What changed in this filing

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Item 1. Business

2021-03-10 compared with 2020-03-11 · 195 added, 208 removed, 79 unchanged (84% of the section changed)

Our Company develops optical touch and gesture

control solutions for human-machine interface (“HMI”) with devices and remote sensing solutions for driver and cabin

monitoring features in automotive and other application areas.

We offer our touch and gesture control technology under the brand

name “zForce”.

Our main business model is to license our

technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 system suppliers who embed our technology into systems

and products they develop, manufacture and sell.

Our customers have to date sold approximately 73 million systems and products

that use our technology.

In addition to our licensing business, we

design and manufacture sensor modules that incorporate our zForce AIR technology.

We sell our sensors modules to OEMs, Original

Design Manufacturers (“ODMs”) and Tier 1 suppliers for use in their systems and products.

We also sell our Neonode

branded AirBar product that incorporates one of our sensor modules through distributors.

We develop advanced optical sensing solutions for contactless

touch, touch, gesture sensing, and in-cabin monitoring.

We market and sell our contactless touch, touch, and gesture sensing products

and solutions using our zForce technology platform, and our in-cabin monitoring solutions using our MultiSensing technology platform.

In 2010, we began licensing to Original

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

Since 2010, our licensing customers have sold approximately 79 million devices that use our technology.

In October 2017,

we augmented our licensing business and began manufacturing and shipping sensor modules that incorporate our technology.

these embedded sensors modules to OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers for use in their

To reduce time to market, we started selling AirBar in the fourth

quarter of 2016, a Neonode branded consumer product, which incorporates one of our sensor modules to enable laptop touchscreen

functionalities, through distributors and directly to consumers.

We have no current plans to develop new Neonode branded products

for the consumer markets.

Since the beginning of 2020 we manage our sales and business

development work through three separate business areas, HMI Solutions, HMI Products, and Remote Sensing Solutions.

They offer products

and solutions to customers in different market segments using different business models as described below.

“HMI”

for Human Machine Interaction.

HMI Solutions

This business area offers bespoke touch

and gesture sensing solutions that we develop together with our customers based on our patented, infrared (“IR”)-based

zForce technology.

The revenues from this business area come from sales of prototypes, non-recurring engineering services, and

technology licenses.

Some revenues also come from support services under separate agreements with licensing customers.

Our licensing customers may use our Application

Specific Integrated Circuit (“ASIC”) controllers, which are designed specifically for our optical sensing technology.

These ASICs are developed together with and sold by Texas Instruments and ST Microelectronics, respectively, under special agreements.

Until 2019, our main focus was developing

touch solutions for and licensing the zForce technology to e-Reader manufacturers, printer manufacturers, and Automotive OEMs and

Tier 1 system suppliers.

During 2020, we have changed this and are now focusing mainly on customers in the Military & Avionics

and Industrial segments where we think we can better leverage our advanced zForce technology and our knowhow to grow our business

and increase our profitability.

As of December 31, 2020, we have entered into forty-two technology

license agreements with global OEMs, ODMs and Tier 1 suppliers and our licensing customers have to date sold more than 79 million

systems and products that use our licensed technology.

Fourteen of our licensing customers are currently shipping products that

embed our technology.

This business unit designs, manufactures and sells our standardized

Touch Sensor Modules (“TSM”) that can be used to create contactless touch interfaces to elevator control panels, keypads,

displays, and other human-machine interfaces as well as to create touch and gesture sensing features for various application areas.

We sell our TSM through a combination of direct sales with our own salespersons and indirect sales using distributors, value-added

resellers, and other types of partners.

We also sell our Neonode branded AirBar product, which incorporates our sensor module to

enable laptop touchscreen functionalities through distributors.

Our HMI Products business areas mainly targets customers in

the Elevator and Interactive Kiosk segments, but we also sell the TSMs to customers in other segments.

Remote Sensing Solutions

This business area, which was just established in 2020, offers

driver and in-cabin monitoring solutions based on our software platform MultiSensing to Automotive OEMs and Tier 1 system suppliers,

which we address directly with our own salespersons and indirectly with sales representatives.

In the future we may also have indirect

sales through partners.

This business unit did not generate any revenues for 2020, but

similar to our HMI Solutions business area, we expect the revenues from this business area will come from sales of prototypes,

non-recurring engineering services, and technology licenses.

Some revenues may also come from support services under separate agreements

with licensing customers.

Our Organization

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is located in San Jose, California.

In 2008, we established a wholly owned subsidiary

Neonode Technologies AB (Sweden) to develop and license touchscreen technology.

In 2013, we established wholly owned subsidiaries:

Neonode Japan Inc., (Japan);

Neno User Interface Solutions AB (Sweden) (sold in December 2018);

NEON Technology Inc.

(U.S.) (dissolved

November 19, 2018);

and Neonode Americas Inc.

(U.S.) (dissolved November 19, 2018).

In 2014, we established an additional wholly

owned subsidiary:

We have the following wholly owned

subsidiaries:

Neonode Technologies AB (Sweden) (established in 2008 to develop and license touchscreen technology);

Japan Inc., (Japan) (established in 2013);

Neonode Korea Ltd.

(South Korea).

In 2015, we established an additional wholly owned subsidiary:

Neonode Taiwan

Ltd (Taiwan).

In 2015, we established a 51% majority owned consolidated subsidiary:

Pronode Technologies AB (Sweden).

we entered into a joint venture, Neoeye AB (Sweden).

(South Korea) (established in 2014);

and Neonode Taiwan Ltd

(Taiwan) (established in 2015).

In 2015, we established a 51% majority owned consolidated subsidiary, Pronode Technologies AB

In 2016, we entered into a joint venture, Neoeye AB (Sweden), which we sold in November 2020.

Strategy and Focus Areas

Our customers use touch, gesture and remote

sensing technology to grow their businesses, drive efficiencies, and seek competitive advantages.

Our strategy is to deliver value-adding

HMI and remote sensing solutions and products that allow the customers to achieve these targets.

Our strategy is further to offer

specialized engineering services related to the integration of our solutions and products into customer systems and products to

ensure that optimal functionality and performance is achieved.

Our goal is to continue to be a leader in

optical touch and gesture control technology and pursue opportunities with both our licensing business and our product sales business

while expanding to new markets where our type of touch and gesture control features provide a competitive advantage.

continuing to develop our remote sensing business.

We are innovating and will introduce the next-generation products that offer

better price and performance and architectural advantages compared to our current offers and our competitors.

We intend to execute

on this strategy through portfolio transformation, internal innovation, and co-development of products with our customers and

the building of strategic partnerships.

Business Model

We derive revenues through technology licensing,

selling embedded sensor modules and engineering consulting services.

We mainly operate in the B2B markets.

As of December 31, 2019, we have entered

into forty-two technology license agreements with global OEMs, ODMs and Tier 1 suppliers.

Our licensing customer base is primarily

in the automotive and printer segment.

Sixteen of our licensing customers are currently shipping products that embed our touch

and gesture technology.

We anticipate current and new customers will initiate product shipments throughout 2020 and in future years

as they complete final product development and release cycles.

Customer product development and release cycles typically take between

6 months to 36 months.

We normally earn our royalties on a per unit basis when our customers ship products using our technology.

Our licensing customers must use our Application

Specific Integrated Circuit (“ASIC”) controllers designed specifically for our optical sensing technology.

are developed together with and sold by Texas Instruments and ST Microelectronics, respectively, under special agreements.

We also offer engineering consulting services

to our licensing customers on a flat rate or hourly rate basis.

Typically, our customers require engineering support during the

development and initial manufacturing phase for their products using our technology.

Product Sales

Our zForce AIR sensor modules enabless touch

interaction, gesture control and object detection and can be used to create value-adding and user-friendly solutions using a compact

hardware component.

We utilize a manufacturing process designed

specifically for the zForce AIR sensor modules.

Industry specific sensor modules with a common technology platform provides

hardware touch, gesture control and object sensing solutions that, paired with our technology licensing platform, gives us a full

range of options to enter and compete in key markets.

Our offerings include a consumer product,

AirBar, a plug and play accessory, that enables touch and gesture functionality for notebook computers.

We currently sell our sensor modules to

business customers in the medical, automotive and aeronautic markets.

Over time, we expect a significant portion of our revenues

will be derived from sales of sensor modules.

Sensors are a key enabler to developing

new vehicles that become more interactive in every generation.

Our solutions and product offerings address challenges when the

driver, the passengers, or other vehicles or infrastructure interact with the vehicle.

The need for new touch, gesture control

and remote sensing solutions is growing rapidly as new concepts develop into automobiles ready for mass production.

Automotive OEMs are supported by a series

of Tier 1 suppliers who to large extent design and manufacture the different systems which the OEMs integrate into their vehicles

to create competitive products.

In this market we act as a Tier 2 component supplier and we have license agreements with several

Tier 1 suppliers who deliver infotainment systems to automotive OEMs.

We are also in discussions and active development co-operations

regarding other touch and gesture control and remote sensing solutions.

Our customers use contactless touch, touch on surface, gesture

sensing, and remote sensing technologies to grow their businesses, drive efficiencies, and seek competitive advantages.

is to deliver value-adding HMI and remote sensing solutions and products that enable our customers to achieve these targets.

strategy is further to offer specialized engineering services related to the integration of our solutions and products into customer

systems and products to ensure that optimal functionality and performance is achieved.

Our goal is to become a market leader in the area of contactless

touch interfaces, expanding our touch sensor module (“TSM”) sales in markets where our contactless touch technology

provides end-customer value and increased competitiveness for our customers, value-added resellers, and partners, while continuing

to be a leader in optical touch and gesture sensing technology by licensing customized solutions.

We also aim to capture a share

of the growing driver and in-cabin monitoring market by developing our remote sensing business.

We are innovators in the HMI and

in-cabin monitoring spaces and our goal is to introduce next-generation products in these areas that offer better price and performance

and architectural advantages compared to our current offers and those of our competitors.

We intend to execute on this strategy

through portfolio transformation, internal innovation, and co-development of products with our customers and the building of strategic

partnerships.

The Automotive value chain consists of OEMs (vehicle manufacturers)

and tiered suppliers (Tier 1 system suppliers, Tier 2 component suppliers, etc.).

In this market, we mainly act as a Tier 2 technology

provider to Tier 1 suppliers who license our technology and deliver different kinds of systems to OEMs, such as infotainment system

displays featuring our touch technology.

In some cases, we are also engaged directly with OEMs, following the trend that OEMs are

insourcing more and more of their systems and software development.

During 2020, our customers shipped approximately

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Printers and Office Equipment

Multi-function printers typically require

feature-rich menus and settings to deliver an optimal user experience and printer OEMs are increasingly replacing mechanical buttons

and older resistive touch displays with higher performance touch displays.

Multi-function printers typically feature

touch displays for user interaction with feature-rich menus and settings.

We have operational license agreements with three of

the leading global printers and office equipment OEMs.

During 2019 our customers shipped approximately 5 million printers and cumulatively

they shipped approximately 37 million printers using our touch technology since mid-2014.

Other Markets

Other markets we serve in our three

business areas include, but are not limited to, medical technology, industrial control systems and avionics.

markets we see interesting opportunities for our optical touch and gesture control solutions and products and we have

existing customer relations and ongoing development projects in several cases.

We also see a large and increasing demand

for remote sensing solutions in several other markets besides automotive, for instance avionics and in different industrial

applications.

During 2020 our customers shipped approximately four million printers using

our touch technology and since mid-2014 they have shipped approximately 42 million printers using our touch technology.

Military & Avionics

Mechanical switches and buttons and

older types of touch displays in airplane cockpits are increasingly being replaced with larger touch displays with higher

performance capabilities.

Our zForce technology has demonstrable advantages for these type of applications, as it provides low latency,

superior image clarity, can be operated by pilots wearing gloves, has excellent electro-magnetic interference and

electro-magnetic compatibility properties, and works well with night vision systems.

We see interesting opportunities for our

optical touch and gesture control solutions in the rugged industrial touchscreen market.

We also see potential demand for our

remote sensing solutions in industrial settings.

Elevators and Interactive Kiosks

The COVID-19 pandemic has created strong consumer demand for

technologies that eliminate direct physical contact between users and different types of machines and systems in public environment

such as self-service kiosks, vending machines, and elevators.

Using our TSMs, OEMs can easily create safe, intuitive, and easy-to-use

contactless touch interfaces for their elevator and kiosk products.

Our TSMs are also very suitable for retrofit applications and

many of our OEM customers, value-added resellers, and partners have or are developing such solutions and marketing and selling

them in their respective markets.

We have a strong and increasing demands for our TSMs from customers in these markets and expect

to grow this business significantly in the coming years.

Product Backlog

Our zForce AIR sensor module product backlog

at February 26, 2020 was approximately $56,000.

The product backlog includes orders confirmed for products planned to be shipped

within 60 days to two customers.

Our cycle time between order and shipment is generally short and customers occasionally change

delivery schedules.

Our TSM product backlog on December 31,

2020 was approximately $274,000.

The product backlog includes orders confirmed for products planned to be shipped within five

months to seven customers.

Our cycle time between order and shipment is generally short and customers occasionally change delivery

Additionally, orders can be cancelled without significant penalties.

As a result of these factors, we do not

believe that our product backlog, as of any particular date, is necessarily indicative of actual product revenue for any future

Distribution, Sales and Marketing

In our licensing business, we consider OEMs,

ODMs and Tier 1 suppliers to be our primary customers.

OEMs, ODMs and Tier 1 suppliers determine the design requirements and make

the overall decision regarding the use of our touch and gesture control and remote sensing technologies in their products.

use and pricing of our user interface and touch technology are governed by a technology licensing agreement, which typically have

an initial term of three years with automatic one-year renewal periods.

During the development and launch phases of the customers’

products we also have an opportunity to sell engineering services which generates additional NRE revenues.

Our licensing agreements historically resulted

from sales efforts by our senior management, design engineers, and sales personnel interacting with our potential customers’

decision-makers throughout the product development and order process.

Product Sales

In our sensor module business, we consider

OEMs, ODMs and Tier 1 suppliers to be our primary customers.

Our customers purchase sensor modules that come in different sizes

with different interfaces and we offer engineering consulting to customize hardware and/or firmware to meet specific requirements.

We manufacture the sensor modules in Sweden by our majority-owned subsidiary Pronode.

The sales of our sensors are governed by

a product supply agreement.

In addition, our customers may request engineering services which will generate NRE revenues.

Our sales force and marketing operations

are managed out of our office in Stockholm, Sweden.

Our current salaried sales force is comprised of sales offices located in the

United States, Sweden, South Korea, Japan and Taiwan.

We also market and sell our products through external sales representatives,

value-add partners and distributors in the United States, EU, Japan and China.

Our sales are normally negotiated and executed

As of December 31, 2019, we have entered

into forty-two technology license agreements compared to forty-one license agreements as of December 31, 2018.

Sixteen of our licensing

customers are currently shipping products that embed our touch and gesture technology.

The products related to these license agreements

include e-readers, tablets, commercial and consumer printers, automotive consoles and GPS devices.

Our customers are primarily located in the

United States, Europe and Asia.

As of December 31, 2019, three customers

represented approximately 72% of our consolidated accounts receivable and unbilled revenues.

As of December 31, 2018, four customers

represented approximately 67% of our consolidated accounts receivable and unbilled revenues.

As a result of these factors, we do not believe

that our product backlog, as of any particular date, is necessarily indicative of actual product revenue for any future period.

As of both December 31, 2020 and 2019, we have entered into

42 technology license agreements.

Fourteen of our licensing customers are currently shipping products that embed our touch and

gesture technology.

The products related to these license agreements include e-readers, tablets, commercial and consumer printers,

Automotive infotainment system displays, and global positioning system (GPS) devices.

Our customers are primarily located in North America, Europe

As of December 31, 2020, four of our

customers represented approximately 62% of our consolidated accounts receivable and unbilled revenues.

As of December 31, 2019, three of our

customers represented approximately 72% of our consolidated accounts receivable and unbilled revenues.

Customers who accounted for 10% or more

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Epson –

Canon –

Alpine –

Customers by Market

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by market as a percentage of total revenues for the years ended December 31:

Consumer electronics

Sensor modules

Automotive (licensing)

Consumer electronics (licensing)

Touch Sensor Modules (products)

Non-recurring engineering (“NRE”) revenues

Geographical Data

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There are various technologies for touch and gesture control

solutions available and competing with our optical, infrared (“IR”)-based technologies that we develop, market and

The competing technologies have differing profiles such as performance, power consumption, level of maturity and cost.

touch solutions the main competition comes from resistive and capacitive touch solutions.

For touch displays the projective capacitive

technology is the prevalent standard in mobile phones and tablets and therefore an important competing technology to ours that

many suppliers offer with price being a major differentiation point.

This means we must continuously develop our technology and

improve our offers to defend and grow our market share.

For gesture control the main competition comes from other optical technologies

and from both ultrasonic and radar technologies.

Detection range and resolution plus cost are the main differentiators.

solutions available and competing with our optical, IR-based zForce technologies.

The competing technologies have differing profiles

such as performance, power consumption, level of maturity and cost.

For touch solutions, the main competition comes from resistive

and capacitive touch solutions.

For touch displays, projective capacitive technology is the prevalent standard in mobile phones

and tablets and therefore an important competing technology to ours that many suppliers offer with price being a major differentiation

This means we must continuously develop our technology and improve our offers to defend and grow our market share.

control the main competition comes from other optical technologies and from both ultrasonic and radar technologies.

Detection range,

resolution and cost are the main differentiators.

For contactless touch opportunities, competing

technologies include camera-based technologies for detecting finger placement and gestures in the airspace in front of a kiosk

or button panel, capacitive sensors capable of detecting a finger hovering above a display or button, as well as voice-activated

interfaces and interfaces using one’s mobile phone to interact with a kiosk or button panel.

There are various driver and in-cabin monitoring solutions that

compete with our remote sensing technologies.

Our competitors among Tier 2 software providers include SmartEye, Xperi, EyeSight,

Seeing Machines, PUX and Jungo.

Intellectual Property

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Not Applicable

Our patents cover five main categories:

user interfaces, optics, controller integrated circuits, drivers and applications.

Our user interface software may also be

protected by copyright laws in most countries, including Sweden and the European Union, which do not grant patent protection for

the software itself, if the software is deemed new and original.

Our user interface software may also be protected by copyright

laws in most countries, including Sweden and the European Union, which will not grant patent protection for the software itself,

if the software is deemed new and original.

Protection can be claimed from the date of creation.

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while abandoning certain patents that were no longer in our product plans.

On May 6, 2019, we entered into an Assignment

Agreement with Aequitas Technologies LLC by which we assigned a portfolio of patents to Aequitas.

The patents in the portfolio

relate to sweep gestures and touchscreen devices.

The portfolio contains two patent families comprising nine U.S.

patents, five

patents and three pending U.S.

patent applications as listed in the agreement (the “Assigned Patents”).

to the agreement, Aequitas will plan, manage, and enforce all efforts to license or otherwise monetize the Assigned Patents.

part of the agreement, Aequitas granted to us a non-exclusive, royalty-free, perpetual license to use the Assigned Patents in

our products.

In consideration for the assignment, we have the right to receive 50% of net proceeds generated by Aequitas as a

result of its efforts to monetize the Assigned Patents.

We have the right to terminate the agreement during the 30-day period

after one year from its effective date if Aequitas has not met certain milestones towards monetizing the Assigned Patents.

the event of termination, our agreement provides that Aequitas will assign the Assigned Patents back to us.

The duration of our patent protection for

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registrations), zForce (9 registrations), zForce AIR (1 registration), AlwaysON (6 registrations), MultiSensing (4 registrations),

Touch In Everything (1 registration), AirBar (worldwide registrations) and the AirBar logo (1 registration) as well as a pending

trademark application for the mark zForce DRIVE.

Touch In Everything (1 registration), AirBar (worldwide registrations) and the AirBar logo (1 registration) as well as pending

trademark applications for the marks zForce DRIVE and MultiSensing.

Research and Development

In fiscal years 2019 and 2018, we spent

$5.2 million and $5.3 million, respectively, on research and development activities.

Our research and development is predominantly

in-house, but may also be performed in collaboration with external partners and specialists.

In fiscal years 2020 and 2019, we

spent $4.1 million and $5.2 million, respectively, on research and development activities.

Our research and development is

performed predominantly in-house, but may also be performed in collaboration with external partners and specialists.

The development, attraction and retention

of employees is a critical success factor for Neonode.

We took steps to increase our employee focus

during 2020, including the engagement of a dedicated Human Relations (“HR”) Manager to ensure clear and beneficial

HR related processes, such as talent management, employee engagement and recruitment performance.

During the year we also changed pension

partner and upgraded our pension plan and health insurances for our Swedish employees.

While on parental leave, the Swedish Government

pays a basic salary to the employee and this is topped-up by the Company since 2020.

Since the COVID-19 pandemic outbreak, our employees have had

the opportunity to work remotely to avoid being infected.

For those choosing to come to the office, free parking spaces has been

offered and social distancing has been promoted.

We work proactively against all types of

discrimination, harassment and other abusive behavior to ensure the work environment is good and healthy.

On December 31, 2020, we had forty-six employees

and fourteen full-time consultants.

There were a total of nine employees in our general and administrative group, six in our sales

and marketing group, twenty-seven in our engineering group, and four in our production group.

We have employees or consultants

located in the United States, Sweden, Japan, South Korea and Taiwan.

None of our employees is represented by a labor union.

have experienced no work stoppages.

and ten full-time consultants.

There was a total of eight employees in our general and administrative group, eight in our sales

and marketing group, twenty-five in our engineering group, and five in our production group.

We have employees or consultants located

in the United States, Sweden, Germany, United Kingdom, Japan, South Korea and Taiwan.

None of our employees is represented by a

We have experienced no work stoppages.

We believe our employee relations are positive.

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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 1. Business