10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

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

For the transition period from _______ to ________

Commission file number 1-35526

NEONODE INC.

(Exact name of registrant as specified in its charter)

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

Storgatan 23C, 114 55 Stockholm, Sweden

(Address of principal executive offices and zip code)

+46 (0) 8 667 17 17

(Registrant’s telephone number, including area code)

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

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
(do not check if a smaller reporting company)		Emerging growth company	☐

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

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

The number of shares of the registrant’s common stock outstanding as of November 6, 2017 was 58,594,503.

NEONODE INC.

Form 10-Q

For the Fiscal Quarter Ended September 30, 2017

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
	Item 1	Financial Statements	1
		Condensed Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016 (Audited)	1
		Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016	2
		Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016	3
		Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016	4
		Notes to Unaudited Condensed Consolidated Financial Statements	5
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	29
	Item 4	Controls and Procedures	29
PART II	OTHER INFORMATION
	Item 1	Legal Proceedings	30
	Item 1A	Risk Factors	30
	Item 6	Exhibits	31
SIGNATURES			32
EXHIBITS

PART I. Financial Information

Item 1. Financial Statements

NEONODE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2017			2016
ASSETS	(Unaudited)			(Audited)
Current assets:
Cash	$	6,872		$	3,476
Accounts receivable, net		620			1,548
Projects in process		299			-
Inventory		2,065			696
Prepaid expenses and other current assets		2,208			1,949
Total current assets		12,064			7,669
Investment in joint venture		3			3
Property and equipment, net		3,637			2,031
Total assets	$	15,704		$	9,703
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	759		$	1,286
Accrued payroll and employee benefits		1,085			1,001
Accrued expenses		148			172
Deferred revenues		1,299			1,921
Current portion of capital lease obligations		570			228
Total current liabilities		3,861			4,608
Capital lease obligations, net of current portion		1,840			960
Total liabilities		5,701			5,568
Commitments and contingencies
Stockholders’ equity:
Series B Preferred stock, 54,425 shares authorized with par value $0.001 per share; 83 shares issued and outstanding at September 30, 2017 and December 31, 2016. (In the event of dissolution, each share of Series B Preferred stock has a liquidation preference equal to par value of $0.001 per share over the shares of common stock)		-			-
Common stock, 100,000,000 shares authorized with par value $0.001 per share; 58,594,503 and 48,844,503 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		59			49
Additional paid-in capital		192,795			183,667
Accumulated other comprehensive income (loss)		34			(171	)
Accumulated deficit		(182,026	)		(179,040	)
Total Neonode Inc. stockholders’ equity		10,862			4,505
Noncontrolling interests		(859	)		(370	)
Total stockholders’ equity		10,003			4,135
Total liabilities and stockholders’ equity	$	15,704		$	9,703

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

1

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Revenues:
License fees	$	2,072		$	1,637		$	6,158		$	6,117
Sensor components		211			-			634			-
Non-recurring engineering		22			2			174			1,228
Total revenues		2,305			1,639			6,966			7,345
Cost of revenues:
Sensor components		151			-			510			-
Non-recurring engineering		-			33			137			1,013
Total cost of revenues		151			33			647			1,013
Total gross margin		2,154			1,606			6,319			6,332
Operating expenses:
Research and development		1,668			2,014			4,283			5,734
Sales and marketing		743			666			2,158			2,151
General and administrative		1,154			1,067			3,365			3,167
Total operating expenses		3,565			3,747			9,806			11,052
Operating loss		(1,411	)		(2,141	)		(3,487	)		(4,720	)
Other expense:
Interest expense		24			17			59			32
Other expense, net		-			49			-			91
Total other expense		24			66			59			123
Loss before provision for income taxes		(1,435	)		(2,207	)		(3,546	)		(4,843	)
(Benefits from) provision for income taxes		(24	)		55			(71	)		234
Net loss including noncontrolling interests		(1,411	)		(2,262	)		(3,475	)		(5,077	)
Less: Net loss attributable to noncontrolling interests		296			100			489			217
Net loss attributable to Neonode Inc.	$	(1,115	)	$	(2,162	)	$	(2,986	)	$	(4,860	)
Loss per common share:
Basic and diluted loss per share	$	(0.02	)	$	(0.05	)	$	(0.06	)	$	(0.11	)
Basic and diluted – weighted average number of common shares outstanding		55,166			46,252			50,959			44,627

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

2

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2017			2016			2017			2016
Net loss	$	(1,411	)	$	(2,262	)	$	(3,475	)	$	(5,077	)
Other comprehensive income (loss):
Foreign currency translation adjustments		83			(36	)		205			(102	)
Comprehensive loss		(1,328	)		(2,298	)		(3,270	)		(5,179	)
Less: Comprehensive loss attributable to noncontrolling interests		296			100			489			217
Comprehensive loss attributable to Neonode Inc.	$	(1,032	)	$	(2,198	)	$	(2,781	)	$	(4,962	)

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

3

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine months ended September 30,
	2017			2016
Cash flows from operating activities:
Net loss (including noncontrolling interests)	$	(3,475	)	$	(5,077	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		56			224
Loss on disposal of property and equipment		-			91
Depreciation and amortization		672			206
Changes in operating assets and liabilities:
Accounts receivable		933			1,066
Projects in process		(299	)		95
Inventory		(1,222	)		(940	)
Prepaid expenses and other current assets		(52	)		(438	)
Accounts payable and accrued expenses		(675	)		319
Deferred revenues		(629	)		737
Net cash used in operating activities		(4,691	)		(3,717	)
Cash flows from investing activities:
Purchase of property and equipment		(643	)		(851	)
Investment in joint venture		-			(3	)
Proceeds from sale of property and equipment		-			5
Net cash used in investing activities		(643	)		(849	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net of offering costs		9,082			7,911
Proceeds from note payable		1,713			-
Payments on note payable		(1,713	)		-
Principal payments on capital lease obligations		(301	)		(57	)
Net cash provided by financing activities		8,781			7,854
Effect of exchange rate changes on cash		(51	)		(92	)
Net increase in cash		3,396			3,196
Cash at beginning of period		3,476			3,082
Cash at end of period	$	6,872		$	6,278
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	15		$	179
Cash paid for interest	$	59		$	15
Supplemental disclosure of non-cash investing and financing activities
Purchase of equipment with capital lease obligations	$	1,287		$	1,022

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

4

NEONODE INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Interim Period Reporting

The accompanying unaudited interim condensed consolidated financial statements, include all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of results for a full fiscal year or any other period.

The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2017 and 2016 have been prepared by us, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Operations

Neonode Inc. (collectively with its subsidiaries, is referred to in this Form 10-Q Report as “Neonode”, “we”, “us”, “our”, “registrant”, or “Company”) develops optical touch and gesture solutions for human interaction with devices. In 2010 we began licensing our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who in-turn embed our technology into products they develop, manufacture and sell. Since 2010, our customers have sold over 52 million devices under our licensing agreements that use our technology. In 2016, we augmented our licensing business and started to manufacture and sell standardized embedded sensors that incorporate our technology to OEMs, Tier 1 Suppliers, distributors and our branded products sold directly to consumers.

Reclassifications

Revenues and cost of sales for the period ended September 30, 2016 are now reported as license fees, sensor components and non-recurring engineering instead of net revenues in the accompanying condensed consolidated statement of operations, in order to conform to current period presentation.

5

Liquidity

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.1 million and $3.0 million and $2.2 million and $4.9 million for the three and nine months ended September 30, 2017 and 2016, respectively, and had an accumulated deficit of approximately $182.0 million and $179.0 million as of September 30, 2017 and December 31, 2016, respectively. In addition, operating activities used cash of approximately $4.7 million and $3.7 million for the nine months ended September 30, 2017 and 2016, respectively. 

We expect our revenues from license fees, non-recurring engineering fees and embedded sensor components sales will enable us to reduce our operating losses going forward. In addition, we have improved the overall cost efficiency of our operations, as a result of the transition from providing our customers a full custom design solution to providing standardized sensor components which require limited to no custom design work. 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.

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

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

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

August 2016 Private Placement

In August 2016, we entered into a Securities Purchase Agreement with institutional and accredited investors as part of a private placement pursuant to which we issued a total of 8,627,352 shares of common stock, as described below, and warrants for an aggregate purchase price of $7.9 million in net proceeds. The total number of shares included (i) an aggregate of 427,352 shares at $1.17 per share to Thomas Eriksson, Chief Executive Officer of Neonode, and Remo Behdasht, SVP AirBar Devices at Neonode for gross proceeds of approximately $500,000, (ii) an aggregate of 4,600,000 shares at a price of $1.00 per share to outside investors for gross proceeds of $4,600,000, and (iii) up to 3,600,000 shares issuable upon exercise of warrants (the “ 2016 Pre-Funded Warrants”) by outside investors for which we received $3,564,000 pre-funded in proceeds and will receive up to $36,000 in proceeds upon future cash exercises.

Under the terms of the 2016 Securities Purchase Agreement, we issued warrants (the “2016 Purchase Warrants”) to all investors in the private placement to purchase up to a total of 4,313,676 shares of common stock at an exercise price of $1.12 per share. The 2016 Purchase Warrants became exercisable February 17, 2017 and will expire February 17, 2022. None of the 2016 Purchase Warrants have been exercised as of November 6, 2017. If the 2016 Purchase Warrants are fully exercised, we will receive approximately $4.8 million in cash proceeds.

6

August 2017 Private Placement

In August, 2017, we entered into a Securities Purchase Agreement with accredited investors as part of a private placement pursuant to which we issued a total of 9,750,000 shares of common stock at $1.00 per share, and warrants, for of an aggregate purchase price of $9.75 million in gross proceeds. We received approximately $9.1 million in net proceeds. Under the terms of the 2017 Securities Purchase Agreement, we also issued warrants (the “2017 Warrants”) to investors in the private placement to purchase up to a total of 3,250,000 shares of common stock at an exercise price of $2.00 per share. The 2017 Warrants will become exercisable on August 8, 2018, and will expire on August 8, 2020. If the 2017 Warrants are fully exercised, we will receive approximately $6.5 million in proceeds. There are no registration rights associated with the securities to be issued and sold pursuant to the 2017 Securities Purchase Agreement.

The proceeds from the August 2017 private placement were used to repay $1.7 million in short-term debt and will be used for general corporate purposes including business development.

Shelf Registration Statement

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

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

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

In June 2016, we entered into a Joint Venture (“JV”) with a Swedish based eye-tracking company SMART EYE AB. By combining our technologies, we plan to bring multi-chip modules to the market for the consumer and automotive markets that provide new opportunities for interaction with cars and devices. The name of the newly established JV is Neoeye AB (“Neoeye”).

We use the equity method of accounting to record our investments in the common stock of each entity in which Neonode has the ability to exercise significant influence, but does not own a majority equity interest. Under the equity method, our investment is originally included in equity interests at cost, and is adjusted to recognize our share of net earnings or losses of the investee, in our condensed consolidated balance sheets; our share of net income (loss) is reported in our condensed consolidated statements of operations according to our equity ownership in each entity.

The condensed consolidated balance sheets at September 30, 2017 and December 31, 2016 and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2017 and 2016 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), as well as Pronode Technologies AB (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB.

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires making estimates and assumptions 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. Significant estimates include, but are not limited to, provisions for uncollectible receivables and sales returns, warranty liabilities, the achievement of substantive milestones and vendor-specific objective evidence (“VSOE”) of fair value for purposes of revenue recognition (or deferral of revenue), net realizable value of inventory, recoverability of capitalized project costs and long-lived assets, the valuation allowance related to our deferred tax assets, and the fair value of options and warrants issued for stock-based compensation.

7

Cash

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

Concentration of Cash Balance Risks

Cash balances are maintained at various banks in the U.S., Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions in the U.S. the U.S. Federal Deposit Insurance Corporation, provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts. The Japanese government provides insurance coverage up to 10,000,000 Yen per customer. The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount of insurance provided.

Accounts Receivable and Allowance for Doubtful Accounts

Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $149,000 as of September 30, 2017 and December 31, 2016, respectively.

Projects in Process

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our condensed consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. Costs capitalized in projects in process were $299,000 as of September 30, 2017. There were no costs capitalized in projects in process as of December 31, 2016.

Inventory

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”) and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of September 30, 2017 and December 31, 2016, the Company’s inventory consists primarily of components that will be used in the manufacturing of our first sensor component, AirBar. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

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

	September 30,		December 31,
	2017		2016
Raw materials	$	807	$	522
Work-in-Process		220		42
Finished goods		1,038		132
Ending inventory	$	2,065	$	696

8

Investment in JV

We have invested $3,000, for a 50% interest in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through September 30, 2017.

Neoeye, as an unconsolidated equity investee, will recognize revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured, which is generally upon the receipt of the license proceeds. Neoeye may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones have been met.

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

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows:

Estimated useful lives

Computer equipment	3 years
Furniture and fixtures	5 years
Equipment	7 years

Equipment purchased under a capital lease is recognized over the term of the lease, if that lease term is shorter than the estimated useful life.

9

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.

Long-lived Assets

We assess any impairment by estimating the future cash flow 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 September 30, 2017, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

Foreign Currency Translation and Transaction Gains and Losses

The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese Yen, South Korean Won and Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted-average exchange rate during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Foreign currency translation gains were $83,000 and $205,000 during the three and nine months ended September 30, 2017, respectively, compared to translation losses of $(36,000) and $(102,000) during the three and nine months ended September 30, 2016, respectively. Losses resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed consolidated statements of operations and were $(45,000) and $(24,000) during the three and nine months ended September 30, 2017, respectively, compared to gains of $25,000 and $59,000 during the same periods in 2016, respectively.

Concentration of Credit and Business Risks

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

As of September 30, 2017, three customers represented approximately 80% of the Company’s accounts receivable.

As of December 31, 2016, three customers represented approximately 59% of the Company’s accounts receivable.

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 30%

● Canon – 17%

● Seiko Epson – 12%

● Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2017 are as follows:

● Hewlett Packard Company – 31%

● Canon – 15%

● Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 50%

● Bosch  – 11%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 42%

● Amazon – 13%

● Autoliv Development AB – 12%

10

Revenue Recognition

Licensing Revenues:

We derive revenue from the licensing of 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 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. We follow U.S. GAAP for revenue recognition as per unit royalty products are distributed or licensed by our customers. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of technology; (2) the customer distributes or licenses the products; (3) the customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. Our customers report to us the quantities of products distributed or licensed by them after the end of the reporting period stipulated in the contract, generally 30 to 45 days after the end of the month or quarter. We recognize licensing revenue in the period in which royalty reports are received, rather than the period in which the products are distributed or to which the license relates.

Explicit return rights are not offered to customers. There have been no returns through September 30, 2017.

Engineering Services:

We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue.

Generally, we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers. Engineering services are performed under a signed Statement of Work (“SOW”) with a customer. The deliverables and payment terms stipulated under the SOW provide guidance on the project revenue recognition.

Revenues from contracts that are short-term in nature and related costs that are difficult to estimate are accounted for under the completed contract method.

Revenues from contracts with substantive defined milestones that we have determined are reasonable, relevant to all the deliverables and payment terms in the SOW that are commensurate with the efforts required to achieve the milestones are recognized under the milestone recognition method.

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the periods ended September 30, 2017 and 2016, no losses related to SOW projects were recorded.

Optical Sensor Components Revenues:

We derive revenue from the sales of sensor components hardware products sold directly to our OEM and Tier 1 supplier customers who embed our hardware into their products and from sales of branded consumer products that incorporate our sensor components sold to distributors or directly to end users. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. We enter into sales agreements that generally provide customers with limited rights of return and warranty provisions. U.S. GAAP allows companies to make reasonable aggregations and approximations of returns data with regard to returns. Our returns and warranty experience to date has enabled us to make reasonable returns estimates, which are further supported by the fact that our product sales involve homogenous transactions.

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Revenue is recognized when all of the following criteria have been met:

● Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.

● Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.

● The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

● Collectability is reasonably assured. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. As our business and offerings are expected to evolve over time, our pricing practices may be required to be modified accordingly, which could result in changes in selling prices.

We make sales to distributors and revenue from distributors is recognized based on a sell-through basis using sales and inventory information provided by these distributors. Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred revenues in the consolidated balance sheet. When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known, we recognize previously deferred revenues as sales and cost of sales. 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.

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant as of September 30, 2017 and December 31, 2016. 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.

Product Warranty

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

	September 30, 2017		December 31, 2016
Balance at beginning of period	$	11	$	-
Provisions for warranty issued		19		11
Balance at end of period	$	30	$	11

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

Deferred Revenues

We defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of September 30, 2017 and December 31, 2016, we have $0.8 million and $1.8 million, respectively, of deferred license fee revenue related to prepayments for future license fees from two and four customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of September 30, 2017 and December 31, 2016 we had $0.2 million and $0.1 million, respectively, of deferred revenue from our AirBar sales. As of September 30, 2017 we had $0.3 million of deferred engineering development fees from two customers. As of December 31, 2016 there were no deferred engineering development fees.

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Advertising

Advertising costs are expensed as incurred. Advertising costs for the three and nine months ended September 30, 2017 amounted to approximately $216,000 and $529,000, respectively. Advertising costs for the three and nine months ended September 30, 2016 amounted to approximately $76,000 and $193,000, respectively.

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 stock 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, actual forfeitures.

We account for equity instruments issued to non-employees at their estimated fair value. The measurement date for the estimated fair value for the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached, or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instruments is primarily recognized over the term of the consulting agreement. The estimated fair value of the stock-based compensation is periodically re-measured and income or expense is recognized during the vesting term.

When determining stock-based compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.

Noncontrolling Interests

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

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

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

Income Taxes

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

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of September 30, 2017 and December 31, 2016. 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.

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We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of September 30, 2017 and December 31, 2016, we had no unrecognized tax benefits.

Net Loss per Share

Net loss per share amounts has been computed based on the weighted average number of shares of common stock outstanding during the three and nine months ended September 30, 2017 and 2016. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the three and nine months ended September 30, 2017 and 2016 exclude the potential common stock equivalents, as the effect would be anti-dilutive (See Note 8).

Other Comprehensive Income (Loss)

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

Cash Flow Information

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

	Nine months ended September 30,
	2017		2016
Swedish Krona		8.62		8.39
Japanese Yen		111.91		108.60
South Korean Won		1,136.27		1,158.23
Taiwan Dollar		30.51		32.38

Exchange rate for the consolidated balance sheets was as follows:

	Periods Ended
	September 30,		December 31,
	2017		2016
Swedish Krona		8.13		9.07
Japanese Yen		112.45		116.97
South Korean Won		1,151.20		1,205.11
Taiwan Dollar		30.32		32.28

Fair Value of Financial Instruments

We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. We are currently compiling a complete list of our contracts, and we are finalizing our implementation plan. We expect to select the cumulative effect (modified retrospective) approach for our transition, because we believe that implementation of the new standard will not have a material impact on our consolidated financial statements. However, we do expect increased disclosures upon implementation of the new standard.

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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. We currently have a limited number of leased capital assets. We maintain a lease inventory for those assets, and they are currently reported on our condensed consolidated balance sheets. We also have a small number of leases which are currently classified as operating leases; we will compile and analyze those leases during the transition to the new standard. We expect that the transition may result in additions and changes to classifications on our condensed consolidated balance sheets, and changes to disclosures. However, because of the small number of assets we lease, we do not need to make systems changes to comply with the new standard. We plan to continue to track those leased assets outside of our accounting systems. We will assess the accounting and possible tax impacts during the coming months; however, we do not expect material changes in financial ratios, leasing practices, or tax reporting.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments”, (“ASU 2016-13”). 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 will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. We do not expect to adopt this standard early. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements.

3. Note Payable

On June 9, 2017, the Company entered into a short-term unsecured loan agreement and issued a note payable with the principal amount of 15,000,000 SEK. The interest cost rate was 2.5% per annum and the note was due on September 1, 2017. The note was paid off in August with total interest of approximately $8,900.

4. Stockholders’ Equity

Common Stock

On October 6, 2017, the Company amended its certificate of incorporation to increase its authorized shares of common stock to 100,000,000.

August 2017 Private Placement

On August 2, 2017, we entered into a Securities Purchase Agreement with accredited investors as part of a private placement pursuant to which we issued a total of 9,750,000 shares of common stock at $1.00 per share, and warrants, for an aggregate purchase price of $9.75 million in gross proceeds (see Note 1 for additional details).

Preferred Stock

We have one class of preferred stock outstanding. There were no activities that affected preferred stock during the nine months ended September 30, 2017.

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Conversion of Preferred Stock Issued to Common Stock

The following table summarizes the amounts as of September 30, 2017.

	Shares of Preferred Stock Not Exchanged as of September 30, 2017		Conversion Ratio		Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged at September 30, 2017
Series B Preferred stock		83		132.07		10,962

Warrants

As of September 30, 2017 and December 31, 2016, there were 11,163,676 and 7,913,677 warrants to purchase common stock outstanding, respectively. During the nine months ended September 30, 2017, we agreed to issue the 2017 Warrants to investors in the August 2017 private placement to purchase up to a total of approximately 3,250,000 shares of common stock at an exercise price of $2.00 per share. The 2017 Warrants will become exercisable 12 months from the date of issuance and will expire three years from the date of issuance. If the 2017 Warrants are fully exercised, we will receive approximately $6.5 million in cash.

5. Stock-Based Compensation

The stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016 reflects the estimated fair value of the vested portion of options granted to employees, directors and eligible consultants. Stock-based compensation expense in the accompanying condensed consolidated statements of operations is as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Research and development	$	-	$	8	$	-	$	48
Sales and marketing		11		19		39		132
General and administrative		6		27		17		44
Total stock-based compensation expense	$	17	$	54	$	56	$	224

	Remaining unrecognized expense at September 30, 2017
Stock-based compensation	$	28

The remaining unrecognized expense related to stock options will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period, which approximates 0.4 years.

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

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Stock Options

We have adopted equity incentive plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors. Except for 265,000 options issued to certain Swedish employees during 2015, all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants was based only on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

As of September 30, 2017 we had two equity incentive plans:

● The 2006 Equity Incentive Plan; and

● The 2015 Stock Incentive Plan

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

	Number of Options Outstanding			Weighted Average Exercise Price
Outstanding at January 1, 2017		1,846,000		$	4.39
Granted		-			-
Forfeited		(90,000	)		8.21
Outstanding at September 30, 2017		1,756,000		$	4.20

The aggregate intrinsic value of the 1,756,000 stock options that are outstanding, vested and expected to vest as of September 30, 2017 was $0.

For the three and nine months ended September 30, 2017 and 2016, we recorded $17,000 and $56,000 and $54,000 and $0.2 million, respectively, of compensation expense related to the vesting of stock options. The fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the date of grant of the stock option.

During the nine months ended September 30, 2017, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.

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

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6. Commitments and Contingencies

Indemnities and Guarantees

Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of September 30, 2017 and December 31, 2016.

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of September 30, 2017 and December 31, 2016.

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 pursuant to which Texas Instruments will integrate Neonode’s intellectual property into an ASIC. The NN1002 ASIC only can be sold by Texas Instruments exclusively to licensees of Neonode. Under the terms of the NN1002 Agreement, we will reimburse Texas Instruments up to $500,000 of non-recurring engineering costs based on shipments of the NN1002. Under the terms of the NN1002 Agreement we will reimburse Texas Instruments a non-recurring engineering fee of $0.25 per unit for each of the first two million units sold. The NN1002 began shipping to customers in 2015. As of September 30, 2017, we had made no payments under the NN1002 Agreement.

On December 4, 2014, we entered into an Analog Device Development Agreement (the “NN1003 Agreement”) with ST Microelectronics International N.V. pursuant to which ST Microelectronics will integrate Neonode’s intellectual property into an ASIC. The NN1003 ASIC only can be sold by ST Microelectronics exclusively to licensees of Neonode. Under the terms of the NN1003 Agreement, we will reimburse ST Microelectronics up to $835,000 of non-recurring engineering costs as follows:

● $235,000 at the feasibility review and contract signature (paid on January 20, 2015)

● $300,000 on completion of tape-out (paid on October 31, 2015)

● $300,000 on completion on product validation (paid by January 2, 2017)

Under the terms of the NN1003 Agreement, we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As of September 30, 2017, we had paid $835,000 under the NN1003 Agreement.

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7. Segment Information

We have one reportable segment, which is comprised of the touch technology licensing and sensor component business. All of our sales for the three and nine months ended September 30, 2017 and 2016 were to customers located in North America, Europe and Asia. The Company reports revenues from external customers based on the country where the customer is located. Of our total assets, 11% and 43% were held in the U.S. as of September 30, 2017 and December 31, 2016, respectively, and 88% and 55% were held in Sweden, respectively.

The following table presents net revenues by geographic area for the three and nine months ended September 30, 2017 and 2016 (in thousands):

	Three months ended September 30, 2017					Three months ended September 30, 2016
	Amount		Percentage			Amount		Percentage
United States	$	977		42	%	$	982		60	%
Canada		-		-	%		127		8	%
Japan		771		33	%		-		-	%
China		92		4	%		210		13	%
Taiwan		-		-	%		96		6	%
Germany		341		15	%		180		11	%
Other		124		6	%		44		2	%
	$	2,305		100	%	$	1,639		100	%

	Nine months ended September 30, 2017					Nine months ended September 30, 2016
	Amount		Percentage			Amount		Percentage
United States	$	3,203		46	%	$	4,080		56	%
Canada		-		-	%		379		5	%
Japan		1,666		24	%		-		-	%
China		631		9	%		1,010		14	%
Germany		911		13	%		551		8	%
Sweden		-		-	%		915		12	%
Other		555		8	%		410		6	%
	$	6,966		100	%	$	7,345		100	%

The following table presents long-lived assets by geographic region (in thousands)

	September 30, 2017		December 31, 2016
Long-lived assets in North America	$	4	$	2
Long lived assets in Asia		7		8
Long-lived assets in Europe		3,626		2,021
	$	3,637	$	2,031

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8. Net Loss per Share

Basic net loss per common share for the three and nine months ended September 30, 2017 and 2016 was computed by dividing the net loss attributable to Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to Neonode Inc. by the weighted average number of shares of common stock and common stock equivalents outstanding.

Potential common stock equivalents of approximately 0 and 5,000 outstanding stock options and 4.4 million and 5.2 million outstanding stock warrants under the treasury stock method, and 11,000 and 11,000 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share calculation for the nine months ended September 30, 2017 and 2016, respectively, due to their anti-dilutive effect.

(in thousands, except per share amounts)	Three months ended September 30,
	2017			2016
BASIC AND DILUTED
Weighted average number of common shares outstanding		55,166			46,252
Net loss attributable to Neonode Inc.	$	(1,115	)	$	(2,162	)
Net loss per share - basic and diluted	$	(0.02	)	$	(0.05	)

(in thousands, except per share amounts)	Nine months ended September 30,
	2017			2016
BASIC AND DILUTED
Weighted average number of common shares outstanding		50,959			44,627
Net loss attributable to Neonode Inc.	$	(2,986	)	$	(4,860	)
Net loss per share - basic and diluted	$	(0.06	)	$	(0.11	)

9. Subsequent Events

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

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995. Statements that are not purely historical may be forward-looking. You can identify some forward-looking statements by the use of words such as “believes,” “anticipates,” “expects,” “intends” and similar expressions. Forward looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the uncertainty of growth in market acceptance for our technology, our history of losses since inception, our ability to remain competitive in response to new technologies, the costs to defend, as well as risks of losing, patents and intellectual property rights, a reliance on our future customers’ ability to develop and sell products that incorporate our technology, our customer concentration and dependence on a limited number of customers, the uncertainty of demand for our technology in certain markets, the length of a product development and release cycle, our ability to manage growth effectively, our dependence on key members of our management and development team, our remediation and detection of material weaknesses in our internal control over financial reporting, our ability to obtain adequate capital to fund future operations and the possibility of and the prospects for liquidity and an active trading market associated with our proposed dual listing of our common stock on the Nasdaq OMX Stockholm. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and in our publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the filing date of this Quarterly Report on Form 10-Q. Because actual events or results may differ materially from those discussed in or implied by forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement. We do not undertake responsibility to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether as a result of new information, future events or otherwise.

The following Management’s Discussion and Analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2016 included in our Annual Report on Form 10-K.

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

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Overview

Neonode Inc. develops user interface and optical interactive touch and gesture solutions. Our patented technology offers multiple features including the ability to sense an object’s size, depth, velocity, pressure, and proximity to any type of surface. In 2010 we began licensing our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who in-turn embed our technology into products they develop, manufacture and sell. Since 2010, our customers have sold approximately 52 million devices under our licensing agreements that use our technology. In 2016, we augmented our licensing business and started to manufacture and sell standardized sensor components that incorporate our technology to OEMs and Tier 1 suppliers, distributors and our branded products directly to consumers.

Licensing

As of September 30, 2017, we had forty-one technology license agreements with global OEMs and ODMs. During the nine months ended September 30, 2017, we had nineteen customers using our touch technology in products that were being shipped to customers. In addition, we are currently developing prototype products and are engaged in product engineering design discussions with numerous global OEMs and ODMs who are in the process of qualifying our touch technology for incorporation in various products. The development and release cycle for these products typically takes six to thirty-nine months.

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

In late 2016, we limited our efforts of entering into new license agreements with customers. However, we anticipate continuing to earn license fees from our current license customers. Our plan is to transition current customers with license agreements to purchase agreements using our sensor components. This conversion process is expected to take several years.

Sensor Component

In 2015, we completed the first stage of development on zForce AIR. This optical interactive touch and gesture enabling technology led to the development of a series of standardized sensors that provide our customers with an easy to install touch and gesture enabling solution in a sensor component.

During 2016, we invested in developing a new robotic manufacturing process designed specifically for zForce AIR sensor components and in the last quarter of 2016 we started mass production of our first sensor components. Industry specific standardized sensor components using a common technology platform will allow us to enter and compete in numerous markets without being encumbered with the project specific custom design solutions of our licensing business.

In October 2017, we launched the zForce AIR Touch Sensor, our first range of sensor components to be easily integrated into various applications. The Touch Sensors are available for immediate shipment worldwide through Digi-Key Electronics, a global electronic components distributor. The zForce AIR Touch Sensor enables instant touch interaction on any device with a USB or I2C interface. The sensor simplifies integration into any host based application supporting the most common interfaces, by integrating precision optics, lasers along with a Neonode proprietary controller IC. The zForce AIR Touch Sensor reports touch coordinates up to 300 times per second for virtually zero delay. The zForce AIR Touch Sensor is available in two types (0° and 90° type) to enable both vertical and horizontal integration and is available in sizes from 43 to 346 mm in order to fit into a wide range of products. We currently have signed development agreements with customers in the automotive market to embed our sensor components in steering wheels and entry system products. We expect the integration of our sensor components will continue to gain momentum as we expand our product offerings. Over time, we expect the majority of our revenue to be derived from the sale of sensor components.

Consumer Products

In 2016, we developed our first consumer product, AirBar. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers. AirBar is powered by one of our sensor components.

We focused our initial development and production of AirBar on our solution for Windows-based 15.6 inch display notebook PCs. In the fourth quarter of 2016, we started mass production of the 15.6 inch version of AirBar and began initial shipments to Ingram Micro and direct customers in the United States and Europe. In the second quarter of 2017, we began initial production and sales of our AirBar versions for 13.3 inch and 14 inch Windows-based notebook PCs and for the 13.3 inch Apple MacBook Air.

We produce the sensor components for AirBar at our manufacturing facility in Sweden and ship the completed sensor components to Salutica Allied Solutions (“Salutica”) in Malaysia for the final product assembly, packaging and distribution to Ingram Micro and other customers. Ingram Micro is our global distributor and provides complete distribution and fulfillment services in North America, Europe, India and Asia. AirBar, in all our selected sizes, is available for purchase at various web sites globally including: Amazon, Best Buy, Dell, Walmart, Fry’s, MediaMarkt and Saturn, to name a few. All AirBars are also available at all MediaMarkt stores in Sweden and AirBar for Apple MacBook Air will soon be available at selected Apple Resellers. We continue to expand our sales channels in all our markets to include additional web based sellers and selected brick and mortar stores.

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During the first nine months of 2016 we invested in inventory to support the increased production in models and sizes of AirBar, the production of sensor components for our first three embedded sensor component customers and sensor components to be used for embedded B to B sales and marketing. At September 30, 2017, we have sufficient quantities of long lead-time critical components in inventory to meet our estimated near-term requirements to produce sensor components for AirBar and our embedded sensor component customers.

Results of Operations

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

	Three months ended												Nine months ended
	September 30,						Change						September 30,						Change
	2017			2016			$			%			2017			2016			$			%
Revenue:
License Fees	$	2,072		$	1,637		$	435			26.6	%	$	6,158		$	6,117		$	41			0.7	%
Percentage of revenue		89.9	%		99.9	%								88.4	%		83.3	%
Sensor components	$	211		$	-		$	211			-	%	$	634		$	-		$	634			-	%
Percentage of revenue		9.2	%		-									9.1	%		-
NRE	$	22		$	2		$	20			1,000	%	$	174		$	1,228		$	(1,054	)		(85.8	)%
Percentage of revenue		1.0	%		0.1	%								2.5	%		16.7	%
Total Revenue	$	2,305		$	1,639		$	666			40.6	%	$	6,966		$	7,345		$	(379	)		(5.2	)%
Cost of Sales:
Sensor components	$	151		$	-		$	151			-	%	$	510		$	-		$	510			-	%
Percentage of revenue		6.6	%		-									7.3	%		-	%
NRE	$	-		$	33		$	(33	)		(100.0	)%	$	137		$	1,013		$	(876	)		(86.5	)%
Percentage of revenue		-	%		2.0	%								2.0	%		13.8	%
Total Cost of Sales	$	151		$	33		$	118			357.6	%	$	647		$	1,013		$	(366	)		(36.1	)%
Total Gross Margin	$	2,154		$	1,606		$	548			34.1	%	$	6,319		$	6,332		$	(13	)		(0.2	)%
Operating Expense:
Research and development	$	1,668		$	2,014		$	(346	)		(17.2	)%	$	4,283		$	5,734		$	(1,451	)		(25.3	)%
Percentage of revenue		72.4	%		122.9	%								61.5	%		78.1	%
Sales and marketing		743			666			77			11.6	%		2,158			2,151			7			0.3	%
Percentage of revenue		32.2	%		40.6	%								31.0	%		29.3	%
General and administrative		1,154			1,067			87			8.2	%		3,365			3,167			198			6.3	%
Percentage of revenue		50.1	%		65.1	%								48.3	%		43.1	%
Total Operating Expenses	$	3,565		$	3,747		$	(182	)		(4.9	)%	$	9,806		$	11,052		$	(1,246	)		(11.3	)%
Percentage of revenue		154.7	%		228.6	%								140.8	%		150.5	%
Operating Loss	$	(1,411	)	$	(2,141	)	$	730			34.1	%	$	(3,487	)	$	(4,720	)	$	1,233			26.1	%
Percentage of revenue		(61.2	)%		(130.6	)%								(50.1	)%		(64.3	)%
Other Expenses		(24	)		(66	)		42			(63.6	)%		(59	)		(123	)		64			52.0	%
Percentage of revenue		(1.0	)%		(4.0	)%								(0.8	)%		(1.7	)%
Net Loss attributable to Neonode Inc.		(1,115	)		(2,162	)		1,047			48.4	%		(2,986	)		(4,860	)		1,874			(38.6	)%
Percentage of revenue		(48.4	)%		(131.9	)%								(42.9	)%		(66.2	)%
Net Loss attributable to Neonode Inc. per share	$	(0.02	)	$	(0.05	)	$	(0.03	)		(60.0	)%	$	(0.06	)	$	(0.11	)	$	(0.05	)		(45.5	)%

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Net Revenues

All of our sales for the nine months ended September 30, 2017 and 2016 were to customers located in North America, Europe and Asia.

The following table presents revenues by market and NRE revenues for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

	Three months ended September 30, 2017					Three months ended September 30, 2016
	Amount		Percentage			Amount		Percentage
Net license revenues from Automotive	$	457		20	%	$	428		26	%
Net license revenues from Consumer Electronics		1,615		70	%		1,209		74	%
Net revenues from sensor components		211		9	%		-		-	%
Net revenues from NRE		22		1	%		2		-	%
	$	2,305		100	%	$	1,639		100	%

	Nine months ended September 30, 2017					Nine months ended September, 2016
	Amount		Percentage			Amount		Percentage
Net license revenues from Automotive	$	1,714		25	%	$	1,673		23	%
Net license revenues from Consumer Electronics		4,444		64	%		4,444		60	%
Net revenues from sensor components		634		9	%		-		-	%
Net revenues from NRE		174		2	%		1,228		17	%
	$	6,966		100	%	$	7,345		100	%

The increase of 41% in total net revenues for the three month period 2017 as compared to the same period in 2016 is primarily related to printer license fees due to new product launch by Canon and Epson and also AirBar sales, which fully offset lower e-Reader license fees. The decrease of 5% in net revenues for the nine month period 2017 as compared to the same period in 2016 is primarily due to an 86% decrease in NRE fees. This decrease was partially offset by new revenues from AirBar sales. The decrease in NRE fees to $0.2 million from $1.2 million for the nine months ended September 30, 2017 compared to the same period in 2016 was expected due to a planned reduction in NRE driven custom integration projects. The majority of the NRE fees in 2016 are related to our Autoliv assisted and self-driving steering wheel project.

Our net revenues for the three and nine months ended September 30, 2017 included $2.1 million and $6.2 million, respectively, from technology license fees plus $22,000 and $0.2 million, respectively, in NRE fees. In addition, we earned $0.2 million and $0.6 million from sales of AirBar for the three and nine months ended September 30, 2017, respectively. Our net revenues for the three and nine months ended September 30, 2016 included $1.6 million and $6.1 million, respectively, from technology license fees plus $2,000 and $1.2 million, respectively, in NRE fees. There were no sales of AirBar in the three and nine months ended September 30, 2016.

In the third quarter 2017, we manufactured and sold our first touch sensor components to twelve customers for total revenue of approximately $20,000. We expect the sales of sensor components to increase in future periods.

The following table presents the license fee revenue distribution per market for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

	Three months ended September 30, 2017					Three months ended September 30, 2016
	Amount		Percentage			Amount		Percentage
Printers	$	1,383		67	%	$	823		50	%
E-Readers and tablets		232		11	%		386		24	%
Automotive		457		22	%		428		26	%
	$	2,072		100	%	$	1,637		100	%

	Nine months ended September 30, 2017					Nine months ended September, 2016
	Amount		Percentage			Amount		Percentage
Printers	$	3,562		58	%	$	3,105		51	%
E-Readers and tablets		882		14	%		1,340		22	%
Automotive		1,714		28	%		1,672		27	%
	$	6,158		100	%	$	6,117		100	%

In the nine months ended September 30, 2016, license fees from our printer customers included $0.8 million associated with a one-time adjustment to adjust license fees earned to customer shipments plus a customer’s sales of a limited release series of low cost printer. Excluding the license fees related to these activities, the adjusted license fee revenues for the first nine months in 2016 totals to $5.3 million.

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Gross Margin

The increase in total gross margin percentage in 2017 as compared to 2016 is primarily due to the fact that license fees with a 100% gross margin are a higher percentage of our total revenue in 2017 compared to 2016. In the three months ended September 30, 2017, license fees accounted for 90% of total revenue compared to 100% in the same period in 2016. In the nine months ended September 30, 2017, license fees accounted for 88% of total revenue compared to 83% in the same period in 2016. NRE projects had a 100% and 21% margin in the three and nine months ended September 30, 2017, respectively compared to a negative and 18% margin in the three and nine months ended September 30, 2016, respectively. AirBar sales had a 28% and 20% margin in the three and nine months ended September 30, 2017. We expect the gross margin for all AirBars to stabilize at approximately 40% in the near term and increase as volumes increase.

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 contract and cost of goods sold for AirBar includes manufacturing, outsourced final assembly and component costs.

Research and Development

Research and development (“R&D”) expenses for the three and nine months ended September 30, 2017 decreased by 17% and 25%, respectively, compared to the same periods in 2016. The decrease for both periods is mainly related to a reduction in full custom design projects requiring fewer resources and external consultants. R&D costs mainly consist of personnel related costs in addition to some external consultancy costs, such as testing, certifying and measurements, along with costs related to developing and building new product prototypes. There was no non-cash stock-based compensation expense included in R&D expenses in the three and nine months ended September 30, 2017. Included in R&D expenses is $8,000 and $48,000 of non-cash stock-based compensation expense for the three and nine months ended September 30, 2016, respectively.

Sales and Marketing

Sales and marketing expenses increased 12% and had a 0% change in the three and nine months ended September 30, 2017, respectively, compared to the same periods last year. The increase in the three month period is primarily due to marketing expenses related to AirBar sales and is partially offset by a reduction in non-cash stock option expense. Non-cash stock-based compensation expense was $11,000 and $39,000 for the three and nine months ended September 30, 2017, respectively, compared to $19,000 and $132,000 for the same periods in 2016. Our sales activities focus primarily on OEM customers who will integrate our touch technology into their products and the sale of our AirBar device to qualified global distributors. 

General and Administrative

General and administrative (“G&A”) expenses increased 8% and 6% in the three and nine months ended September 30, 2017, respectively, compared to the same periods last year. The increases are primarily due to higher payroll expenses and professional fees. Included in G&A expenses is $6,000 and $17,000 of non-cash stock-based compensation expense for the three and nine months ended September 30, 2017, respectively, compared to $27,000 and $44,000 for the same periods in 2016. These are stock options issued to employees, consultants and members of our Board of Directors.

Income Taxes

Our effective tax rate was 2% and 2% for the three and nine months ended September 30, 2017, respectively, and (3)% and (5)% for the three and nine months ended September 30, 2016. The tax rate in the three and nine months ended September 30, 2017 is mainly due to returns of previously withheld taxes from sales in Germany. The negative tax rate in the three and nine months ended September 30, 2016 is due to withholding taxes from sales in Asia. We recorded valuation allowances for the three month periods ended September 30, 2017 and 2016 for deferred tax assets related to net operating losses due to the uncertainty of realization.

Net Loss

As a result of the factors discussed above, we recorded a net loss attributable to Neonode Inc. of $1.1 million and $3.0 million for the three and nine months ended September 30, 2017, respectively, compared to a net loss of $2.2 million and $4.9 million in the comparable periods in 2016.

Off-Balance Sheet Arrangements

We do not have any transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than operating leases. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support; or 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 condensed consolidated financial statements.

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Contractual Obligations and Commercial Commitments

Non-Recurring Engineering Development Costs

On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments pursuant to which Texas Instruments will integrate Neonode’s intellectual property into an ASIC. The NN1002 ASIC only can be sold by Texas Instruments exclusively to licensees of Neonode. Under the terms of the NN1002 Agreement, we will reimburse Texas Instruments up to $500,000 of non-recurring engineering costs based on shipments of the NN1002. Under the terms of the NN1002 Agreement we will reimburse Texas Instruments a non-recurring engineering fee of $0.25 per unit for each of the first two million units sold. The NN1002 began shipping to customers in 2015. As of September 30, 2017, we had made no payments under the NN1002 Agreement.

On December 4, 2014, we entered into an additional Analog Device Development Agreement (the “NN1003 Agreement”) with ST Microelectronics International N.V pursuant to which ST Microelectronics will integrate Neonode’s intellectual property into an ASIC. The NN1003 ASIC only can be sold by ST Microelectronics exclusively to licensees of Neonode. Under the terms of the NN1003 Agreement, we will reimburse ST Microelectronics up to $835,000 of non-recurring engineering costs as follows:

● $235,000 at the feasibility review and contract signature (paid on January 20, 2015)

● $300,000 on completion of tape-out (paid on October 31, 2015)

● $300,000 on completion on product validation ($300,000 paid by January 2, 2017).

Under the terms of the NN1003 Agreement, we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As of September 30, 2017, we had paid $835,000 under the NN1003 Agreement.

Operating Leases

We lease office space located at 2880 Zanker Road, San Jose, CA 95134 USA. The annual payment for this space equates to approximately $15,000. This lease was effective on August 22, 2016 and can be terminated with one month’s notice.

Our subsidiary Neonode Technologies AB leases 7,007 square feet of office space located at Storgatan 23C, Stockholm, Sweden. The annual payment for this space is approximately $421,000 per year including property tax (excluding VAT). This lease is valid through November 30, 2018. The lease can be extended on a yearly basis.

Neonode Technologies AB’s majority-owned subsidiary Pronode Technologies AB leases 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka, Sweden. The annual payment for this space equates to approximately $93,000 per year. The lease is valid through December 9, 2017.

Our subsidiary Neonode Japan K.K. leases office space located at 405 Elpulimento Shinjuku, 6-7-1, Shinjuku-ku, Tokyo. The annual payment for this space equates to approximately $21,000 per year. The lease can be terminated with one month’s notice.

Our subsidiary Neonode Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea in January, 2015. The annual payment for this space equates to approximately $9,000 per year. We can terminate the lease with 2 months written notice.

Our subsidiary Neonode Taiwan Ltd. entered into a lease agreement located at Rm. 2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan. The annual payment for this space equates to approximately $14,000 per year. The lease is renewed every three months unless termination is notified.

For the three and nine months ended September 30, 2017, we recorded approximately $177,000 and $506,000, respectively, for rent expense, compared to $252,000 and $690,000 for the same periods in 2016.

We believe our existing facilities are in good condition and suitable for the conduct of our business.

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A summary of future minimum payments under non-cancellable operating lease commitments as of September 30, 2017 is as follows (in thousands):

Years ending December 31,	Total
2017	$	121
2018		386
2019		-
	$	507

Equipment Subject to Capital 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 6 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 capital lease. The lease payments and depreciation period began on July 1, 2014 when the equipment went into service. The implicit interest rate of the lease is 4% per annum.

In 2016, we have 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 capital 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 will be paid off after 5 years. In accordance with relevant accounting guidance the lease is classified as a capital 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 have entered into one lease for component production equipment. Under the terms of the lease agreement the lease will be renewed with one year at the time at the end of the original 4 year lease term. In accordance with relevant accounting guidance the lease is classified as a capital 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 2.5% per annum.

The following is a schedule of minimum future rentals on the non-cancelable capital leases as of September 30, 2017 (in thousands):

Year ending December 31,	Total
2017	$	154
2018		619
2019		616
2020		623
2021		506
Total minimum payments required:		2,518
Less amount representing interest:		(108	)
Present value of net minimum lease payments:		2,410
Less current portion		(570	)
	$	1,840
Equipment under capital lease	$	3,623
Less: accumulated depreciation		(644	)
Net book value	$	2,979

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Liquidity and Capital Resources

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

● actual versus anticipated licensing of our technology;

● actual versus anticipated operating expenses;

● timing of our OEM customer product shipments;

● timing of payment for our technology licensing agreements;

● actual versus anticipated gross profit margin;

● ability to raise additional capital, if necessary; and

● ability to secure credit facilities, if necessary.

As of September 30, 2017, we had cash of $6.9 million compared to $3.5 million as of December 31, 2016.

Working capital (current assets less current liabilities) was $8.2 million as of September 30, 2017, compared to $3.1 million as of December 31, 2016.

Net cash used in operating activities for the nine months ended September 30, 2017 was $4.7 million and was primarily the result of (1) a net loss of approximately $3.5 million and (2) approximately $1.9 million in net cash used in changes in operating assets and liabilities and (3) approximately $0.7 million in non-cash operating expenses, comprised of depreciation and amortization and stock-based compensation.

Accounts receivable decreased by approximately $0.9 million as of September 30, 2017 compared with December 31, 2016. This is due to the timing of the payments received from customers.

Inventory increased by approximately $1.2 million during the nine months ended September 30, 2017 compared with December 31, 2016. This is to support the increased production of AirBar and other sensor components.

Deferred revenues decreased by approximately $0.6 million during the nine months ended September 30, 2017 compared with December 31, 2016, mainly due to recognition of revenue from customers that have prepaid license fees, partly offset by increased prepayments for NRE projects and reserved AirBar revenues from Ingram Micro.

Net cash used in operating activities for the nine months ended September 30, 2016 was $3.7 million and was primarily the result of (1) a net loss of approximately $5.1 million and (2) approximately $0.8 million in net cash provided by changes in operating assets and liabilities and (3) approximately $1.1 million in non-cash operating expenses, comprised of depreciation and amortization, loss on disposal of property and equipment and stock-based compensation.

In the nine months ended September 30, 2017 and 2016, we purchased approximately $643,000 and $851,000 respectively, of property and equipment, primarily furniture and test equipment.

Net cash provided by financing activities of $8.8 million during the nine months ended September 30, 2017 was the result of net cash proceeds of approximately $9.1 million from issuance of shares of our common stock and warrants, offset by $0.3 million in principal payments on capital leases.

Net cash provided by financing activities was the result of net proceeds of approximately $7.9 million from issuance of shares of our common stock and warrants during the nine months ended September 30, 2016. 

We incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.1 million and $3.0 million and $2.2 million and $4.9 million for the three and nine months ended September 30, 2017 and 2016, respectively, and had an accumulated deficit of approximately $182.0 million and $179.0 million as of September 30, 2017 and December 31, 2016, respectively. In addition, operating activities used cash of approximately $4.7 million and $3.7 million for the nine months ended September 30, 2017 and 2016.

In August 2016, we entered into a Securities Purchase Agreement with institutional and accredited investors as part of a private placement pursuant to which we issued a total of 8,627,352 shares of common stock, as described below, and warrants for an aggregate purchase price of $7.9 million in net proceeds. The total number of shares included (i) an aggregate of 427,352 shares at $1.17 per share to Thomas Eriksson, Chief Executive Officer of Neonode, and Remo Behdasht, SVP AirBar Devices at Neonode for gross proceeds of approximately $500,000, (ii) an aggregate of 4,600,000 shares at a price of $1.00 per share to outside investors for gross proceeds of $4,600,000, and (iii) up to 3,600,000 shares issuable upon exercise of warrants (the “2016 Pre-Funded Warrants”) by outside investors for which we received $3,564,000 pre-funded in proceeds and will receive up to $36,000 in proceeds upon future cash exercises.

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Under the terms of the 2016 Securities Purchase Agreement, we issued warrants (the “2016 Purchase Warrants”) to all investors in the private placement to purchase up to a total of 4,313,676 shares of common stock at an exercise price of $1.12 per share. The 2016 Purchase Warrants became exercisable February 17, 2017 and will expire February 17, 2022. None of the 2016 Purchase Warrants have been exercised as of March 10, 2017. If the 2016 Purchase Warrants are fully exercised, we will receive approximately $4.8 million in proceeds.

On June 9, 2017, the Company entered into a short-term unsecured loan agreement and issued a note payable with the principal amount of 15,000,000 SEK. The interest rate was 2.5% per annum and the note was due on September 1, 2017. We repaid the note in August 2017 with interest cost of approximately $8,900.

In August, 2017, we entered into a Securities Purchase Agreement with accredited investors as part of a private placement pursuant to which we issued a total of 9,750,000 shares of common stock at $1.00 per share, and warrants, for of an aggregate purchase price of $9.75 million in gross proceeds. We received approximately $9.1 million in net proceeds. Under the terms of the 2017 Securities Purchase Agreement, we also issued warrants (the “2017 Warrants”) to investors in the private placement to purchase up to a total of 3,250,000 shares of common stock at an exercise price of $2.00 per share. The 2017 Warrants will become exercisable on August 8, 2018, and will expire on August 8, 2020. If the 2017 Warrants are fully exercised, we will receive approximately $6.5 million in proceeds. There are no registration rights associated with the securities to be issued and sold pursuant to the 2017 Securities Purchase Agreement.

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

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

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

Critical Accounting Policies

There have been no material changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in internal control over financial reporting

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

29

PART II.   Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Other than as set forth below, there have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Future sales of our common stock by our stockholders could negatively affect our stock price.

In August 2016, we sold 5,027,352 shares of common stock and 3,600,000 pre-funded warrants to institutional and accredited investors including 427,352 shares sold to the chief executive officer and a senior vice president of Neonode. We also issued warrants to purchase up to 4,313,676 shares of our common stock at an exercise price of $1.12 per share. The warrants are exercisable until February 17, 2022. None of the warrants have been exercised as of November 7, 2017.

In August 2017, we sold 9,750,000 shares of common stock shares of common stock at $1.00 per share and issued approximately 3,250,000 warrants to accredited investors at an exercise price of $2.00 per share. The warrants are exercisable until three years after issuance, but are not exercisable during the initial 12 months.

Sales of a substantial number of shares of our common stock in the public market by insiders or large stockholders, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.

The dual listing of our common stock on Nasdaq OMX Stockholm may adversely affect the liquidity and trading prices for our common stock on one or both of the exchanges as a result of circumstances that may be outside of our control.

On June 12, 2017, we announced that we are pursuing a dual listing of our common stock on the Nasdaq OMX Stockholm. There is no assurance that our common stock will be listed on the Nasdaq OMX Stockholm, or that if listed, an active market for trading there will develop. Although we believe the dual listing of our common stock is beneficial for the liquidity of our common stock as it should permit a broader base of investors to purchase shares of our common stock in secondary trading, it may also adversely affect liquidity and trading prices for our common stock on one or both of the exchanges as a result of circumstances that may be outside of our control. For example, transfers by investors of our shares from trading on one exchange to the other could result in increases or decreases in liquidity and/or trading prices on either or both of the exchanges. In addition, investors could seek to sell or buy our common stock to take advantage of any price differences between the two markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our common stock prices on either exchange and the volumes of shares of our common stock available for trading on either exchange.

30

Item 6. Exhibits

Exhibit #	Description
3.1	Amended and Restated Certificate of Incorporation of Neonode Inc., dated April 17, 2009 (incorporated by reference to Exhibit 10.22 of our Quarterly Report on Form 10-Q filed on August 4, 2009 (file no. 0-08419))
3.1.1	Certificate of Amendment, dated December 13, 2010 (incorporated by reference to Exhibit 3.1.1 of our Annual Report on Form 10-K filed on March 31, 2011 (file no. 0-08419))
3.1.2	Certificate of Amendment, dated March 18, 2011 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on March 28, 2011 (file no. 0-08419))
3.1.3	Certificate of Correction, dated February 29, 2011 (incorporated by reference to Exhibit 3.1.3 of our Annual Report on Form 10-K filed on March 30, 2012 (file no. 0-08419))
3.1.4	Certificate of Correction, dated August 7, 2017* (incorporated by reference to Exhibit 3.1.4 of our Quarterly Report on Form 10-Q filed on August 9, 2017 (file no. 1-35525)
3.1.5	Certificate of Amendment, dated October 6, 2017*
3.2	Bylaws (incorporated by reference to Exhibit 3.2 of our Annual Report on Form 10-K filed on April 15, 2008 (file no. 0-08419))
4.1	Form of Warrant, as of August 8, 2017 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on August 8, 2017 (file no.1-35525))
10.1	Securities Purchase Agreement, dated as of August 2, 2017 (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on August 8, 2017 (file no.1-35525)
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
32	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101. INS	XBRL Instance Document
101. SCH	XBRL Taxonomy Extension Schema Document
101. CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101. DEF	XBRL Taxonomy Extension Definition Linkbase Document
101. LAB	XBRL Taxonomy Extension Label Linkbase Document
101. PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

31

SIGNATURES

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

	NEONODE INC.
Date: November 9, 2017	By:	/s/ Lars Lindqvist
		Lars Lindqvist
		Chief Financial Officer,
		Vice President, Finance,
		Treasurer and Secretary
		(Principal Financial and Accounting Officer)

32

EX-3.1.5

Exhibit 3.1.5

THIRD CERTIFICATE OF AMENDMENT

TO

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

NEONODE, INC.

* * *

ARTICLE IV.

A.         This corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the corporation is authorized to issue is One Hundred One Million (101,000,000) shares, of which One Hundred Million (100,000,000) shares will be Common Stock, par value $0.001 per share, and One Million (1,000,000) shares will be Preferred Stock, par value $0.001 per share, of which 444,541 shares shall be designated as Series A Preferred Stock and 54,425 shares shall be designated as Series B Preferred Stock. 

* * *

EX-31.1

Exhibit 31.1

Certification OF PRINCIPAL EXECUTIVE OFFICER Pursuant to Section 302 of

the Sarbanes-Oxley Act of 2002

I, Thomas Eriksson, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Neonode Inc.;

2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

   a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

   b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 9, 2017	By:	/s/ Thomas Eriksson
		Thomas Eriksson
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification OF PRINCIPAL FINANCIAL OFFICER Pursuant to Section 302 of

the Sarbanes-Oxley Act of 2002

I, Lars Lindqvist, certify that:

1.       I have reviewed this quarterly report on Form 10-Q of Neonode Inc.

2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.       The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

   b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

   c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

   d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fiscal fourth quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.       The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

   a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

   b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 9, 2017	By:	/s/ Lars Lindqvist
		Lars Lindqvist
		Chief Financial Officer,
		Vice President, Finance,
		Treasurer and Secretary

EX-32

Exhibit 32

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Neonode Inc. (the “Company”) on Form 10-Q for the fiscal period ended June 30, 2017 as filed with the Securities and Exchange Commission (the “Report”), the undersigned principal executive officer and principal financial officer of the Company, each hereby certify, solely for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

1. The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 9, 2017	By:	/s/ Thomas Eriksson
		Thomas Eriksson
		President and Chief Executive Officer
Date:  November 9, 2017	By:	/s/ Lars Lindqvist
		Lars Lindqvist
		Chief Financial Officer,
		Vice President, Finance,
		Treasurer and Secretary

This certification is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, whether made before or after the date of the Report, irrespective of any general incorporation language contained in such filing.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Nov. 06, 2017
Document and Entity Information [Abstract]
Entity Registrant Name	Neonode, Inc
Entity Central Index Key	0000087050
Trading Symbol	NEON
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		58,594,503

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash	$ 6,872	$ 3,476
Accounts receivable, net	620	1,548
Projects in process	299
Inventory	2,065	696
Prepaid expenses and other current assets	2,208	1,949
Total current assets	12,064	7,669
Investment in joint venture	3	3
Property and equipment, net	3,637	2,031
Total assets	15,704	9,703
Current liabilities:
Accounts payable	759	1,286
Accrued payroll and employee benefits	1,085	1,001
Accrued expenses	148	172
Deferred revenues	1,299	1,921
Current portion of capital lease obligations	570	228
Total current liabilities	3,861	4,608
Capital lease obligations, net of current portion	1,840	960
Total liabilities	5,701	5,568
Commitments and contingencies
Stockholders' equity:
Series B Preferred stock, 54,425 shares authorized with par value $0.001 per share; 83 shares issued and outstanding at September 30, 2017 and December 31, 2016. (In the event of dissolution, each share of Series B Preferred stock has a liquidation preference equal to par value of $0.001 per share over the shares of common stock)
Common stock, 100,000,000 shares authorized with par value $0.001 per share; 58,594,503 and 48,844,503 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	59	49
Additional paid-in capital	192,795	183,667
Accumulated other comprehensive income (loss)	34	(171)
Accumulated deficit	(182,026)	(179,040)
Total Neonode Inc. stockholders' equity	10,862	4,505
Noncontrolling interests	(859)	(370)
Total stockholders' equity	10,003	4,135
Total liabilities and stockholders' equity	$ 15,704	$ 9,703

XML

Condensed Consolidated Balance Sheets (Parenthetical) - $ / shares	Sep. 30, 2017	Dec. 31, 2016
Common stock, shares authorized	100,000,000	100,000,000
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares issued	58,594,503	48,844,503
Common stock, shares outstanding	58,594,503	48,844,503
Series B Preferred Stock
Preferred stock, shares authorized	54,425	54,425
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, shares issued	83	83
Preferred stock, shares outstanding	83	83
Preferred stock, liquidation preference	$ 0.001	$ 0.001

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Revenues:
License fees	$ 2,072	$ 1,637	$ 6,158	$ 6,117
Sensor components	211		634
Non-recurring engineering	22	2	174	1,228
Total revenues	2,305	1,639	6,966	7,345
Cost of revenues:
Sensor components	151		510
Non-recurring engineering		33	137	1,013
Total cost of revenues	151	33	647	1,013
Total gross margin	2,154	1,606	6,319	6,332
Operating expenses:
Research and development	1,668	2,014	4,283	5,734
Sales and marketing	743	666	2,158	2,151
General and administrative	1,154	1,067	3,365	3,167
Total operating expenses	3,565	3,747	9,806	11,052
Operating loss	(1,411)	(2,141)	(3,487)	(4,720)
Other expense:
Interest expense	24	17	59	32
Other expense, net		49		91
Total other expense	24	66	59	123
Loss before provision for income taxes	(1,435)	(2,207)	(3,546)	(4,843)
(Benefits from) provision for income taxes	(24)	55	(71)	234
Net loss including noncontrolling interests	(1,411)	(2,262)	(3,475)	(5,077)
Less: Net loss attributable to noncontrolling interests	296	100	489	217
Net loss attributable to Neonode Inc.	$ (1,115)	$ (2,162)	$ (2,986)	$ (4,860)
Loss per common share:
Basic and diluted loss per share	$ (0.02)	$ (0.05)	$ (0.06)	$ (0.11)
Basic and diluted - weighted average number of common shares outstanding	55,166	46,252	50,959	44,627

XML

Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Statements of Comprehensive Loss [Abstract]
Net loss	$ (1,411)	$ (2,262)	$ (3,475)	$ (5,077)
Other comprehensive income (loss):
Foreign currency translation adjustments	83	(36)	205	(102)
Comprehensive loss	(1,328)	(2,298)	(3,270)	(5,179)
Less: Comprehensive loss attributable to noncontrolling interests	296	100	489	217
Comprehensive loss attributable to Neonode Inc.	$ (1,032)	$ (2,198)	$ (2,781)	$ (4,962)

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net loss (including noncontrolling interests)	$ (3,475)	$ (5,077)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	56	224
Loss on disposal of property and equipment		91
Depreciation and amortization	672	206
Changes in operating assets and liabilities:
Accounts receivable	933	1,066
Projects in process	(299)	95
Inventory	(1,222)	(940)
Prepaid expenses and other current assets	(52)	(438)
Accounts payable and accrued expenses	(675)	319
Deferred revenues	(629)	737
Net cash used in operating activities	(4,691)	(3,717)
Cash flows from investing activities:
Purchase of property and equipment	(643)	(851)
Investment in joint venture		(3)
Proceeds from sale of property and equipment		5
Net cash used in investing activities	(643)	(849)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net of offering costs	9,082	7,911
Proceeds from note payable	1,713
Payments on note payable	(1,713)
Principal payments on capital lease obligations	(301)	(57)
Net cash provided by financing activities	8,781	7,854
Effect of exchange rate changes on cash	(51)	(92)
Net increase in cash	3,396	3,196
Cash at beginning of period	3,476	3,082
Cash at end of period	6,872	6,278
Supplemental disclosure of cash flow information:
Cash paid for income taxes	15	179
Cash paid for interest	59	15
Supplemental disclosure of non-cash investing and financing activities
Purchase of equipment with capital lease obligations	$ 1,287	$ 1,022

XML

Interim Period Reporting

9 Months Ended

Sep. 30, 2017

Interim Period Reporting [Abstract]

Interim Period Reporting

1. Interim Period Reporting

The accompanying unaudited interim condensed consolidated financial statements, include all adjustments, consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of results for a full fiscal year or any other period.

The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2017 and 2016 have been prepared by us, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Operations

Neonode Inc. (collectively with its subsidiaries, is referred to in this Form 10-Q Report as “Neonode”, “we”, “us”, “our”, “registrant”, or “Company”) develops optical touch and gesture solutions for human interaction with devices. In 2010 we began licensing our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who in-turn embed our technology into products they develop, manufacture and sell. Since 2010, our customers have sold over 52 million devices under our licensing agreements that use our technology. In 2016, we augmented our licensing business and started to manufacture and sell standardized embedded sensors that incorporate our technology to OEMs, Tier 1 Suppliers, distributors and our branded products sold directly to consumers.

Reclassifications

Revenues and cost of sales for the period ended September 30, 2016 are now reported as license fees, sensor components and non-recurring engineering instead of net revenues in the accompanying condensed consolidated statement of operations, in order to conform to current period presentation.

Liquidity

We have incurred significant operating losses and negative cash flows from operations since our inception. The Company incurred net losses of approximately $1.1 million and $3.0 million and $2.2 million and $4.9 million for the three and nine months ended September 30, 2017 and 2016, respectively, and had an accumulated deficit of approximately $182.0 million and $179.0 million as of September 30, 2017 and December 31, 2016, respectively. In addition, operating activities used cash of approximately $4.7 million and $3.7 million for the nine months ended September 30, 2017 and 2016, respectively. 

We expect our revenues from license fees, non-recurring engineering fees and embedded sensor components sales will enable us to reduce our operating losses going forward. In addition, we have improved the overall cost efficiency of our operations, as a result of the transition from providing our customers a full custom design solution to providing standardized sensor components which require limited to no custom design work. 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.

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

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

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

August 2016 Private Placement

In August 2016, we entered into a Securities Purchase Agreement with institutional and accredited investors as part of a private placement pursuant to which we issued a total of 8,627,352 shares of common stock, as described below, and warrants for an aggregate purchase price of $7.9 million in net proceeds. The total number of shares included (i) an aggregate of 427,352 shares at $1.17 per share to Thomas Eriksson, Chief Executive Officer of Neonode, and Remo Behdasht, SVP AirBar Devices at Neonode for gross proceeds of approximately $500,000, (ii) an aggregate of 4,600,000 shares at a price of $1.00 per share to outside investors for gross proceeds of $4,600,000, and (iii) up to 3,600,000 shares issuable upon exercise of warrants (the “ 2016 Pre-Funded Warrants”) by outside investors for which we received $3,564,000 pre-funded in proceeds and will receive up to $36,000 in proceeds upon future cash exercises.

Under the terms of the 2016 Securities Purchase Agreement, we issued warrants (the “2016 Purchase Warrants”) to all investors in the private placement to purchase up to a total of 4,313,676 shares of common stock at an exercise price of $1.12 per share. The 2016 Purchase Warrants became exercisable February 17, 2017 and will expire February 17, 2022. None of the 2016 Purchase Warrants have been exercised as of November 6, 2017. If the 2016 Purchase Warrants are fully exercised, we will receive approximately $4.8 million in cash proceeds.

August 2017 Private Placement

In August, 2017, we entered into a Securities Purchase Agreement with accredited investors as part of a private placement pursuant to which we issued a total of 9,750,000 shares of common stock at $1.00 per share, and warrants, for of an aggregate purchase price of $9.75 million in gross proceeds. We received approximately $9.1 million in net proceeds. Under the terms of the 2017 Securities Purchase Agreement, we also issued warrants (the “2017 Warrants”) to investors in the private placement to purchase up to a total of 3,250,000 shares of common stock at an exercise price of $2.00 per share. The 2017 Warrants will become exercisable on August 8, 2018, and will expire on August 8, 2020. If the 2017 Warrants are fully exercised, we will receive approximately $6.5 million in proceeds. There are no registration rights associated with the securities to be issued and sold pursuant to the 2017 Securities Purchase Agreement.

The proceeds from the August 2017 private placement were used to repay $1.7 million in short-term debt and will be used for general corporate purposes including business development.

Shelf Registration Statement

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

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

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

In June 2016, we entered into a Joint Venture (“JV”) with a Swedish based eye-tracking company SMART EYE AB. By combining our technologies, we plan to bring multi-chip modules to the market for the consumer and automotive markets that provide new opportunities for interaction with cars and devices. The name of the newly established JV is Neoeye AB (“Neoeye”).

We use the equity method of accounting to record our investments in the common stock of each entity in which Neonode has the ability to exercise significant influence, but does not own a majority equity interest. Under the equity method, our investment is originally included in equity interests at cost, and is adjusted to recognize our share of net earnings or losses of the investee, in our condensed consolidated balance sheets; our share of net income (loss) is reported in our condensed consolidated statements of operations according to our equity ownership in each entity.

The condensed consolidated balance sheets at September 30, 2017 and December 31, 2016 and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2017 and 2016 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), as well as Pronode Technologies AB (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB.

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires making estimates and assumptions 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. Significant estimates include, but are not limited to, provisions for uncollectible receivables and sales returns, warranty liabilities, the achievement of substantive milestones and vendor-specific objective evidence (“VSOE”) of fair value for purposes of revenue recognition (or deferral of revenue), net realizable value of inventory, recoverability of capitalized project costs and long-lived assets, the valuation allowance related to our deferred tax assets, and the fair value of options and warrants issued for stock-based compensation.

Cash

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

Concentration of Cash Balance Risks

Cash balances are maintained at various banks in the U.S., Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions in the U.S. the U.S. Federal Deposit Insurance Corporation, provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts. The Japanese government provides insurance coverage up to 10,000,000 Yen per customer. The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount of insurance provided.

Accounts Receivable and Allowance for Doubtful Accounts

Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $149,000 as of September 30, 2017 and December 31, 2016, respectively.

Projects in Process

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our condensed consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. Costs capitalized in projects in process were $299,000 as of September 30, 2017. There were no costs capitalized in projects in process as of December 31, 2016.

Inventory

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”) and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of September 30, 2017 and December 31, 2016, the Company’s inventory consists primarily of components that will be used in the manufacturing of our first sensor component, AirBar. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

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

	September 30,		December 31,
	2017		2016
Raw materials	$	807	$	522
Work-in-Process		220		42
Finished goods		1,038		132
Ending inventory	$	2,065	$	696

Investment in JV

We have invested $3,000, for a 50% interest in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through September 30, 2017.

Neoeye, as an unconsolidated equity investee, will recognize revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured, which is generally upon the receipt of the license proceeds. Neoeye may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones have been met.

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

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows:

Estimated useful lives

Computer equipment	3 years
Furniture and fixtures	5 years
Equipment	7 years

Equipment purchased under a capital lease is recognized over the term of the lease, if that lease term is shorter than the estimated useful life.

Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the condensed consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.

Long-lived Assets

We assess any impairment by estimating the future cash flow 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 September 30, 2017, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

Foreign Currency Translation and Transaction Gains and Losses

The functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar. The translation from Swedish Krona, Japanese Yen, South Korean Won and Taiwan Dollar to U.S. Dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted-average exchange rate during the period. Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive income (loss). Foreign currency translation gains were $83,000 and $205,000 during the three and nine months ended September 30, 2017, respectively, compared to translation losses of $(36,000) and $(102,000) during the three and nine months ended September 30, 2016, respectively. Losses resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed consolidated statements of operations and were $(45,000) and $(24,000) during the three and nine months ended September 30, 2017, respectively, compared to gains of $25,000 and $59,000 during the same periods in 2016, respectively.

Concentration of Credit and Business Risks

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

As of September 30, 2017, three customers represented approximately 80% of the Company’s accounts receivable.

As of December 31, 2016, three customers represented approximately 59% of the Company’s accounts receivable.

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 30%

● Canon – 17%

● Seiko Epson – 12%

● Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2017 are as follows:

● Hewlett Packard Company – 31%

● Canon – 15%

● Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 50%

● Bosch  – 11%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 42%

● Amazon – 13%

● Autoliv Development AB – 12%

Revenue Recognition

Licensing Revenues:

We derive revenue from the licensing of 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 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. We follow U.S. GAAP for revenue recognition as per unit royalty products are distributed or licensed by our customers. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of technology; (2) the customer distributes or licenses the products; (3) the customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. Our customers report to us the quantities of products distributed or licensed by them after the end of the reporting period stipulated in the contract, generally 30 to 45 days after the end of the month or quarter. We recognize licensing revenue in the period in which royalty reports are received, rather than the period in which the products are distributed or to which the license relates.

Explicit return rights are not offered to customers. There have been no returns through September 30, 2017.

Engineering Services:

We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue.

Generally, we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers. Engineering services are performed under a signed Statement of Work (“SOW”) with a customer. The deliverables and payment terms stipulated under the SOW provide guidance on the project revenue recognition.

Revenues from contracts that are short-term in nature and related costs that are difficult to estimate are accounted for under the completed contract method.

Revenues from contracts with substantive defined milestones that we have determined are reasonable, relevant to all the deliverables and payment terms in the SOW that are commensurate with the efforts required to achieve the milestones are recognized under the milestone recognition method.

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the periods ended September 30, 2017 and 2016, no losses related to SOW projects were recorded.

Optical Sensor Components Revenues:

We derive revenue from the sales of sensor components hardware products sold directly to our OEM and Tier 1 supplier customers who embed our hardware into their products and from sales of branded consumer products that incorporate our sensor components sold to distributors or directly to end users. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. We enter into sales agreements that generally provide customers with limited rights of return and warranty provisions. U.S. GAAP allows companies to make reasonable aggregations and approximations of returns data with regard to returns. Our returns and warranty experience to date has enabled us to make reasonable returns estimates, which are further supported by the fact that our product sales involve homogenous transactions.

Revenue is recognized when all of the following criteria have been met:

● Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.

● Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.

● The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

● Collectability is reasonably assured. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. As our business and offerings are expected to evolve over time, our pricing practices may be required to be modified accordingly, which could result in changes in selling prices.

We make sales to distributors and revenue from distributors is recognized based on a sell-through basis using sales and inventory information provided by these distributors. Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred revenues in the consolidated balance sheet. When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known, we recognize previously deferred revenues as sales and cost of sales. 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.

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant as of September 30, 2017 and December 31, 2016. 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.

Product Warranty

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

	September 30, 2017		December 31, 2016
Balance at beginning of period	$	11	$	-
Provisions for warranty issued		19		11
Balance at end of period	$	30	$	11

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

Deferred Revenues

We defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of September 30, 2017 and December 31, 2016, we have $0.8 million and $1.8 million, respectively, of deferred license fee revenue related to prepayments for future license fees from two and four customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of September 30, 2017 and December 31, 2016 we had $0.2 million and $0.1 million, respectively, of deferred revenue from our AirBar sales. As of September 30, 2017 we had $0.3 million of deferred engineering development fees from two customers. As of December 31, 2016 there were no deferred engineering development fees.

Advertising

Advertising costs are expensed as incurred. Advertising costs for the three and nine months ended September 30, 2017 amounted to approximately $216,000 and $529,000, respectively. Advertising costs for the three and nine months ended September 30, 2016 amounted to approximately $76,000 and $193,000, respectively.

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 stock 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, actual forfeitures.

We account for equity instruments issued to non-employees at their estimated fair value. The measurement date for the estimated fair value for the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached, or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instruments is primarily recognized over the term of the consulting agreement. The estimated fair value of the stock-based compensation is periodically re-measured and income or expense is recognized during the vesting term.

When determining stock-based compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.

Noncontrolling Interests

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

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

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

Income Taxes

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

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of September 30, 2017 and December 31, 2016. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.

We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of September 30, 2017 and December 31, 2016, we had no unrecognized tax benefits.

Net Loss per Share

Net loss per share amounts has been computed based on the weighted average number of shares of common stock outstanding during the three and nine months ended September 30, 2017 and 2016. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the three and nine months ended September 30, 2017 and 2016 exclude the potential common stock equivalents, as the effect would be anti-dilutive (See Note 8).

Other Comprehensive Income (Loss)

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

Cash Flow Information

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

	Nine months ended September 30,
	2017		2016
Swedish Krona		8.62		8.39
Japanese Yen		111.91		108.60
South Korean Won		1,136.27		1,158.23
Taiwan Dollar		30.51		32.38

Exchange rate for the consolidated balance sheets was as follows:

	Periods Ended
	September 30,		December 31,
	2017		2016
Swedish Krona		8.13		9.07
Japanese Yen		112.45		116.97
South Korean Won		1,151.20		1,205.11
Taiwan Dollar		30.32		32.28

Fair Value of Financial Instruments

We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. We are currently compiling a complete list of our contracts, and we are finalizing our implementation plan. We expect to select the cumulative effect (modified retrospective) approach for our transition, because we believe that implementation of the new standard will not have a material impact on our consolidated financial statements. However, we do expect increased disclosures upon implementation of the new standard.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. We currently have a limited number of leased capital assets. We maintain a lease inventory for those assets, and they are currently reported on our condensed consolidated balance sheets. We also have a small number of leases which are currently classified as operating leases; we will compile and analyze those leases during the transition to the new standard. We expect that the transition may result in additions and changes to classifications on our condensed consolidated balance sheets, and changes to disclosures. However, because of the small number of assets we lease, we do not need to make systems changes to comply with the new standard. We plan to continue to track those leased assets outside of our accounting systems. We will assess the accounting and possible tax impacts during the coming months; however, we do not expect material changes in financial ratios, leasing practices, or tax reporting.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments”, (“ASU 2016-13”). 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 will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. We do not expect to adopt this standard early. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements.

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Note Payable

9 Months Ended

Sep. 30, 2017

Note Payable [Abstract]

Note Payable

3. Note Payable

On June 9, 2017, the Company entered into a short-term unsecured loan agreement and issued a note payable with the principal amount of 15,000,000 SEK. The interest cost rate was 2.5% per annum and the note was due on September 1, 2017. The note was paid off in August with total interest of approximately $8,900.

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Stockholders' Equity

9 Months Ended

Sep. 30, 2017

Stockholders' Equity [Abstract]

Stockholders' Equity

4. Stockholders’ Equity

Common Stock

On October 6, 2017, the Company amended its certificate of incorporation to increase its authorized shares of common stock to 100,000,000.

August 2017 Private Placement

On August 2, 2017, we entered into a Securities Purchase Agreement with accredited investors as part of a private placement pursuant to which we issued a total of 9,750,000 shares of common stock at $1.00 per share, and warrants, for an aggregate purchase price of $9.75 million in gross proceeds (see Note 1 for additional details).

Preferred Stock

We have one class of preferred stock outstanding. There were no activities that affected preferred stock during the nine months ended September 30, 2017.

Conversion of Preferred Stock Issued to Common Stock

The following table summarizes the amounts as of September 30, 2017.

	Shares of Preferred Stock Not Exchanged as of September 30, 2017		Conversion Ratio		Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged at September 30, 2017
Series B Preferred stock		83		132.07		10,962

Warrants

As of September 30, 2017 and December 31, 2016, there were 11,163,676 and 7,913,677 warrants to purchase common stock outstanding, respectively. During the nine months ended September 30, 2017, we agreed to issue the 2017 Warrants to investors in the August 2017 private placement to purchase up to a total of approximately 3,250,000 shares of common stock at an exercise price of $2.00 per share. The 2017 Warrants will become exercisable 12 months from the date of issuance and will expire three years from the date of issuance. If the 2017 Warrants are fully exercised, we will receive approximately $6.5 million in cash.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2017

Stock-Based Compensation [Abstract]

Stock-Based Compensation

5. Stock-Based Compensation

The stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016 reflects the estimated fair value of the vested portion of options granted to employees, directors and eligible consultants. Stock-based compensation expense in the accompanying condensed consolidated statements of operations is as follows (in thousands):

	Three months ended  September 30,				Nine months ended  September 30,
	2017		2016		2017		2016
Research and development	$	-	$	8	$	-	$	48
Sales and marketing		11		19		39		132
General and administrative		6		27		17		44
Total stock-based compensation expense	$	17	$	54	$	56	$	224

	Remaining unrecognized  expense at September 30, 2017
Stock-based compensation	$	28

The remaining unrecognized expense related to stock options will be recognized on a straight line basis monthly as compensation expense over the remaining vesting period, which approximates 0.4 years.

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

Stock Options

We have adopted equity incentive plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors. Except for 265,000 options issued to certain Swedish employees during 2015, all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants was based only on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

As of September 30, 2017 we had two equity incentive plans:

● The 2006 Equity Incentive Plan; and

● The 2015 Stock Incentive Plan

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

	Number of Options Outstanding			Weighted Average Exercise Price
Outstanding at January 1, 2017		1,846,000		$	4.39
Granted		-			-
Forfeited		(90,000	)		8.21
Outstanding at September 30, 2017		1,756,000		$	4.20

The aggregate intrinsic value of the 1,756,000 stock options that are outstanding, vested and expected to vest as of September 30, 2017 was $0.

For the three and nine months ended September 30, 2017 and 2016, we recorded $17,000 and $56,000 and $54,000 and $0.2 million, respectively, of compensation expense related to the vesting of stock options. The fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the date of grant of the stock option.

During the nine months ended September 30, 2017, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.

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

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2017

Commitments and Contingencies [Abstract]

Commitments and Contingencies

6. Commitments and Contingencies

Indemnities and Guarantees

Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of September 30, 2017 and December 31, 2016.

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of September 30, 2017 and December 31, 2016.

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 pursuant to which Texas Instruments will integrate Neonode’s intellectual property into an ASIC. The NN1002 ASIC only can be sold by Texas Instruments exclusively to licensees of Neonode. Under the terms of the NN1002 Agreement, we will reimburse Texas Instruments up to $500,000 of non-recurring engineering costs based on shipments of the NN1002. Under the terms of the NN1002 Agreement we will reimburse Texas Instruments a non-recurring engineering fee of $0.25 per unit for each of the first two million units sold. The NN1002 began shipping to customers in 2015. As of September 30, 2017, we had made no payments under the NN1002 Agreement.

On December 4, 2014, we entered into an Analog Device Development Agreement (the “NN1003 Agreement”) with ST Microelectronics International N.V. pursuant to which ST Microelectronics will integrate Neonode’s intellectual property into an ASIC. The NN1003 ASIC only can be sold by ST Microelectronics exclusively to licensees of Neonode. Under the terms of the NN1003 Agreement, we will reimburse ST Microelectronics up to $835,000 of non-recurring engineering costs as follows:

● $235,000 at the feasibility review and contract signature (paid on January 20, 2015)

● $300,000 on completion of tape-out (paid on October 31, 2015)

● $300,000 on completion on product validation (paid by January 2, 2017)

Under the terms of the NN1003 Agreement, we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold. As of September 30, 2017, we had paid $835,000 under the NN1003 Agreement.

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Segment Information

9 Months Ended

Sep. 30, 2017

Segment Information [Abstract]

Segment Information

7. Segment Information

We have one reportable segment, which is comprised of the touch technology licensing and sensor component business. All of our sales for the three and nine months ended September 30, 2017 and 2016 were to customers located in North America, Europe and Asia. The Company reports revenues from external customers based on the country where the customer is located. Of our total assets, 11% and 43% were held in the U.S. as of September 30, 2017 and December 31, 2016, respectively, and 88% and 55% were held in Sweden, respectively.

The following table presents net revenues by geographic area for the three and nine months ended September 30, 2017 and 2016 (in thousands):

	Three months ended  September 30, 2017					Three months ended  September 30, 2016
	Amount		Percentage			Amount		Percentage
United States	$	977		42	%	$	982		60	%
Canada		-		-	%		127		8	%
Japan		771		33	%		-		-	%
China		92		4	%		210		13	%
Taiwan		-		-	%		96		6	%
Germany		341		15	%		180		11	%
Other		124		6	%		44		2	%
	$	2,305		100	%	$	1,639		100	%

	Nine months ended  September 30, 2017					Nine months ended  September 30, 2016
	Amount		Percentage			Amount		Percentage
United States	$	3,203		46	%	$	4,080		56	%
Canada		-		-	%		379		5	%
Japan		1,666		24	%		-		-	%
China		631		9	%		1,010		14	%
Germany		911		13	%		551		8	%
Sweden		-		-	%		915		12	%
Other		555		8	%		410		6	%
	$	6,966		100	%	$	7,345		100	%

The following table presents long-lived assets by geographic region (in thousands)

	September 30, 2017		December 31, 2016
Long-lived assets in North America	$	4	$	2
Long lived assets in Asia		7		8
Long-lived assets in Europe		3,626		2,021
	$	3,637	$	2,031

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Net Loss Per Share

9 Months Ended

Sep. 30, 2017

Net Loss Per Share [Abstract]

Net Loss per Share

8. Net Loss per Share

Basic net loss per common share for the three and nine months ended September 30, 2017 and 2016 was computed by dividing the net loss attributable to Neonode Inc. for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to Neonode Inc. by the weighted average number of shares of common stock and common stock equivalents outstanding.

Potential common stock equivalents of approximately 0 and 5,000 outstanding stock options and 4.4 million and 5.2 million outstanding stock warrants under the treasury stock method, and 11,000 and 11,000 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share calculation for the nine months ended September 30, 2017 and 2016, respectively, due to their anti-dilutive effect.

(in thousands, except per share amounts)	Three months ended September 30,
	2017			2016
BASIC AND DILUTED
Weighted average number of common shares outstanding		55,166			46,252
Net loss attributable to Neonode Inc.	$	(1,115	)	$	(2,162	)
Net loss per share - basic and diluted	$	(0.02	)	$	(0.05	)

(in thousands, except per share amounts)	Nine months ended  September 30,
	2017			2016
BASIC AND DILUTED
Weighted average number of common shares outstanding		50,959			44,627
Net loss attributable to Neonode Inc.	$	(2,986	)	$	(4,860	)
Net loss per share - basic and diluted	$	(0.06	)	$	(0.11	)

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Subsequent Events

9 Months Ended

Sep. 30, 2017

Subsequent Events [Abstract]

Subsequent Events

9. Subsequent Events

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

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation

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

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

In June 2016, we entered into a Joint Venture (“JV”) with a Swedish based eye-tracking company SMART EYE AB. By combining our technologies, we plan to bring multi-chip modules to the market for the consumer and automotive markets that provide new opportunities for interaction with cars and devices. The name of the newly established JV is Neoeye AB (“Neoeye”).

We use the equity method of accounting to record our investments in the common stock of each entity in which Neonode has the ability to exercise significant influence, but does not own a majority equity interest. Under the equity method, our investment is originally included in equity interests at cost, and is adjusted to recognize our share of net earnings or losses of the investee, in our condensed consolidated balance sheets; our share of net income (loss) is reported in our condensed consolidated statements of operations according to our equity ownership in each entity.

The condensed consolidated balance sheets at September 30, 2017 and December 31, 2016 and the condensed consolidated statements of operations, comprehensive loss and cash flows for the three and nine months ended September 30, 2017 and 2016 include our accounts and those of our wholly owned subsidiaries, Neonode Technologies AB (Sweden), Neonode Americas Inc. (U.S.), Neonode Japan Inc. (Japan), NEON Technology Inc. (U.S.), Neno User Interface Solutions AB (Sweden), Neonode Korea Ltd. (South Korea) and Neonode Taiwan Ltd. (Taiwan), as well as Pronode Technologies AB (Sweden), a 51% majority owned subsidiary of Neonode Technologies AB.

Estimates

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires making estimates and assumptions 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. Significant estimates include, but are not limited to, provisions for uncollectible receivables and sales returns, warranty liabilities, the achievement of substantive milestones and vendor-specific objective evidence (“VSOE”) of fair value for purposes of revenue recognition (or deferral of revenue), net realizable value of inventory, recoverability of capitalized project costs and long-lived assets, the valuation allowance related to our deferred tax assets, and the fair value of options and warrants issued for stock-based compensation.

Cash

Cash

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

Concentration of Cash Balance Risks

Concentration of Credit and Business Risks

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

As of September 30, 2017, three customers represented approximately 80% of the Company’s accounts receivable.

As of December 31, 2016, three customers represented approximately 59% of the Company’s accounts receivable.

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 30%

● Canon – 17%

● Seiko Epson – 12%

● Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2017 are as follows:

● Hewlett Packard Company – 31%

● Canon – 15%

● Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 50%

● Bosch  – 11%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 42%

● Amazon – 13%

● Autoliv Development AB – 12%

Accounts Receivable and Allowance for Doubtful Accounts

Accounts Receivable and Allowance for Doubtful Accounts

Our accounts receivable are stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Where appropriate, we obtain credit rating reports and financial statements of the customer when determining or modifying its credit limits. We regularly evaluate the collectability of our trade receivable balances based on a combination of factors. When a customer’s account balance becomes past due, we initiate dialogue with the customer to determine the cause. If it is determined that the customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing, deterioration in the customer’s operating results or financial position or other material events impacting its business, we record a specific allowance to reduce the related receivable to the amount we expect to recover. Should all efforts fail to recover the related receivable, we will write-off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $149,000 as of September 30, 2017 and December 31, 2016, respectively.

Projects in process

Projects in Process

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our condensed consolidated balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. Costs capitalized in projects in process were $299,000 as of September 30, 2017. There were no costs capitalized in projects in process as of December 31, 2016.

Inventory

Inventory

Inventory is stated at the lower of cost, computed using the first-in, first-out method (“FIFO”) and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. As of September 30, 2017 and December 31, 2016, the Company’s inventory consists primarily of components that will be used in the manufacturing of our first sensor component, AirBar. We segregate inventory for reporting purposes by raw materials, work-in-process, and finished goods.

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

	September 30,		December 31,
	2017		2016
Raw materials	$	807	$	522
Work-in-Process		220		42
Finished goods		1,038		132
Ending inventory	$	2,065	$	696

Investment in JV

Investment in JV

We have invested $3,000, for a 50% interest in Neoeye AB (see above). We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and will be recognized in the consolidated statements of operations and will also be adjusted by contributions to and distributions from Neoeye. The Company is not required to guarantee any obligations of the JV. There have been no operations of Neoeye through September 30, 2017.

Neoeye, as an unconsolidated equity investee, will recognize revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), performance obligations under the license agreement are satisfied, and the realization of revenue is assured, which is generally upon the receipt of the license proceeds. Neoeye may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones have been met.

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

Property and Equipment

Property and Equipment

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 capital lease is recognized over the term of the lease, if that lease term is shorter than the estimated useful life.

Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the condensed consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.

Long-lived Assets

Long-lived Assets

We assess any impairment by estimating the future cash flow 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 September 30, 2017, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

Foreign Currency Translation and Transaction Gains and Losses

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 were $83,000 and $205,000 during the three and nine months ended September 30, 2017, respectively, compared to translation losses of $(36,000) and $(102,000) during the three and nine months ended September 30, 2016, respectively. Losses resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed consolidated statements of operations and were $(45,000) and $(24,000) during the three and nine months ended September 30, 2017, respectively, compared to gains of $25,000 and $59,000 during the same periods in 2016, respectively.

Concentration of Credit and Business Risks

Concentration of Credit and Business Risks

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

As of September 30, 2017, three customers represented approximately 80% of the Company’s accounts receivable.

As of December 31, 2016, three customers represented approximately 59% of the Company’s accounts receivable.

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 30%

● Canon – 17%

● Seiko Epson – 12%

● Robert Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2017 are as follows:

● Hewlett Packard Company – 31%

● Canon – 15%

● Robert Bosch – 11%

Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 50%

● Bosch  – 11%

Customers who accounted for 10% or more of our net revenues during the Nine months ended September 30, 2016 are as follows:

● Hewlett Packard Company – 42%

● Amazon – 13%

● Autoliv Development AB – 12%

Revenue Recognition

Revenue Recognition

Licensing Revenues:

We derive revenue from the licensing of 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 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. We follow U.S. GAAP for revenue recognition as per unit royalty products are distributed or licensed by our customers. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when: (1) we enter into a legally binding arrangement with a customer for the license of technology; (2) the customer distributes or licenses the products; (3) the customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) collection is reasonably assured. Our customers report to us the quantities of products distributed or licensed by them after the end of the reporting period stipulated in the contract, generally 30 to 45 days after the end of the month or quarter. We recognize licensing revenue in the period in which royalty reports are received, rather than the period in which the products are distributed or to which the license relates.

Explicit return rights are not offered to customers. There have been no returns through September 30, 2017.

Engineering Services:

We may sell engineering consulting services to our customers on a flat rate or hourly rate basis. We recognize revenue from these services when all of the following conditions are met: (1) evidence existed of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our services were performed and risk of loss passed to the customer; (3) we completed all of the necessary terms of the contract; (4) the amount of revenue to which we were entitled was fixed or determinable; and (5) we believed it was probable that we would be able to collect the amount due from the customer. To the extent that one or more of these conditions has not been satisfied, we defer recognition of revenue.

Generally, we recognize revenue as the engineering services stipulated under the contract are completed and accepted by our customers. Engineering services are performed under a signed Statement of Work (“SOW”) with a customer. The deliverables and payment terms stipulated under the SOW provide guidance on the project revenue recognition.

Revenues from contracts that are short-term in nature and related costs that are difficult to estimate are accounted for under the completed contract method.

Revenues from contracts with substantive defined milestones that we have determined are reasonable, relevant to all the deliverables and payment terms in the SOW that are commensurate with the efforts required to achieve the milestones are recognized under the milestone recognition method.

Estimated losses on all SOW projects are recognized in full as soon as they become evident. In the periods ended September 30, 2017 and 2016, no losses related to SOW projects were recorded.

Optical Sensor Components Revenues:

We derive revenue from the sales of sensor components hardware products sold directly to our OEM and Tier 1 supplier customers who embed our hardware into their products and from sales of branded consumer products that incorporate our sensor components sold to distributors or directly to end users. These distributors are generally given business terms that allow them to return a portion of inventory, receive credits for changes in selling prices, and participate in various cooperative marketing programs. We enter into sales agreements that generally provide customers with limited rights of return and warranty provisions. U.S. GAAP allows companies to make reasonable aggregations and approximations of returns data with regard to returns. Our returns and warranty experience to date has enabled us to make reasonable returns estimates, which are further supported by the fact that our product sales involve homogenous transactions.

Revenue is recognized when all of the following criteria have been met:

● Persuasive evidence of an arrangement exists. Contracts, Internet commerce agreements, and customer purchase orders are generally used to determine the existence of an arrangement.

● Delivery has occurred. Shipping documents and customer acceptance, when applicable, are used to verify delivery.

● The fee is fixed or determinable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

● Collectability is reasonably assured. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history.

In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. As our business and offerings are expected to evolve over time, our pricing practices may be required to be modified accordingly, which could result in changes in selling prices.

We make sales to distributors and revenue from distributors is recognized based on a sell-through basis using sales and inventory information provided by these distributors. Under the sell-through basis, accounts receivable are recognized and inventory is relieved upon shipment to the distributor as title to the inventory is transferred upon shipment, at which point we have a legally enforceable right to collection under normal terms. The associated sales and cost of sales are deferred and are included in deferred revenues in the consolidated balance sheet. When the related product is sold by our distributors to their end customers, at which time the ultimate price we receive is known, we recognize previously deferred revenues as sales and cost of sales. 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.

A reserve for future sales returns is established based on historical trends in product return rates. The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant as of September 30, 2017 and December 31, 2016. 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.

Product Warranty

Product Warranty

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

	September 30, 2017		December 31, 2016
Balance at beginning of period	$	11	$	-
Provisions for warranty issued		19		11
Balance at end of period	$	30	$	11

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

Deferred Revenues

Deferred Revenues

We defer license fees until we have met all accounting requirements for revenue recognition as per unit royalty products are distributed and royalty reports are received. Engineering development fee revenues are deferred until such time as the engineering work has been completed and accepted by our customers. As of September 30, 2017 and December 31, 2016, we have $0.8 million and $1.8 million, respectively, of deferred license fee revenue related to prepayments for future license fees from two and four customers, respectively. We defer AirBar revenues until distributors sell the AirBar to their end customers. As of September 30, 2017 and December 31, 2016 we had $0.2 million and $0.1 million, respectively, of deferred revenue from our AirBar sales. As of September 30, 2017 we had $0.3 million of deferred engineering development fees from two customers. As of December 31, 2016 there were no deferred engineering development fees.

Advertising

Advertising

Advertising costs are expensed as incurred. Advertising costs for the three and nine months ended September 30, 2017 amounted to approximately $216,000 and $529,000, respectively. Advertising costs for the three and nine months ended September 30, 2016 amounted to approximately $76,000 and $193,000, respectively.

Research and Development

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

Stock-Based Compensation Expense

We measure the cost of employee services received in exchange for an award of equity instruments, including stock 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, actual forfeitures.

We account for equity instruments issued to non-employees at their estimated fair value. The measurement date for the estimated fair value for the equity instruments issued is determined at the earlier of (1) the date at which a commitment for performance by the consultant or vendor is reached, or (2) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instruments is primarily recognized over the term of the consulting agreement. The estimated fair value of the stock-based compensation is periodically re-measured and income or expense is recognized during the vesting term.

When determining stock-based compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.

Noncontrolling Interests

Noncontrolling Interests

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

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

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

Income Taxes

Income Taxes

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

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of September 30, 2017 and December 31, 2016. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.

We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of September 30, 2017 and December 31, 2016, we had no unrecognized tax benefits.

Net Loss per Share

Net Loss per Share

Net loss per share amounts has been computed based on the weighted average number of shares of common stock outstanding during the three and nine months ended September 30, 2017 and 2016. Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period. The weighted-average number of shares of common stock and potential common stock equivalents used in computing the net loss per share for the three and nine months ended September 30, 2017 and 2016 exclude the potential common stock equivalents, as the effect would be anti-dilutive (See Note 8).

Other Comprehensive Income (Loss)

Other Comprehensive Income (Loss)

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

Cash Flow Information

Cash Flow Information

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

	Nine months ended September 30,
	2017		2016
Swedish Krona		8.62		8.39
Japanese Yen		111.91		108.60
South Korean Won		1,136.27		1,158.23
Taiwan Dollar		30.51		32.38

Exchange rate for the consolidated balance sheets was as follows:

	Periods Ended
	September 30,		December 31,
	2017		2016
Swedish Krona		8.13		9.07
Japanese Yen		112.45		116.97
South Korean Won		1,151.20		1,205.11
Taiwan Dollar		30.32		32.28

Fair Value of Financial Instruments

Fair Value of Financial Instruments

We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.

New Accounting Pronouncements

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 amends the guidance for revenue recognition to replace numerous, industry specific requirements and converges areas under this topic with those of the International Financial Reporting Standards. The ASU implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. The amendment also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Other major provisions include the capitalization and amortization of certain contract costs, ensuring the time value of money is considered in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On July 9, 2015, the FASB approved amendments deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date and permitting early adoption of the standard, but not before the original effective date or for reporting periods beginning after December 15, 2016. We are currently compiling a complete list of our contracts, and we are finalizing our implementation plan. We expect to select the cumulative effect (modified retrospective) approach for our transition, because we believe that implementation of the new standard will not have a material impact on our consolidated financial statements. However, we do expect increased disclosures upon implementation of the new standard.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. We currently have a limited number of leased capital assets. We maintain a lease inventory for those assets, and they are currently reported on our condensed consolidated balance sheets. We also have a small number of leases which are currently classified as operating leases; we will compile and analyze those leases during the transition to the new standard. We expect that the transition may result in additions and changes to classifications on our condensed consolidated balance sheets, and changes to disclosures. However, because of the small number of assets we lease, we do not need to make systems changes to comply with the new standard. We plan to continue to track those leased assets outside of our accounting systems. We will assess the accounting and possible tax impacts during the coming months; however, we do not expect material changes in financial ratios, leasing practices, or tax reporting.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments”, (“ASU 2016-13”). 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 will become effective for the Company for fiscal years beginning after December 15, 2019, with early adoption permitted. We do not expect to adopt this standard early. We are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements.

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Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2017

Summary of Significant Accounting Policies [Abstract]

Schedule of inventory

	September 30,		December 31,
	2017		2016
Raw materials	$	807	$	522
Work-in-Process		220		42
Finished goods		1,038		132
Ending inventory	$	2,065	$	696

Schedule of estimated useful lives of property and equipment

Computer equipment	3 years
Furniture and fixtures	5 years
Equipment	7 years

Schedule of activity related to the product warranty liability

	September 30, 2017		December 31, 2016
Balance at beginning of period	$	11	$	-
Provisions for warranty issued		19		11
Balance at end of period	$	30	$	11

Schedule of weighted-average exchange rate for the condensed consolidated statements of operations

	Nine months ended September 30,
	2017		2016
Swedish Krona		8.62		8.39
Japanese Yen		111.91		108.60
South Korean Won		1,136.27		1,158.23
Taiwan Dollar		30.51		32.38

Schedule of exchange rate for the consolidated balance sheets

	Periods Ended
	September 30,		December 31,
	2017		2016
Swedish Krona		8.13		9.07
Japanese Yen		112.45		116.97
South Korean Won		1,151.20		1,205.11
Taiwan Dollar		30.32		32.28

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Stockholders' Equity (Tables)

9 Months Ended

Sep. 30, 2017

Stockholders' Equity [Abstract]

Schedule of conversion of preferred stock issued to common stock

	Shares of Preferred Stock Not Exchanged as of September 30, 2017		Conversion Ratio		Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged at September 30, 2017
Series B Preferred stock		83		132.07		10,962

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2017

Stock-Based Compensation [Abstract]

Summary of stock-based compensation expense

	Three months ended  September 30,				Nine months ended  September 30,
	2017		2016		2017		2016
Research and development	$	-	$	8	$	-	$	48
Sales and marketing		11		19		39		132
General and administrative		6		27		17		44
Total stock-based compensation expense	$	17	$	54	$	56	$	224

	Remaining unrecognized  expense at September 30, 2017
Stock-based compensation	$	28

Summary of the combined activity under all of the stock option plans

	Number of Options Outstanding			Weighted Average Exercise Price
Outstanding at January 1, 2017		1,846,000		$	4.39
Granted		-			-
Forfeited		(90,000	)		8.21
Outstanding at September 30, 2017		1,756,000		$	4.20

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Segment Information (Tables)

9 Months Ended

Sep. 30, 2017

Segment Information [Abstract]

Summary of net revenues by geographic region

	Three months ended  September 30, 2017					Three months ended  September 30, 2016
	Amount		Percentage			Amount		Percentage
United States	$	977		42	%	$	982		60	%
Canada		-		-	%		127		8	%
Japan		771		33	%		-		-	%
China		92		4	%		210		13	%
Taiwan		-		-	%		96		6	%
Germany		341		15	%		180		11	%
Other		124		6	%		44		2	%
	$	2,305		100	%	$	1,639		100	%

	Nine months ended  September 30, 2017					Nine months ended  September 30, 2016
	Amount		Percentage			Amount		Percentage
United States	$	3,203		46	%	$	4,080		56	%
Canada		-		-	%		379		5	%
Japan		1,666		24	%		-		-	%
China		631		9	%		1,010		14	%
Germany		911		13	%		551		8	%
Sweden		-		-	%		915		12	%
Other		555		8	%		410		6	%
	$	6,966		100	%	$	7,345		100	%

Schedule of long-lived assets by geographic region

	September 30, 2017		December 31, 2016
Long-lived assets in North America	$	4	$	2
Long lived assets in Asia		7		8
Long-lived assets in Europe		3,626		2,021
	$	3,637	$	2,031

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Net Loss Per Share (Tables)

9 Months Ended

Sep. 30, 2017

Net Loss Per Share [Abstract]

Schedule of basic and diluted for net loss per share

(in thousands, except per share amounts)	Three months ended September 30,
	2017			2016
BASIC AND DILUTED
Weighted average number of common shares outstanding		55,166			46,252
Net loss attributable to Neonode Inc.	$	(1,115	)	$	(2,162	)
Net loss per share - basic and diluted	$	(0.02	)	$	(0.05	)

(in thousands, except per share amounts)	Nine months ended  September 30,
	2017			2016
BASIC AND DILUTED
Weighted average number of common shares outstanding		50,959			44,627
Net loss attributable to Neonode Inc.	$	(2,986	)	$	(4,860	)
Net loss per share - basic and diluted	$	(0.06	)	$	(0.11	)

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Interim Period Reporting (Details) - USD ($)	1 Months Ended			3 Months Ended		9 Months Ended		12 Months Ended
	Aug. 31, 2017	Mar. 31, 2017	Aug. 31, 2016	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2010	Aug. 02, 2017	Dec. 31, 2016
Interim Period Reporting (Textual)
Number of equipment sold								$ 52,000,000
Net loss				$ (1,115,000)	$ (2,162,000)	$ (2,986,000)	$ (4,860,000)
Accumulated deficit				$ (182,026,000)		(182,026,000)				$ (179,040,000)
Net cash used in operating activities						(4,691,000)	(3,717,000)
Net proceeds from issuance of common stock						$ 9,082,000	$ 7,911,000
Shelf registration common stock offering price		$ 20,000,000
Shelf registration statement expiration date		Mar. 24, 2020
August 2017 Private Placement [Member]
Interim Period Reporting (Textual)
Issuance of common stock						3,250,000
Share price									$ 1.00
Cash proceeds from warrants						$ 6,500,000
Warrants purchase exercise price									2.00
Securities Purchase Agreement [Member]
Interim Period Reporting (Textual)
Net proceeds from issuance of common stock	$ 9,100,000
Securities Purchase Agreement [Member] | August 2016 Private Placement [Member]
Interim Period Reporting (Textual)
Issuance of common stock			9,750,000
Net proceeds from issuance of common stock			$ 7,900,000
Securities Purchase Agreement [Member] | August 2017 Private Placement [Member]
Interim Period Reporting (Textual)
Issuance of common stock	9,750,000
Net proceeds from issuance of common stock	$ 9,750,000
Share price									1.00
Warrant expiration date	Aug. 08, 2020
Proceeds from private placement	$ 1,700,000
Warrants to purchase shares of common stock	3,250,000
Warrants purchase exercise price									$ 2.00
Aggregate purchase price of warrants	$ 9,750,000
Warrant exercisable, description	The 2017 Warrants will become exercisable on August 8, 2018, and will expire on August 8, 2020.
Warrants exercised value	$ 6.5
Purchase Warrants [Member] | August 2016 Private Placement [Member]
Interim Period Reporting (Textual)
Issuance of common stock			4,313,676
Share price			$ 1.12
Cash proceeds from warrants			$ 4,800,000
Warrant expiration date			Feb. 17, 2022
Employee Investor Shares [Member] | August 2016 Private Placement [Member]
Interim Period Reporting (Textual)
Issuance of common stock			427,352
Net proceeds from issuance of common stock			$ 500,000
Share price			$ 1.17
Outside Investor Shares [Member] | August 2016 Private Placement [Member]
Interim Period Reporting (Textual)
Issuance of common stock			4,600,000
Net proceeds from issuance of common stock			$ 4,600,000
Share price			$ 1.00

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Summary of Significant Accounting Policies (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Summary of Significant Accounting Policies [Abstract]
Raw materials	$ 807	$ 522
Work-in-Process	220	42
Finished goods	1,038	132
Ending inventory	$ 2,065	$ 696

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Summary of Significant Accounting Policies (Details 1)	9 Months Ended
	Sep. 30, 2017
Computer equipment [Member]
Estimated useful lives of property and equipment
Estimated useful lives	3 years
Furniture and fixtures [Member]
Estimated useful lives of property and equipment
Estimated useful lives	5 years
Equipment [Member]
Estimated useful lives of property and equipment
Estimated useful lives	7 years

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Summary of Significant Accounting Policies (Details 2) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Summary of Significant Accounting Policies [Abstract]
Balance at beginning of period	$ 11
Provisions for warranty issued	19	11
Balance at end of period	$ 30	$ 11

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Summary of Significant Accounting Policies (Details 3)	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Swedish Krona [Member]
Weighted-average exchange rate for the condensed consolidated statements of operations
Weighted-average exchange rate	8.62	8.39
Japanese Yen [Member]
Weighted-average exchange rate for the condensed consolidated statements of operations
Weighted-average exchange rate	111.91	108.60
South Korean Won [Member]
Weighted-average exchange rate for the condensed consolidated statements of operations
Weighted-average exchange rate	1,136.27	1,158.23
Taiwan Dollar [Member]
Weighted-average exchange rate for the condensed consolidated statements of operations
Weighted-average exchange rate	30.51	32.38

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Summary of Significant Accounting Policies (Details 4)	Sep. 30, 2017	Dec. 31, 2016
Swedish Krona [Member]
Exchange rate for the consolidated balance sheets
Exchange rate	8.13	9.07
Japanese Yen [Member]
Exchange rate for the consolidated balance sheets
Exchange rate	112.45	116.97
South Korean Won [Member]
Exchange rate for the consolidated balance sheets
Exchange rate	1,151.20	1,205.11
Taiwan Dollar [Member]
Exchange rate for the consolidated balance sheets
Exchange rate	30.32	32.28

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Summary of Significant Accounting Policies (Details Textual)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Sep. 30, 2017 USD ($) Customers	Sep. 30, 2016 USD ($)	Dec. 31, 2016 USD ($) Customers	Sep. 30, 2017 TWD	Sep. 30, 2017 SEK	Sep. 30, 2017 JPY (¥)	Sep. 30, 2017 KRW (₩)
Summary of Significant Accounting Policies (Textual)
Deferred license fee revenue	$ 1,299,000		$ 1,299,000		$ 1,921,000
Basic deposit coverage limits per owner and customer	250,000		250,000			TWD 3,000,000	SEK 100,000	¥ 10,000,000	₩ 50,000,000
Allowance for doubtful accounts	149,000		149,000		149,000
Costs capitalized in projects in process			299,000
Foreign currency translation adjustments	83,000	$ (36,000)	205,000	$ (102,000)
Foreign currency translation, general and administrative expenses	(45,000)	25,000	(24,000)	59,000
Investment in joint venture	$ 3,000		$ 3,000		3,000
Equity ownership percentage	50.00%		50.00%			50.00%	50.00%	50.00%	50.00%
Advertising costs	$ 216,000	$ 76,000	$ 529,000	$ 193,000
Noncontrolling interest owned by Pronode Technologies AB	51.00%		51.00%			51.00%	51.00%	51.00%	51.00%
Noncontrolling interest owned by Propoint AB	49.00%		49.00%			49.00%	49.00%	49.00%	49.00%
Noncontrolling interest, description			Noncontrolling interests' partners have less than 50% share of voting rights at any one of the subsidiary level companies.
Prepayments for Future License Fees [Member]
Summary of Significant Accounting Policies (Textual)
Deferred license fee revenue	$ 800,000		$ 800,000		$ 1,800,000
Number of customer | Customers			2		4
Deferred Engineering Development Fees [Member]
Summary of Significant Accounting Policies (Textual)
Deferred license fee revenue	$ 300,000		$ 300,000
Number of customer | Customers			2
Maximum [Member]
Summary of Significant Accounting Policies (Textual)
Equity ownership percentage	50.00%		50.00%			50.00%	50.00%	50.00%	50.00%
Warrant term			36 months
Minimum [Member]
Summary of Significant Accounting Policies (Textual)
Equity ownership percentage	20.00%		20.00%			20.00%	20.00%	20.00%	20.00%
Warrant term			12 months
Sweden [Member]
Summary of Significant Accounting Policies (Textual)
Concentration risk, percentage			88.00%		55.00%
Noncontrolling interest owned by Pronode Technologies AB	51.00%		51.00%			51.00%	51.00%	51.00%	51.00%
Accounts Receivable [Member]
Summary of Significant Accounting Policies (Textual)
Number of customer | Customers			3		3
Concentration risk, percentage			80.00%		59.00%
Hewlett Packard Company [Member] | Net Revenues [Member]
Summary of Significant Accounting Policies (Textual)
Concentration risk, percentage	30.00%	50.00%	31.00%	42.00%
Amazon [Member] | Net Revenues [Member]
Summary of Significant Accounting Policies (Textual)
Concentration risk, percentage				13.00%
Autoliv Development AB [Member] | Net Revenues [Member]
Summary of Significant Accounting Policies (Textual)
Concentration risk, percentage				12.00%
Bosch [Member] | Net Revenues [Member]
Summary of Significant Accounting Policies (Textual)
Concentration risk, percentage	11.00%	11.00%	11.00%
Canon [Member] | Net Revenues [Member]
Summary of Significant Accounting Policies (Textual)
Concentration risk, percentage	17.00%		15.00%
Airbar Sales [Member]
Summary of Significant Accounting Policies (Textual)
Deferred revenue	$ 200,000		$ 200,000		$ 100,000
Seiko Epson [Member] | Net Revenues [Member]
Summary of Significant Accounting Policies (Textual)
Concentration risk, percentage	12.00%

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Note Payable (Details)	9 Months Ended
	Sep. 30, 2017 USD ($)	Sep. 01, 2017	Jun. 09, 2017 SEK
Note Payable (Textual)
Short-term unsecured loan agreement and issued note payable with principal amount | SEK			SEK 15,000,000
Interest rate		2.50%
Total interest amount | $	$ 8,900

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Stockholders' Equity (Details) - Series B Preferred Stock [Member]	9 Months Ended
	Sep. 30, 2017 shares
Schedule of conversion of preferred stock issued to common stock
Shares of Preferred Stock Not Exchanged	83
Conversion Ratio	132.07
Shares of Common Stock after Conversion of all Outstanding Shares of Preferred Stock Not yet Exchanged	10,962

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Stockholders' Equity (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	9 Months Ended		12 Months Ended
	Aug. 31, 2017	Sep. 30, 2017	Sep. 30, 2016	Dec. 31, 2016	Oct. 06, 2017	Aug. 02, 2017
Stockholders' Equity (Textual)
Warrants to purchase common stock outstanding		11,163,676		7,913,677
Gross proceeds warrants for an aggregate purchase price		$ 9,082	$ 7,911
Common stock, shares authorized		100,000,000		100,000,000
August 2017 Private Placement [Member]
Stockholders' Equity (Textual)
Issuance of common stock		3,250,000
Share price						$ 1.00
Cash proceeds from warrants		$ 6,500
Warrant, description		The 2017 Warrants will become exercisable 12 months from the date of issuance and will expire three years from the date of issuance.
Subsequent Event [Member]
Stockholders' Equity (Textual)
Common stock, shares authorized					100,000,000
Securities Purchase Agreement [Member]
Stockholders' Equity (Textual)
Gross proceeds warrants for an aggregate purchase price	$ 9,100
Securities Purchase Agreement [Member] | August 2017 Private Placement [Member]
Stockholders' Equity (Textual)
Issuance of common stock	9,750,000
Gross proceeds warrants for an aggregate purchase price	$ 9,750
Share price						$ 1.00
Warrant expiration date	Aug. 08, 2020
2017 Securities Private Placement [Member]
Stockholders' Equity (Textual)
Share price		$ 2.00

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Stock-Based Compensation (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Summary of stock-based compensation expense
Total stock-based compensation expense	$ 17	$ 54	$ 56	$ 224
Remaining unrecognized expense, Stock-based compensation	28		28
Research and development [Member]
Summary of stock-based compensation expense
Total stock-based compensation expense		8		48
Sales and marketing [Member]
Summary of stock-based compensation expense
Total stock-based compensation expense	11	19	39	132
General and administrative [Member]
Summary of stock-based compensation expense
Total stock-based compensation expense	$ 6	$ 27	$ 17	$ 44

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Stock-Based Compensation (Details 1) - Stock options [Member]	9 Months Ended
	Sep. 30, 2017 $ / shares shares
Summary of all stock option plans
Number of Options Outstanding, Beginning Balance | shares	1,846,000
Number of Options Outstanding, Granted | shares
Number of Options Outstanding, Forfeited | shares	(90,000)
Number of Options Outstanding, Ending Balance | shares	1,756,000
Weighted Average Exercise Price, Outstanding, Beginning Balance | $ / shares	$ 4.39
Weighted Average Exercise Price, Granted | $ / shares
Weighted Average Exercise Price, Forfeited | $ / shares	8.21
Weighted Average Exercise Price, Outstanding, Ending Balance | $ / shares	$ 4.20

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Stock-Based Compensation (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016	Jan. 01, 2017	Dec. 31, 2016	Dec. 31, 2015
Stock-Based Compensation (Textual)
Vesting period			4 months 24 days
Share-based compensation expense	$ 17,000	$ 54,000	$ 56,000	$ 224,000
Stock options [Member]
Stock-Based Compensation (Textual)
Aggregate vested options to purchase shares							265,000
Number of options outstanding	1,756,000		1,756,000		1,846,000	1,846,000
Options outstanding, vested and expected to vest, aggregate intrinsic value	$ 0		$ 0
Term of stock options description			Stock options granted under the 2006 and 2015 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

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Commitments and Contingencies (Details) - USD ($)

1 Months Ended

9 Months Ended

Dec. 04, 2014

Apr. 25, 2013

Sep. 30, 2017

Commitments and Contingencies (Textual)

Non-recurring engineering development costs contributed to TI

$ 835,000

$ 500,000

Description of NRE cost distributed to TI

Under the terms of the NN1002 Agreement we will reimburse Texas Instruments a non-recurring engineering fee of $0.25 per unit for each of the first two million units sold.

Non recurring engineering costs description

● $235,000 at the feasibility review and contract signature (paid on January 20, 2015)

● $300,000 on completion of tape-out (paid on October 31, 2015)

● $300,000 on completion on product validation (paid by January 2, 2017)

Capital lease payment description

Under the terms of the NN1003 Agreement, we also will reimburse ST Microelectronics a non-recurring engineering fee of $5.00 per each of the first 10,000 units sold.

Non recurring engineering fee amount

$ 835,000

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Segment Information (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
Summary of net revenues by geographic region
Total revenues	$ 2,305	$ 1,639	$ 6,966	$ 7,345
Revenues percentage	100.00%	100.00%	100.00%	100.00%
United States [Member]
Summary of net revenues by geographic region
Total revenues	$ 977	$ 982	$ 3,203	$ 4,080
Revenues percentage	42.00%	60.00%	46.00%	56.00%
Canada [Member]
Summary of net revenues by geographic region
Total revenues		$ 127		$ 379
Revenues percentage		8.00%		5.00%
Japan [Member]
Summary of net revenues by geographic region
Total revenues	$ 771		$ 1,666
Revenues percentage	33.00%		24.00%
China [Member]
Summary of net revenues by geographic region
Total revenues	$ 92	$ 210	$ 631	$ 1,010
Revenues percentage	4.00%	13.00%	9.00%	14.00%
Taiwan [Member]
Summary of net revenues by geographic region
Total revenues		$ 96
Revenues percentage		9.00%
Germany [Member]
Summary of net revenues by geographic region
Total revenues	$ 341	$ 180	$ 911	$ 551
Revenues percentage	15.00%	11.00%	13.00%	8.00%
Sweden [Member]
Summary of net revenues by geographic region
Total revenues				$ 915
Revenues percentage				12.00%
Other [Member]
Summary of net revenues by geographic region
Total revenues	$ 124	$ 44	$ 555	$ 410
Revenues percentage	6.00%	2.00%	8.00%	6.00%

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Segment Information (Details 1) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	$ 3,637	$ 2,031
North America [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	4	2
Asia [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	7	8
Europe [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Long-Lived Assets	$ 3,626	$ 2,021

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Segment Information (Details Textual) - Segment	9 Months Ended	12 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
U.S.
Segment Information (Textual)
Number of reportable segments	1
Percentage of sales	11.00%	43.00%
Sweden
Segment Information (Textual)
Percentage of sales	88.00%	55.00%

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Net Loss Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Sep. 30, 2016
BASIC AND DILUTED
Weighted average number of common shares outstanding	55,166	46,252	50,959	44,627
Net loss attributable to Neonode Inc.	$ (1,115)	$ (2,162)	$ (2,986)	$ (4,860)
Net loss per share - basic and diluted	$ (0.02)	$ (0.05)	$ (0.06)	$ (0.11)

XML

Net Loss Per Share (Details Textual) - shares	9 Months Ended
	Sep. 30, 2017	Sep. 30, 2016
Stock Option [Member]
Net Loss Per Share (Textual)
Antidilutive securities excluded from computation of earnings per share	0	5,000
Warrant [Member]
Net Loss Per Share (Textual)
Antidilutive securities excluded from computation of earnings per share	4,400,000	5,200,000
Convertible Preferred Stock [Member]
Net Loss Per Share (Textual)
Antidilutive securities excluded from computation of earnings per share	11,000	11,000