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Item 7. Management’s Discussion and Analysis

2025-03-21 compared with 2024-02-28 · 300 added, 544 removed, 41 unchanged (95% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be

read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report.

Our company provides advanced optical sensing solutions

for touch, contactless touch, and gesture sensing.

We also provide software solutions for machine perception that feature advanced machine

learning algorithms to detect and track persons and objects in video streams for cameras and other types of imagers.

We base our contactless

touch, touch, and gesture sensing products and solutions using our zForce technology platform and our machine perception solutions on

our MultiSensing technology platform.

We market and sell our solutions to customers in many different markets and segments including,

but not limited to, office equipment, automotive, industrial automation, medical, military and avionics.

In 2010, we began licensing to Original Equipment

Manufacturers (“OEMs”) and Tier 1 suppliers who embed our technology into products they develop, manufacture, and sell.

2010, our licensing customers have sold approximately 95 million devices that use our technology.

In 2017, we augmented our licensing

business and began manufacturing and shipping touch sensor modules (“TSMs”) that incorporate our patented technology.

these TSMs to OEMs, Original Design Manufacturers (“ODMs”), and systems integrators for use in their products.

As of December 31, 2023, we had 34 valid technology

license agreements with global OEMs, ODMs and Tier 1 suppliers.

As of December 31, 2022, that number was 35.

During the year ended December

31, 2023, we had 10 customers using our touch technology in products that were being shipped to their customers.

The majority of our license

fees earned in 2023 and 2022 were from customer shipments of printers.

As of December 31, 2023, we had nine agreements with value added resellers

(“VARs”) for integration of our TSMs in the products they offer to global OEMs, ODMs and systems integrators.

to this, we distribute our TSMs through Digi-Key Corporation, Serial Microelectronics HK Ltd, and Nexty Electronics Corporation.

2023, our three distributors sold and shipped approximately 7,400 TSMs and related development kits.

During 2023 and 2022, we continued to focus our

efforts on maintaining our current licensing customers and achieving design wins for new products both with current and future customers.

In parallel we continued to market and sell TSMs directly and indirectly via partners.

We made investments enhancing the design and improving

the production yield of our TSMs and improving the related firmware and configuration tools software platforms.

We also made investments

to expand our partner networks for sales and distribution of TSMs.

On December 12, 2023, the Company announced a new,

sharpened strategy with full focus on the licensing business.

Consequently, we will phase out the TSM product business during 2024 through

licensing of the TSM technology to strategic partners or outsourcing.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been

prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and include

the accounts of Neonode Inc.

and its wholly owned subsidiaries, as well as Pronode Technologies AB (Sweden), wholly owned subsidiary of

Neonode Technologies AB, one of our wholly owned subsidiaries.

The noncontrolling interests are reported below net loss including noncontrolling

interests under the heading “Net loss attributable to noncontrolling interests” in the consolidated statements of operations,

below comprehensive loss under the heading “Comprehensive loss attributable to noncontrolling interests” in the consolidated

statements of comprehensive loss and shown as a separate component of stockholders’ equity in the consolidated balance sheets.

“Noncontrolling Interests” below for further discussion.

All inter-company accounts and transactions have been eliminated

in consolidation.

The accounting policies affecting our financial

condition and results of operations are more fully described in Note 2 of our consolidated financial statements.

Certain of our accounting

policies require the application of judgment by management in selecting appropriate assumptions for calculating financial estimates, which

inherently contain some degree of uncertainty.

Management bases its estimates on historical experience and various other assumptions that

are believed to be reasonable under the circumstances.

The historical experience and assumptions form the basis for making judgments about

the reported carrying values of assets and liabilities and the reported amounts of revenue and expenses that may not be readily apparent

from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

We believe the following

are critical accounting policies and related judgments and estimates used in the preparation of our consolidated financial statements.

The preparation of financial statements in conformity

GAAP requires making estimates and judgments that affect, at the date of the financial statements, the reported amounts of assets

and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.

Actual results could

differ from these estimates and judgments.

Significant estimates and judgments include, but

are not limited to:

for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone

selling price of performance obligations, and transaction prices and assessing transfer of control;

measuring variable consideration and

other obligations such as product returns and refunds, and product warranties;

provisions for uncollectible receivables;

determining the

net realizable value of inventory;

recoverability of long-lived asset;

for leases, determining whether a contract contains a lease, allocating

consideration between lease and non-lease components, determining incremental borrowing rates, and identifying reassessment events, such

as modifications;

the valuation allowance related to our deferred tax assets;

and the fair value of options issued for stock-based compensation.

Revenue Recognition

We recognize revenue when control of products is

transferred to our customers, and when services are completed and accepted by our customers;

the amount of revenue we recognize reflects

the consideration we expect to receive for those products or services.

Our contracts with customers may include combinations of products

and services (e.g., a contract that includes products and related engineering services).

We structure our contracts such that distinct

performance obligations, such as product sales or license fees, and related engineering services, are clearly defined in each contract.

License fees and sales of our TSMs are on a per-unit

Therefore, we generally satisfy performance obligations as units are shipped to our customers.

Non-recurring engineering service

performance obligations are satisfied as work is performed and accepted by our customers.

We recognize revenue net of allowances for returns

and any taxes collected from customers, which are subsequently remitted to governmental authorities.

We treat all product shipping and

handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods.

Therefore, we treat all shipping

and handling charges as expenses.

We earn revenue from licensing our internally developed

intellectual property (“IP”).

We enter into IP licensing agreements that generally provide licensees the right to incorporate

our IP components into their products, with terms and conditions that vary by licensee.

Fees under these agreements may include license

fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed

The license for our IP has standalone value and can be used by the licensee without maintenance and support.

For technology license arrangements that do not

require significant modification or customization of the underlying technology, we recognize technology license revenue when the license

is made available to the customer and the customer has a right to use that license.

At the end of each reporting period, we record unbilled

license fees, using prior royalty revenue data by customer to make estimates of those royalties.

Explicit return rights are not offered to customers.

There have been no returns through December 31, 2023.

Product Sales

We earn revenue from sales of TSM hardware products

to our OEM, ODM and Tier 1 supplier customers, who embed our hardware into their products, and from sales of branded consumer products

that incorporate our TSMs that are sold through distributors or directly to end users.

These distributors are generally given business

terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate in various cooperative

marketing programs.

Our sales agreements generally provide customers with limited rights of return and warranty provisions.

Because we use distributors to provide TSMs to

our customers, we must analyze the terms of our distributor agreements to determine when control passes from us to our distributors.

sales of TSMs sold through distributors, we recognize revenues when our distributors obtain control over our products.

Control passes

to our distributors when we have a present right to payment for products sold to the distributors, the distributors have legal title to

and physical possession of products purchased from us, and the distributors have significant risks and rewards of ownership of products

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.

GAAP, companies may make reasonable

aggregations and approximations of returns data to accurately estimate returns.

Our TSM returns and warranty experience to date has enabled

us to make reasonable returns estimates, which are supported by the fact that our product sales involve homogenous transactions.

for future sales returns is recorded as a reduction of our accounts receivable and revenue and was $8,000 and $9,000 as of December 31,

2023 and 2022, respectively.

The warranty reserve is recorded as an accrued expense and cost of sales and was $30,000 and $49,000 as of

December 31, 2023 and 2022, respectively.

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.

Non-Recurring Engineering

For technology license or TSM contracts that require

modification or customization of the underlying technology to adapt the technology to customer use, we determine whether the technology

license or TSM, and required engineering consulting services represent separate performance obligations.

We perform our analysis on a

contract-by-contract basis.

If there are separate performance obligations, we determine the standalone selling price (“SSP”)

of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied.

We provide engineering

consulting services to our customers under a signed Statement of Work (“SOW”).

Deliverables and payment terms are specified

We generally charge an hourly rate for engineering services, and we recognize revenue as engineering services specified in

contracts are completed and accepted by our customers.

Any upfront payments we receive for future non-recurring engineering are recorded

as unearned revenue until that revenue is earned.

We believe that recognizing revenue from non-recurring

engineering as progress towards completion of engineering services and customer acceptance of those services occurs best reflects the

economics of those transactions, because engineering services as tracked in our systems correspond directly with the value to our customers

of our performance completed to date.

Hours performed for each engineering project are tracked and reflect progress made on each project

and are charged at a consistent hourly rate.

Revenues from non-recurring engineering contracts

that are short-term in nature are recorded when those services are complete and accepted by customers.

Revenues from non-recurring engineering contracts

with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required to produce such deliverables

are recognized as they are completed and accepted by customers.

Estimated losses on all SOW projects are recognized

in full as soon as they become evident.

During the years ended December 31, 2023 and 2022, we recorded no losses.

Accounts Receivable and Credit Losses

Accounts receivable is stated

at net realizable value.

We estimate and record a provision for expected credit losses related to our financial instruments, including

our trade receivables.

We consider historical collection rates, the current financial status of our customers, macroeconomic factors,

and other industry-specific factors when evaluating for current expected credit losses.

Forward-looking information is also considered

in the evaluation of current expected credit losses.

However, because of the short time to the expected receipt of accounts receivable,

we believe that the carrying value, net of expected losses, approximates fair value and therefore, we rely more on historical and current

analysis of such financial instruments, including our trade receivables.

Further, we consider macroeconomic

factors and the status of the technology industry to estimate if there are current expected credit losses within our trade receivables

based on the trends and our expectation of the future status of such economic and industry-specific factors.

Also, specific allowance

amounts are established based on review of outstanding invoices to record the appropriate provision for customers that have a higher probability

The accounts receivable balance

on our consolidated balance sheet as of December 31, 2023 was $0.9 million, net of approximately $30,000 of allowances.

The following

table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable

to present the net amount expected to be collected at December 31, 2023:

Balance at January 1, 2023

Change in expected credit losses

Write-offs, net of recoveries

Balance at December 31, 2023

The Company’s

inventory consists primarily of components that will be used in the manufacturing of our TSMs.

We classify inventory for reporting purposes

as raw materials, work-in-process, and finished goods.

is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method.

Net realizable

value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and

transportation.

Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current

With the new, sharpened strategy, announced in December 2023, the Company

focuses solely on the licensing business.

Consequently, we will phase out the TSM product business through licensing of the TSM technology

to strategic partners or outsourcing.

Management has decided to reserve TSM related raw materials which are expected to remain after production

ends in 2024.

The TSM inventory reserve was $3.6 million as of December 31, 2023.

Due to the low sell-through of

our AirBar products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials

and finished goods.

The AirBar inventory reserve was $0.3 million as of December 31,

In 2023, management decided to scrap the fully reserved AirBar inventory.

Research and Development

Research and development (“R&D”) costs are expensed

R&D costs consist mainly of personnel-related costs in addition to some external consultancy costs such as testing, certifying

and measurements.

Stock-Based Compensation Expense

We measure the cost of employee services received

in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award on the grant date,

and recognize the value as compensation expense over the period the employee is required to provide services in exchange for the award,

usually the vesting period.

We account for equity instruments issued to non-employees

at their estimated fair value.

When determining stock-based compensation expense

involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.

Noncontrolling Interests

We recognize any noncontrolling interest, also

known as a minority interest, as a separate line item in stockholders’ equity in the consolidated financial statements.

A noncontrolling

interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us.

Generally, any interest

that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest;

however, there are other factors,

such as decision-making rights, that are considered as well.

We include the amount of net income (loss) attributable to noncontrolling

interests in consolidated net income (loss) on the face of the consolidated statements of operations.

The Company provides either in the consolidated

statement of stockholders’ equity, if presented, or in the notes to consolidated financial statements, a reconciliation at the beginning

and the end of the period of the carrying amount of total equity (net assets), equity (net assets) attributable to the Company, and equity

(net assets) attributable to the noncontrolling interest that separately discloses:

Net income or loss;

Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners;

Each component of other comprehensive income or loss.

Net Loss per Share

Net loss per share amounts have been computed based

on the weighted-average number of shares of common stock outstanding during the years ended December 31, 2023 and 2022.

Net loss per share,

assuming dilution amounts from common stock equivalents, is computed based on the weighted-average number of shares of common stock and

potential common stock equivalents outstanding during the period.

The weighted-average number of shares of common stock and potential

common stock equivalents used in computing the net loss per share for years ended December 31, 2023 and 2022 exclude the potential common

stock equivalents, as the effect would be anti-dilutive.

Contract Liabilities

Contract liabilities (deferred revenues) consist

primarily of prepayments for license fees, and other products or services that we have been paid in advance.

We earn the revenue when

we transfer control of the product or service.

Deferred revenues may also include upfront payments for consulting services to be performed

in the future, such as non-recurring engineering services.

We defer license fees until we have met all accounting

requirements for revenue recognition, which is when a license is made available to a customer and that customer has a right to use the

Non-recurring engineering fee revenues are deferred until engineering services have been completed and accepted by our customers.

The following table presents our deferred revenues

by source (in thousands):

Deferred revenues license fees

Deferred revenues products

Deferred revenues non-recurring engineering

Results of Operations

A summary of our financial results for the years

ended December 31, 2023 and 2022 is as follows (in thousands, except percentages):

Percentage of revenue

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto

included elsewhere in this Annual Report.

All information in the following discussion and analysis present the results of continuing

operations and exclude amounts related to discontinued operations for all periods presented unless otherwise stated.

provides advanced optical sensing solutions for touch, contactless touch, and gesture sensing.

We also provide software solutions for

machine perception that feature advanced machine learning algorithms to detect and track persons and objects in video streams from cameras

and other types of imagers.

We base our contactless touch, touch, and gesture sensing products and solutions using our zForce technology

platform and our machine perception solutions on our MultiSensing technology platform.

We market and sell our solutions to customers

in many different markets and segments including, but not limited to, office equipment, automotive, industrial automation, medical, military

and avionics.

Accounting Pronouncements

information set forth under Note 1 to the consolidated financial statements is incorporated herein by reference.

Accounting Estimates

consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States

of America (“U.S.

GAAP”), which requires us to make certain estimates, judgments and assumptions that can affect the reported

amounts of assets, liabilities, revenues, expenses, and related disclosure.

Critical accounting estimates are those estimates that involve

a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on our financial condition

or results of operations.

We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information

available to us at the time that these estimates, judgments and assumptions are made.

To the extent that there are differences between

these estimates, judgments or assumptions and actual results, our financial statements will be affected.

We have not identified any critical

accounting estimate.

Refer to Note 1 of our consolidated financial statements for more discussion of our significant accounting policies.

of Operations

following table provides our consolidated results for the continuing operations:

Years ended December 31,

(in thousands)

Percentage of revenue

3 unchanged sentences

Cost of revenues:

Percentage of revenue

Non-recurring engineering

Percentage of revenue

Loss on purchase commitment

Percentage of revenue

Total cost of revenues

Total gross (loss) margin

Operating expenses:

9 unchanged sentences

Percentage of revenue

Other income, net

Percentage of revenue

1 unchanged sentence

Percentage of revenue

net loss attributable to noncontrolling interests

Percentage of revenue

Net loss attributable to Neonode Inc.

Loss from continuing operations

Percentage of revenue

Net loss per share attributable to Neonode Inc.

All of our sales for the years ended December 31,

2023 were to customers located in the United States, Europe, Asia and Oceania.

All of our sales for the years ended December 31, 2022

were to customers located in the United States, Europe and Asia.

Total net revenues were $4.4 million and $5.7 million for the

years ended December 31, 2023 and 2022, respectively.

The decrease in total net revenues by 21.5% for the year ended December 31, 2023

as compared to 2022 was caused by lower revenues from all three revenue streams.

The following tables present the net revenues distribution

by geographical area and revenue stream for the years ended December 31, 2023 and 2022 (dollars in thousands):

North America

Non-recurring engineering

Loss per share from continuing operations

of our sales for the years ended December 31, 2024 and 2023 were to customers located in the United States, Europe and Asia.

net revenues were $3.1 million and $3.8 million for the years ended December 31, 2024 and 2023, respectively.

The decrease in total net

revenues by 18.8% for the year ended December 31, 2024 as compared to 2023 was caused by lower revenues from license revenues offset

by higher revenues from non-recurring engineering.

following table present the net revenues distribution by business area and revenue stream:

ended December 31,

(in thousands)

Non-recurring engineering

Europe, Middle East and Africa

IT & Industrial

Non-recurring engineering

The following table presents disaggregated revenues

by revenue stream for the years ended December 31, 2023 and 2022 (dollars in thousands):

December 31, 2023

December 31, 2022

following table presents disaggregated revenues by revenue stream:

ended December 31,

(in thousands)

Net license revenues from amusement

Net license revenues from automotive

Net license revenues from consumer electronics

Net product revenues from TSMs

Net non-recurring engineering services revenues

Revenues from license fees were $3.8 million and

$4.5 million for the years ended December 31, 2023 and 2022, respectively.

The decreased of 14.9% in 2023 as compared to 2022 is primarily

the result of the macro economic downturn.

Revenues from product sales were $0.6 million and

$1.0 for the years ended December 31, 2023 and 2022, respectively.

The decrease of 37.7% in 2023 compared to 2022 was mainly due to low

customer demand.

Revenues from non-recurring engineering revenues

were $26,000 and $0.2 million for the years ended December 31, 2023 and 2022.

Most of our non-recurring engineering revenues are related

to application development and proof-of-concept projects related to our TSMs or to our zForce and MultiSensing technology platforms.

decrease of 87.3% in 2023 compared to 2022 was mainly due to fewer projects.

Gross (Loss) Margin

Our combined total gross (loss) margin was (2.1)% in 2023 compared

to 85.8% in 2022.

Gross (loss) margin related to product sales was (630.6)% in 2023 compared to 22.0% in 2022.

The gross loss for products

for the year ended December 31, 2023 was impacted by one-time costs of $362,000 related to a loss on purchase commitment, $143,000 related

to a customer claim and $3.6 million related to inventory write-down.

The gross margin for products for the year ended December 31, 2022

was impacted by a one-time cost of $262,000 related to inventory write-down.

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

Cost of goods sold for TSMs includes fully burdened manufacturing costs, outsourced final assembly costs, and component costs

Cost of sales also includes loss on purchase commitment after cancelling an order of components related to the TSMs.

Research and Development

R&D expenses for 2023 and 2022 were $3.8 million

and $4.0 million, respectively.

R&D expenses primarily consist of personnel-related costs in addition to external consultancy costs, such as testing,

certifying and measurements, along with costs related to developing and building new product prototypes.

The decrease of 3.3% in 2023

compared to 2022 was primarily related to lower product development costs.

Sales and Marketing

Sales and marketing expenses for were $2.5 million

and $2.0 million, respectively.

Sales and marketing expenses in 2023 increased 20.7% compared to 2022 primarily due to higher cost for personnel and

related costs and higher cost for marketing.

There is approximately $8,000 of stock-based compensation expense included in sales and

marketing expenses for each of the years ended December 31, 2023 and 2022.

Our sales and marketing activities focus on OEM,

ODM and Tier 1 customers who will license our technology or purchase and embed our TSMs into their products.

General and Administrative

General and administrative (“G&A”) expenses for

2023 and 2022 were $4.4 million and $4.2 million, respectively.

The increase of 5.0% from 2022 was primarily due to higher cost for professional

There is approximately $50,000 of non-cash stock-based compensation included in G&A expenses for the year ended December 31,

2023 compared to $114,000 for the year ended December 31, 2022.

Other income for the year ended December 31, 2023 was $736,000 compared

to $121,000 for the year ended December 31, 2022.

The other income for 2023 was mainly related to interest income earned.

Net non-recurring engineering

services revenues

from license fees were $2.7 million and $3.8 million for the years ended December 31, 2024 and 2023, respectively.

The decreased of 29.3%

in 2024 as compared to 2023 were mainly due to lower demand for our legacy customers products within printer and passenger car touch

applications offset by revenues from new licensing customers.

Revenues from non-recurring engineering revenues were $0.4 million

and $26,000 for the years ended December 31, 2024 and 2023.

Our non-recurring engineering revenues are related to application development

and proof-of-concept projects related to our zForce and MultiSensing technology platforms.

The increase of 1,519.2% in 2024 compared to

2023 was mainly attributable to the DMS project with the commercial vehicle OEM customer that was announced at the end of 2023 and the

new agreement with NEXTY Electronics for an evolution of our licensable Touch Sensor Module (“TSM”) technology.

gross margin was 96.3% in 2024 compared to 99.7% in 2023.

The decrease in 2024 compared to 2023 were due to more NRE projects.

cost of revenues includes the direct cost of production of certain customer prototypes, costs of engineering personnel, engineering consultants

to complete the engineering design contracts.

and Development

expenses for 2024 and 2023 were $3.4 million and $3.8 million, respectively.

R&D expenses primarily consist of personnel-related

costs in addition to external consultancy costs, such as testing, certifying and measurements, along with costs related to developing

and building new product prototypes.

The decrease of 10.1% in 2024 compared to 2023 was primarily related to lower payroll and related

and Marketing

and marketing expenses for were $2.3 million and $2.5 million, respectively.

Sales and marketing expenses in 2024 decreased 5.2% compared

to 2023 primarily due to lower cost for personnel and related costs offset by higher cost for marketing.

There is no non-cash stock-based

compensation included in sales and marketing expenses for the year ended December 31, 2024 compared to $8,000 for the year ended December

sales and marketing activities focus on OEM, ODM and Tier 1 customers who will license our technology.

and Administrative

and administrative (“G&A”) expenses for 2024 and 2023 were $3.8 million and $3.3 million, respectively.

of 15.3% from 2023 was primarily due to higher for cost payroll and related costs and professional fees.

There is approximately $3,000

of non-cash stock-based compensation included in G&A expenses for the year ended December 31, 2024 compared to $50,000 for the year

ended December 31, 2023.

income for the year ended December 31, 2024 was $0.7 compared to $0.7 million for the year ended December 31, 2023.

The other income

for 2022 was related to interest income earned and gain from recovery of bad debt offset by primarily finance leases.

Foreign Currency Translation and Transaction Gains and Losses

The functional currency of our foreign subsidiaries is the applicable

local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar.

The translation from Swedish Krona, Japanese

Yen, South Korean Won or the Taiwan Dollar to U.S.

Dollars is performed for balance sheet accounts using current exchange rates in effect

at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period.

Gains or (losses)

resulting from translation are included as a separate component of accumulated other comprehensive income (loss).

Foreign currency translation

gains (losses) were $(56,000) and $68,000 during the years ended December 31, 2023 and 2022, respectively.

Gains (losses) resulting from

foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations

were $(5,000) and $35,000 during the years ended December 31, 2023 and 2022.

Our effective tax rate was (1.1)% for the year ended December 31, 2023

and (2.3)% for the year ended December 31, 2022.

We recorded valuation allowances in 2023 and 2022 for deferred tax assets related to

net operating losses due to the uncertainty of realization.

As a result of the factors discussed above, we recorded a net loss

of $10.1 million for the year ended December 31, 2023, compared to a net loss of $4.9 million for the year ended December 31, 2022.

Contractual Obligation and Off-Balance Sheet

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

the operating leases incurred in the normal course of business.

We have no special purpose or limited purpose entities

that provide off-balance sheet financing, liquidity, or market or credit risk support.

We do not engage in leasing, hedging, research

and development services, or other relationships that expose us to liability that is not reflected on the face of the consolidated financial

Operating Leases

operates solely through a virtual

office in California.

On December 1, 2020, Neonode Technologies AB entered

into a lease for 6,684 square feet of office space located at Karlavägen 100, Stockholm, Sweden.

The lease agreement has been extended

and is valid through November 2024.

It is extended on a yearly basis unless written notice is provided nine months prior to the expiration

On December 1, 2015, Pronode Technologies AB entered into a lease agreement

for 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka, Sweden.

Pronode Technologies AB has informed the landlord

of its intention to not renew its lease upon expiration in September 2024.

For the years ended December 31, 2023 and 2022,

we recorded approximately $485,000 and $577,000, respectively, for rent expense.

Equipment Subject to Finance Leases

Between the second and fourth quarters of 2016,

we entered into six leases for component production equipment.

Under the terms of five of the lease agreements, we are obligated to purchase

the equipment at the end of the original 3-5 year lease terms for 5-10% of the original purchase price of the equipment.

In accordance

with relevant accounting guidance the leases are classified as finance leases.

The lease payments and depreciation periods began between

June and November 2016 when the equipment went into service.

The implicit interest rate of the leases is currently approximately 3% per

One of the leases is a hire-purchase agreement where the equipment is required to be paid off after five years.

In accordance with

relevant accounting guidance the lease is classified as a finance lease.

The lease payments and depreciation period began on July 1, 2016

when the equipment went into service.

The implicit interest rate of the lease is currently approximately 3% per annum.

On April 1, 2022,

one of lease contracts was extended for three years.

The implicit interest rate of the extended lease period is 2.7% per annum.

In 2017, we entered into a lease for component

production equipment.

Under the terms of the lease agreement the lease will be renewed within one year of the end of the original four-year

In accordance with relevant accounting guidance the lease is classified as a finance lease.

The lease payments and depreciation

periods began in May 2017 when the equipment went into service.

The implicit interest rate of the lease was approximately 1.5% per annum.

In November, 2021, the lease contract was extended for two years.

The implicit interest rate of the extended lease period was 1.5% per

In November, 2023, the equipment was purchased.

In 2018, we entered into a lease for component

production equipment.

Under the terms of the agreement, the lease will be renewed within one year of the original four-year lease term.

In accordance with relevant accounting guidance the lease is classified as a finance lease.

The lease payments and depreciation periods

began in August 2018 when the equipment went into service.

The implicit interest rate of the lease is currently approximately 1.5% per

In 2022, we entered into a lease for soundproof

Under the terms of the agreement, the lease will be renewed within one year of the original three-year lease term.

In accordance

with relevant accounting guidance the lease is classified as a finance lease.

The lease payments and depreciation periods began in May

2022 when the equipment went into service.

The implicit interest rate of the lease is currently approximately 3.0% per annum.

Non-Recurring Engineering Development Costs

On April 25, 2013, we entered into an Analog Device

Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”)

pursuant to which TI agreed to integrate our intellectual property into an Application Specific Integrated Circuit (“ASIC”).

Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC

for each of the first 2,000,000 ASICs sold.

As of December 31, 2023, we had made no payments to TI under the NN1002 Agreement.

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:

for 2024 and 2023 was mainly related to interest income earned.

effective tax rate was (0.3)% for the year ended December 31, 2024 and (2.3)% for the year ended December 31, 2023.

We recorded valuation

allowances in 2024 and 2023 for deferred tax assets related to net operating losses due to the uncertainty of realization.

a result of the factors discussed above, we recorded a net loss of $5.9 million for the year ended December 31, 2024, compared to a net

loss of $5.1 million for the year ended December 31, 2023.

and Capital Resources

liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover.

liquidity will be affected by, among other things:

licensing of our technology;

purchases of our TSMs;

operating expenses;

3 unchanged sentences

ability to raise additional capital, if necessary.

As of December 31, 2023, we had cash and cash equivalents

of $16.2 million, as compared to $14.8 million as of December 31, 2022.

Based on our current cash position, and assuming currently planned

expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent

to the date of this Annual Report.

Working capital (current assets less current liabilities) was $16.8

million as of December 31, 2023, compared to working capital of $19.1 million as of December 31, 2022.

of December 31, 2024, we had cash and cash equivalents of $16.4 million, as compared to $16.2 million as of December 31, 2023.

on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital

to fund operations for the twelve-month period subsequent to the date of this Annual Report.

capital (current assets less current liabilities) was $16.1 million as of December 31, 2024, compared to working capital of $16.1 million

as of December 31, 2023.

cash used in operating activities for combined continuing and discontinued operations for the year ended December 31, 2024 was $5.6 million

and was primarily the result of a net loss of $6.4 million and approximately $0.5 million in non-cash operating expenses, comprised

of stock-based compensation expense, inventory impairment loss, depreciation and amortization and amortization of operating lease right-of-use

assets, and changes in operating assets and liabilities of $0.3 million.

Net cash used in operating activities for the year ended December

2 unchanged sentences

operating lease right-of-use assets, and changes in operating assets and liabilities of $25,000.

Net cash used in operating activities

for the year ended December 31, 2022 was $6.8 million and was primarily the result of a net loss including noncontrolling interests of

$5.3 million and approximately $0.6 million in non-cash operating expenses, comprised of stock-based compensation expense, depreciation

and amortization and amortization of operating lease right-of-use assets and recoveries of bad debt, and changes in operating assets and

liabilities of $(2.1) million.

Accounts receivable and unbilled revenues decreased

by approximately $539,000 as of December 31, 2023 compared to December 31, 2022, due to lower revenues.

Inventory increased by approximately $395,000 as

of December 31, 2023, not considering the $3.6 million non-cash impairment charge recorded during 2023, compared to December 31, 2022.

Accounts payable and accrued expenses increased approximately $173,000

as of December 31, 2023 compared to December 31, 2022.

For the year ended December 31, 2023, we purchased

$123,000 of fixed assets, consisting primarily of manufacturing equipment.

For the year ended December 31, 2022, we purchased $52,000

of fixed assets, consisting primarily of office equipment.

Net cash provided by financing activities for the

year ended December 31, 2023 was $7.8 million and was primarily the result of issuance of common stock under the ATM Facility (as defined

and described below).

Net cash provided by financing activities for the year ended December 31, 2022 was $4.5 million and was mainly the

result of the issuance of common stock, partly offset by principal payments on finance leases.

At-the-Market Offering Program

On May 10, 2021, we entered into an At Market Issuance

Sales Agreement (the “Sales Agreement”) with B.

Riley Securities, Inc.

Riley Securities”) with respect to

an “at the market” offering program (the “ATM Facility”), under which we may, from time to time, in our sole discretion,

issue and sell through B.

Riley Securities, acting as sales agent, up to $25 million of shares of our common stock.

Pursuant to the Sales Agreement, we may sell the

shares through B.

Riley Securities by any method permitted that is deemed an “at the market” offering as defined in Rule 415

under the Securities Act of 1933, as amended.

Riley Securities will use commercially reasonable efforts consistent with its normal

trading and sales practices to sell the shares from time to time, based upon instructions from us (including any price or size limits

or other customary parameters or conditions we may impose).

We will pay B.

Riley Securities a commission of 3.0% of the gross sales price

per share sold under the Sales Agreement.

We are not obligated to sell any shares under the

Sales Agreement.

The offering of shares pursuant to the Sales Agreement will terminate upon the earlier to occur of (i) the issuance and

sale, through B.

Riley Securities, of all of the shares subject to the Sales Agreement and (ii) termination of the Sales Agreement in

accordance with its terms.

During the year ended December 31, 2023, we sold

an aggregate of 903,716 shares of our common stock under the ATM Facility with aggregate net proceeds to us of $7,866,000, after payment

of commissions to B.

Riley Securities and other expenses of $244,000.

Accounts receivable and unbilled revenues for combined continuing and

discontinued operations decreased by approximately $134,000 as of December 31, 2024 compared to December 31, 2023, due to lower revenues.

for discontinued operations increased by approximately $223,000 as of December 31, 2024, not considering the $357,000 non-cash impairment

charge recorded during 2024, compared to December 31, 2023.

Accounts payable and accrued expenses for combined continuing and discontinued

operations decreased approximately $342,000 as of December 31, 2024 compared to December 31, 2023.

the year ended December 31, 2024, we purchased $37,000 of fixed assets, consisting primarily of ERP software.

For the year ended December

31, 2023, we purchased $123,000 of fixed assets, consisting primarily of manufacturing equipment.

cash provided by financing activities for the year ended December 31, 2024 was $5.8 million and was primarily the result of issuance

of common stock under the ATM Facility (as defined and described below).

Net cash provided by financing activities for the year ended

December 31, 2023 was $7.8 million and was primarily the result of issuance of common stock under the ATM Facility (as defined and described

have incurred significant operating losses and negative cash flows from operations since our inception.

The Company incurred net losses

for combined continuing and discontinued operations of approximately $6.5 million and $10.1 million for the years ended December 31,

2024 and 2023, respectively, and had an accumulated deficit of approximately $224.1 million and $217.6 million as of December 31, 2024

and 2023, respectively.

In addition, operating activities used cash of approximately $5.6 million and $6.3 million for the years ended

December 31, 2024 and 2023, respectively.

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 negative cash flows from operations and determined that the Company’s current operating

plan and sources of liquidity would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.

Management has prepared an operating plan and believes that the Company has sufficient cash to meet its obligations as they come due

for a year from the date the financial statements were issued.

During the year ended December 31, 2024, we sold an aggregate of 1,423,441

shares of common stock under the ATM Facility, resulting in net proceeds of approximately $4,686,000 after payment of commissions to B.

Riley Securities and other expenses of $167,000.

Future Sources of Liquidity

In the future, we may require sources of capital

in addition to cash on hand and our ATM Facility to continue operations and to implement our strategy.

If our operations do not become

cash flow positive, we may be forced to seek equity investments or debt arrangements.

Historically, we have been able to access the capital

markets through sales of common stock and warrants to generate liquidity.

Our management believes it could raise capital through public

or private offerings if needed to provide us with sufficient liquidity.

No assurances can be given, however, that we will

be successful in obtaining such additional financing on reasonable terms, or at all.

If adequate funds are not available on acceptable

terms, or at all, we may be unable to adequately fund our business plans and it could have a negative effect on our business, results

of operations and financial condition.

In addition, no assurance can be given that stockholders will approve an increase in the number

of our authorized shares of common stock if needed.

The issuance of equity securities or securities convertible into equity could dilute

the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive

covenants that could impair our ability to engage in certain business transactions.

The functional currency of our foreign subsidiaries

is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar.

They are subject to

foreign currency exchange rate risk.

of our common stock under the ATM Facility with aggregate net proceeds to us of $5.8 million, after payment of commissions to Ladenburg

and other expenses of $0.2 million.

the future, we may require sources of capital in addition to cash on hand and our Ladenburg ATM Facility to continue operations and to

implement our strategy.

If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements.

Historically, we have been able to access the capital markets through sales of common stock and warrants to generate liquidity.

Our management

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

assurances can be given, however, that we will be successful in obtaining such additional financing on reasonable terms, or at all.

adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could

have a negative effect on our business, results of operations and financial condition.

In addition, no assurance can be given that stockholders

will approve an increase in the number of our authorized shares of common stock if needed.

The issuance of equity securities or securities

convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of

debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen and the South Korean

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.

Dollar compared

to the Swedish Krona, Japanese Yen or South Korean Won will impact our future operating results.

Obligation and Off-Balance Sheet Arrangements

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 the operating leases incurred in the normal course of business.

have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support.

We do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not

reflected on the face of the consolidated financial statements.

operates solely through a virtual office in California.

December 1, 2020, Neonode Technologies AB entered into a lease for 6,684 square feet of office space located at Karlavägen 100,

Stockholm, Sweden.

The lease agreement has been extended and is valid through November 2026.

It is extended on a yearly basis unless

written notice is provided nine months prior to the expiration date.

For the years ended December

31, 2024 and 2023, we recorded approximately $449,000 and $428,000, respectively, for rent expense in continuing operations.

Subject to Finance Leases

2022, we entered into a lease for soundproof office pods.

Under the terms of the agreement, the lease will be renewed within one year

of the original three-year lease term.

In accordance with relevant accounting guidance the lease is classified as a finance lease.

lease payments and depreciation periods began in May 2022 when the equipment went into service.

The implicit interest rate of the lease

is currently approximately 3.0% per annum.

Non-Recurring

Engineering Development Costs

April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002

Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an

Application Specific Integrated Circuit (“ASIC”).

Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of

non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2,000,000 ASICs sold.

As of December 31, 2024, we

had made no payments to TI under the NN1002 Agreement.

At-the-Market

Offering Program

May 10, 2021, we entered into an At Market Issuance Sales Agreement (the “B.

Riley Sales Agreement”) with B.

Riley Securities,

Riley Securities”) with respect to an “at the market” offering program (the “B.

Riley ATM Facility”),

under which we may, from time to time, in our sole discretion, issue and sell through B.

Riley Securities, acting as sales agent, up

to $25 million of shares of our common stock, in any method permitted that is deemed an “at the market” offering as defined

in Rule 415 under the Securities Act of 1933, as amended.

On May 29, 2024, we terminated the B.

Riley Sales Agreement with B.

Riley Securities.

June 4, 2024, we entered into an At The Market Offering Agreement (the “Ladenburg Sales Agreement”) with Ladenburg Thalmann

(“Ladenburg”) with respect to an “at the market” offering program (the “Ladenburg ATM Facility”),

under which we may, from time to time, in our sole discretion, issue and sell through Ladenburg, acting as agent or principal, up to

approximately $10 million of shares of our common stock.

to the Ladenburg Sales Agreement, we may sell the shares through Ladenburg by any method permitted that is deemed an “at the market”

offering as defined in Rule 415 under the Securities Act of 1933, as amended.

Ladenburg will use commercially reasonable efforts consistent

with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us (including any price

or size limits or other customary parameters or conditions we may impose).

We will pay Ladenburg a commission of 3.0% of the gross sales

price per share sold under the Ladenburg Sales Agreement.

are not obligated to sell any shares under the Ladenburg Sales Agreement.

The offering of shares pursuant to the Ladenburg Sales Agreement

will terminate upon the earlier to occur of (i) the issuance and sale, through Ladenburg, of all of the shares of our common stock subject

to the Ladenburg Sales Agreement and (ii) termination of the Ladenburg Sales Agreement in accordance with its terms.

the year ended December 31, 2024, we sold an aggregate of 1,423,441 shares of our common stock under the Ladenburg ATM Facility with

aggregate net proceeds to us of $5.8 million, after payment of commissions to Ladenburg and other expenses of $0.2 million.

During the year ended December

31, 2023, we sold an aggregate of 903,716 shares of our common stock under the ATM Facility with aggregate net proceeds to us of $7.9

million, after payment of commissions to B.

Riley Securities and other expenses of $0.2 million.

Sources of Liquidity

the future, we may require sources of capital in addition to cash on hand and our Ladenburg ATM Facility to continue operations and to

implement our strategy.

If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements.

Historically, we have been able to access the capital markets through sales of common stock and warrants to generate liquidity.

Our management

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

assurances can be given, however, that we will be successful in obtaining such additional financing on reasonable terms, or at all.

adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could

have a negative effect on our business, results of operations and financial condition.

In addition, no assurance can be given that stockholders

will approve an increase in the number of our authorized shares of common stock if needed.

The issuance of equity securities or securities

convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of

debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

functional currency of our foreign subsidiaries is the applicable local currency, the Swedish Krona, the Japanese Yen and the South Korean

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 or South Korean Won will impact our future operating results.

May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC (“Aequitas”), an unrelated third party.

The assignment provides the Company the right to share the potential net proceeds generated from possible licensing and monetization

program that Aequitas may enter into.

Under the terms of the assignment, net proceeds mean gross proceeds less out of pocket expenses

and legal fees paid by Aequitas.

The Company’s share would also be net of the Company’s own fees and expenses, including

a brokerage fee payable by the Company in connection with the original assignment to Aequitas.

reflected in publicly available court filings, on June 8, 2020, Neonode Smartphone LLC, an unrelated third party that is a subsidiary

of Aequitas (“Aequitas Sub”), filed complaints against Apple Inc.

(“Apple”) (assigned docket number 6:20-cv-00505-ADA),

and Samsung Electronics Co., Ltd., and Samsung Electronics America, Inc.

(collectively, “Samsung”) (assigned docket number

6:20-cv -00507-ADA;

see also 6:23-cv-00204-ADA), in the Western District of Texas alleging infringement of two patents, U.S.

8,095,879 and 8,812,993.

November 2020, Samsung and Apple filed a petition for inter partes review of certain challenged claims in U.S.

assigned proceeding number IPR2021-00144.

As reflected in publicly available records, the U.S.

Patent and Trademark Office Patent Trial

and Appeal Board (“PTAB”) denied the petition in June 2021.

Apple and Samsung filed a request for rehearing, which was ultimately

granted on December 3, 2021, and inter partes review was instituted.

The court case against Apple was subsequently transferred to the

Northern District of California in November 2021 and assigned docket number 3:21-cv-08872, which was subsequently stayed pending the

PTAB’s decision.

The case against Samsung in the Western District of Texas was likewise stayed pending PTAB ruling.

in June 2021, Google LLC (“Google”) filed a separate petition with the PTAB seeking inter partes review of certain challenged

claims in U.S.

8,095,879, assigned proceeding number IPR2021-01041.

As reflected in publicly available records, the PTAB granted

the petition in January 2022

PTAB found in favor of Aequitas Sub and against Apple and Samsung in December 2022 in connection with the inter partes review proceedings,

ruling that none of the challenged claims were unpatentable.

The PTAB similarly held in favor of Aequitas Sub and against Google in January

Apple and Samsung appealed to the United States Court of Appeals for the Federal Circuit (the “Federal Circuit”) in

February 2023 (assigned docket number 23-1464, and Google filed its appeal in the Federal Circuit in March 2023 (assigned docket number

On July 18, 2024, the Federal Circuit affirmed the PTAB’s rulings, found in favor of Aequitas Sub and against Google and

Apple/Samsung, and held that none of the challenged claims in U.S.

8,095,879 are unpatentable.

reflected in publicly available court records, on July 14, 2023, the United States District Court for the Western District of Texas entered

its final claim constructions in the Samsung case (docket number 6:20-cv-507), and based on those claim constructions, entered judgment

in favor of Samsung and against Aequitas Sub.

Aequitas Sub filed an appeal with the Federal Circuit in August 2023 (assigned docket number

23-2304), and oral argument was held on June 6, 2024 As reflected on the public court docket, on August 20, 2024, the Federal Circuit

issued its written opinion, reversing and remanding the case to the Western District of Texas for further proceedings.

Specifically,

the Federal Circuit held that claim 1 of the ‘879 patent was not indefinite.

Mandate issued returning the case to the Western District

of Texas on September 26, 2024.

On November 5, 2024, Samsung filed its Answer to the Complaint.

case against Apple remains pending in the United States District Court for the Northern District of California.

On November 13, 2024,

the Court granted the parties’ motion to continue the stay pending resolution of the Samsung case pending in the Western District

of Texas (case number 20-cv-00507-ADA) by settlement or final judgment.

on information in public records, in November 2020, Samsung and Apple collectively sought inter partes review of certain claims in U.S.

8,812,993 (assigned proceeding number IPR2021-00145).

In June 2022, the PTAB invalidated U.S.

8,812,993, which

Aequitas Sub appealed to the Federal Circuit in August 2022 (assigned docket number 22-2134).

The Federal Circuit affirmed the PTAB’s

decision on June 11, 2024.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis