2023 Weighted Average Remaining Lease Term Operating leases 0.5 years 1.5 years Finance leases 1.1 years 1.4 years Weighted Average Discount Rate: Operating leases (2) 5.0 % 5.0 % Finance leases 2.6 % 2.5 % (2) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019. 21 A summary of future minimum payments under non-cancellable operating lease commitments as of March 31, 2024 is as follows (in thousands): Year ending December 31, Total 2024 35 35 Less imputed interest ( 1 ) Total lease liabilities $ 34 Less current portion ( 34 ) $ - The following is a schedule of minimum future rentals on the non-cancellable finance leases as of March 31, 2024 (in thousands): Year ending December 31, Total 2024 23 2025 19 Total minimum payments required: 42 Less amount representing interest: ( 1 ) Present value of net minimum lease payments: 41 Less current portion ( 29 ) $ 12 8. Net Loss per Share Basic net loss per common share for the three months ended March 31, 2024 and 2023 was computed by dividing the net loss attributable to common shareholders of 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 common shareholders of Neonode Inc. for the relevant period by the weighted average number of shares of common stock and common stock equivalents outstanding. The Company had no potential common stock equivalents for the three months ended March 31, 2024 and 2023, respectively. Three months ended March 31, (in thousands, except per share amounts) 2024 2023 BASIC AND DILUTED Weighted average number of common shares outstanding 15,359 15,209 Net loss attributable to Neonode Inc. $ ( 2,084 ) $ ( 1,425 ) Net loss per share – basic and diluted $ ( 0.14 ) $ ( 0.09 ) 9. Subsequent Events On April 10, 2024, we and Dr. Forssell entered into a Termination Agreement (the “Termination Agreement”), pursuant to which Dr. Forssell was discharged from his position as our President and Chief Executive Officer (“CEO”) and will act as a Senior Advisor to the management team of Neonode Technologies AB, our subsidiary, and our board of directors until December 31, 2024. In connection with the departure of Dr. Forssell, our board of directors appointed our Chief Financial Officer, Fredrik Nihlén, as our Interim President and CEO effective immediately. Mr. Nihlén will serve as Interim President and CEO until a new President and CEO is appointed. 22