What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-10 compared with 2020-03-11 · 656 added, 626 removed, 699 unchanged (65% of the section changed)

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Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets

of Neonode Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the

related consolidated statements of operations, comprehensive loss, stockholders’

equity and cash flows for each of the two

years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial

statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial

position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of

the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United

States of America.

Change in Accounting Principle

As discussed in Note 2 to the consolidated

financial statements, the Company changed the manner in which it accounts for leases in 2019.

We have audited the accompanying consolidated

balance sheets of Neonode Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020

and 2019, the related consolidated statements of operations, comprehensive loss, stockholders’

equity and cash flows for

each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated

financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the

financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for

each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the

United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based

on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor

were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to

obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness

of the Company’s internal control over financial reporting.

These consolidated financial statements

are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial

statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United

States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with

the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether

the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required

to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are

required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion

on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks

of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that

respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in

the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates

made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our

audits provide a reasonable basis for our opinion.

Our audits included performing procedures

to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing

procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and

disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant

estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated

below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required

to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated

financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical

audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not,

by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts

or disclosures to which it relates.

Accounting for Licensing Revenues

Critical Audit Matter Description

As described further in Note 2 to the consolidated

financial statements, the Company earns revenue from licensing its internally developed intellectual property (“IP”)

by entering into IP licensing agreements that generally provide licensees the right to incorporate IP components in their products,

with terms and conditions that vary by licensee.

Fees under these agreements may include license fees relating to the Company’s

IP, and royalties payable to the Company following the distribution by the licensees of products incorporating the licensed technology.

At the end of each reporting period, the Company records unbilled license revenues, using prior royalty revenue data by customer

to make estimates of those royalties.

Auditing management’s evaluation

of unbilled license revenues was challenging due to the lack of objectively verifiable evidence used in the estimation process.

As a result, there is a high degree of auditor judgment involved in performing procedures on the Company’s estimates.

How the Critical Audit Matter Was Addressed

The primary procedures we performed to

address this critical audit matter included assessing the accuracy of royalty estimates made in prior reporting periods as compared

to the actual royalties subsequently determined for all significant licensing customers and inquiring of management as to the reasons

for any significant differences between actual and estimated royalties, determining that the Company has had no significant revenue

reversals as a result of these past differences, and inquiring as to the basis of the current period estimates of royalties, including

the Company’s considerations of the overall economic environment, past royalty experience and the specific circumstances

and trends of the license customers’

royalty-based business based on the Company’s knowledge of and discussions with

customers’

representatives.

/s/ KMJ Corbin & Company LLP

We have served as the Company’s auditor since 2009.

Costa Mesa, California

Irvine, California

March 10, 2021

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Stockholders’

Series B Preferred stock, 54,425 shares authorized with par value of $0.001;

0 and 82 shares issued and outstanding at December 31, 2019 and 2018, respectively.

(In the event of dissolution, each share of Series B Preferred stock has a liquidation preference equal to par value of $0.001 over the shares of common stock)

Common stock, 25,000,000 shares authorized, with par value of $0.001;

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Total liabilities and stockholders’

The accompanying notes are an integral

part of these consolidated financial statements.

The accompanying notes are an integral part

of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Sensor modules

Non-recurring engineering

HMI Solutions

Total revenues

Cost of revenues:

Sensor modules

Non-recurring engineering

HMI Solutions

Total cost of revenues

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Net loss attributable to Neonode Inc.

Preferred dividends

Net loss attributable to common shareholders of Neonode Inc.

Loss per common share:

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weighted average number of common shares outstanding

The accompanying notes are an integral

part of these consolidated financial statements.

The accompanying notes are an integral part

of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE

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Comprehensive loss attributable to Neonode Inc.

The accompanying notes are an integral

part of these consolidated financial statements.

The accompanying notes are an integral part

of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(In thousands)

Series B Preferred

Stock Shares Issued

Series B Preferred

(In thousands, except for Preferred Stock Shares Issued 1 )

Shares Issued

Common Stock Shares

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Stockholders’

January 1, 2018

Adjustment related

to adoption of ASC 606 revenue recognition

Stock option compensation

expense to employees and directors

Conversion of Series

B Preferred Stock to common stock

Proceeds from sale

of common stock, net of offering costs

Balances, January 1,

Common stock issued upon exercise

of common stock warrants

Conversion of Series B Preferred

Stock to common stock

Foreign currency translation

Balances, December 31, 2019

Conversion of Series

B Preferred Stock to common stock

Common stock issued

upon excersise of common stock warrants

Issuance of shares for cash,

net of offering costs

Series C-2 Preferred Stock

issued for repayment of short-term borrowings and accrued interest

Conversion of Series C-1 and

Preferred Stock to common stock

Preferred dividends

Stock-based compensation

Foreign currency translation

December 31, 2020

The accompanying notes are an integral

part of these consolidated financial statements.

The accompanying

notes are an integral part of these consolidated financial statements.

Shares Issued per series can be found under the equity footnote (see Note 8).

CONSOLIDATED STATEMENTS OF CASH FLOWS

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Changes in operating assets and liabilities:

Accounts receivable

Accounts receivable and unbilled revenue, net

Projects in process

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Purchase of property and equipment

Proceeds from sale of property and equipment

Sale of investment in joint venture

Net cash used in investing activities

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Proceeds from issuance of common stock and warrants, net of offering costs

Proceeds from issuance of preferred and common stock, net of offering costs

Preferred dividends

Proceeds from short-term borrowings

Proceeds from short-term tax credits

Payments on short-term borrowings

Payments on short-term tax credits

Principal payments on finance lease obligations

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash

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Supplemental disclosure of non-cash investing and financing activities:

Purchase of equipment with finance lease obligations

Short-term borrowings and accrued interest settled for Series C-2 Preferred Stock

Right-of-use asset obtained in exchange for lease obligations

The accompanying notes are an integral part

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a company founded in February 2004 and incorporated in Sweden.

On December 29, 2008, we entered into a share exchange agreement

with AB Cypressen nr 9683 (renamed Neonode Technologies AB), a Swedish engineering company, and Neonode Technologies AB became

our wholly owned subsidiary.

In 2013, we established additional wholly owned subsidiaries:

We have the following wholly owned subsidiaries:

Neonode Technologies

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

Neonode Japan Inc.

Interface Solutions AB (Sweden) (sold December 27, 2018);

NEON Technology Inc.

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

Americas Inc.

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

In 2014, we established one additional wholly owned subsidiary:

Neonode Korea

(South Korea).

In 2015, we established one additional wholly owned subsidiary:

Neonode Taiwan Ltd.

(Japan) (established in 2013);

Neonode Korea Ltd.

(South Korea) (established in 2014);

and Neonode Taiwan Ltd.

(Taiwan) (established in 2015).

In 2015, we established

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In 2016, we entered into a joint venture, named

Neoeye AB, between SMART EYE AB and our subsidiary Neonode Technologies AB.

Neonode Inc., collectively

with its subsidiaries is referred to as “Neonode”, develops optical touch and gesture control solutions for human

interaction with devices (“HMI”) and remote sensing solutions for driver monitoring and cabin monitoring features

in automotive and other applications.

Neonode’s main business model is to license

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

systems and products they develop, manufacture and sell.

Neoeye AB, between SMART EYE AB and our subsidiary Neonode Technologies AB (sold November 4, 2020).

Neonode Inc., collectively with its subsidiaries

is referred to as “Neonode”, develops optical touch and gesture control solutions for human interaction with devices

(“HMI”) and remote sensing solutions for driver monitoring and cabin monitoring features in automotive and other applications.

Neonode’s main business model is to

license the technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 system suppliers who embed the technology

into systems and products they develop, manufacture and sell.

In addition, Neonode designs and manufactures

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Neonode began shipping sensor modules in October

Neonode also manufactures and sells through distributors, a

Neonode branded AirBar product that incorporates one of the sensor modules.

Neonode also manufactures and sells through

distributors, a Neonode branded AirBar product that incorporates one of the sensor modules.

We incurred net losses of approximately

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million for the years ended December 31, 2020 and 2019, respectively.

In March 2017, we filed a $20 million shelf

registration statement with the SEC that became effective on March 24, 2017.

Subject to the availability of sufficient shares of

authorized common stock, we may from time to time issue shares of our common stock under our shelf registration in amounts, at

prices, and on terms to be announced when and if the securities are offered.

The specifics of any future offerings, along with

the use of proceeds of any securities offered, will be described in a prospectus supplement and any other offering materials, at

the time of the offering.

Our shelf registration statement will expire on March 24, 2020.

December 2018 Private Placement

On December 28, 2018, we entered into a

Securities Purchase Agreement with foreign investors as part of a non-brokered private placement pursuant to which we issued a

total of 2,940,767 shares of common stock at $1.60 per share for net proceeds of $4.6 million.

The common stock issued in the

private placement is not registered for resale and we are not required under the Securities Purchase Agreement to register the

issued stock for resale.

The purchasers in the private placement included Neonode directors, Ulf Rosberg and Andreas Bunge, and

members of management and certain employees of the Company, including the former Chief Executive Officer, Hakan Persson, and the

former Chief Financial Officer, Lars Lindqvist.

The Neonode directors and members of management and employees individually purchased

an aggregate of approximately $2 million of common stock as part of the private placement.

In addition, major shareholder

and now director, Peter Lindell, also purchased shares.

Lindell and Mr.

Rosberg are each a beneficial owner of approximately

18% of Neonode common stock.

The consolidated financial statements included

herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets

and the repayment of liabilities in the ordinary course of business.

Management evaluated the significance of the Company’s

operating loss and determined that the Company’s current operating plan and sources of capital would be sufficient to alleviate

concerns about the Company’s ability to continue as a going concern.

We expect our revenues from license fees,

sensor modules, non-recurring engineering fees and AirBar sales will enable us to reduce our operating losses in coming years.

In addition, we intend to continue to implement various measures to improve our operational efficiencies.

No assurances can be

given that management will be successful in meeting its revenue targets and reducing its operating loss.

In the future, we may require sources of

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

If our operations do not become cash

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

No assurances can be given that we will be successful

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

If adequate funds are not available on acceptable terms,

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

of operations and financial condition.

In addition, if funds are available, the issuance of equity securities or securities convertible

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

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

On June 17, 2020, we entered into short-term

loan facilities (the “Loan Agreements”) with two entities beneficially owned respectively by each of Ulf Rosberg and

Peter Lindell, Directors of Neonode.

Pursuant to the Loan Agreements, each Director made 16,145,000 SEK (Swedish Krona), which

is approximately $1.7 million in U.S.

dollars, principal amount available to the Company.

The Company made an initial drawdown

of an aggregate of approximately $1.0 million under the Loan Agreements.

See Note 6 to our consolidated financial statements for

additional details on the Loan Agreements.

On August 7, 2020, we closed a private placement

(the “August 2020 Private Placement”) with certain institutional and accredited investors.

We issued a total of 1,611,845

shares of common stock at a price of $6.50 per share, and a total of 365 shares of Series C-1 Preferred Stock and 3,050 shares

of Series C-2 Preferred Stock, each with a conversion price of $6.50 per share and a stated value of $1,000 per share, for approximately

$13.9 million in gross proceeds.

The net proceeds from the private placement are being used for working capital purposes.

Ulf Rosberg and Peter Lindell, directors

of Neonode, and Urban Forssell, our Chief Executive Officer, purchased an aggregate of $3.05 million of the Series C-2 Preferred

Stock in the August 2020 Private Placement.

We issued 517 shares of Series C-2 Preferred

Stock to UMR Invest AB, an entity beneficially owned by Ulf Rosberg, in satisfaction of the outstanding indebtedness and accrued

interest under the Loan Agreement with UMR Invest AB.

Cidro Förvaltning AB, an entity associated with Mr.

Lindell purchased

517 shares of Series C-2 Preferred Stock.

Following the closing, we used the proceeds from the sale of Series C-2 Preferred Stock

to Cidro Förvaltning AB to satisfy the outstanding indebtedness and accrued interest under the Loan Agreement with Cidro Holding

As a result of the repayments to each of UMR Invest AB and Cidro Holding AB, the Loan Agreements terminated in accordance with

Pursuant to the terms and the provisions

of the Securities Purchase Agreement, all 365 shares of Series C-1 Preferred Stock and 4,084 shares of Series C-2 Preferred Stock

(together, the “Series C Preferred Shares”) were converted into 684,378 shares of Neonode common stock on September

24 and 29, 2020, respectively.

Prior to their conversion, the holders of

the Series C Preferred Shares were entitled to receive dividends at the rate per share of 5% per annum, totaling $33,000.

December 31, 2020, all of the preferred dividends have been paid.

We entered into a Registration Rights Agreement

(the “Registration Rights Agreement”) with the investors in the August 2020 Private Placement, pursuant to which we

filed a registration statement with the Securities and Exchange Commission (the “SEC”) relating to the offer and sale

by the holders of the shares of common stock sold in the private placement, and the shares of common stock issuable upon conversion

of the Series C Preferred Shares.

The registration statement was declared effective by the SEC on September 18, 2020.

maintain the effectiveness of the registration statement will subject us to payment for liquidated damages.

In connection with the August 2020 Private Placement, we incurred

total offering costs of $879,000, which were netted with the gross proceeds.

The consolidated financial statements included herein have been

prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment

of liabilities in the ordinary course of business.

Management evaluated the significance of the Company’s operating loss

and determined that the Company’s cash position after the Private Placement, current operating plan and sources of potential

capital would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.

We expect our revenues

from our three business areas will enable us to reduce our operating losses in coming years.

In addition, we intend to continue

to implement various measures to improve our operational efficiencies.

No assurances can be given that management will be successful

in meeting its revenue targets and reducing its operating loss.

In the future, we may

require sources of capital in addition to cash on hand to continue operations and to implement our strategy.

If our operations

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

No assurances can be given

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

If adequate funds are not available

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

business, results of operations and financial condition.

In addition, if funds are available, the issuance of equity securities

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

and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business

transactions.

Summary of Significant Accounting policies

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and transactions have been eliminated in consolidation.

Neonode consolidates entities in which it has a controlling

financial interest.

We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights.

The consolidated balance sheets at December 31, 2019 and 2018

and the consolidated statements of operations, comprehensive loss, stockholders equity and cash flows for the years ended 2019

and 2018 include our accounts and those of our wholly owned subsidiaries as well as Pronode Technologies AB.

Neonode consolidates entities in which it

has a controlling financial interest.

We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the

voting rights.

The consolidated balance sheets at December

31, 2020 and 2019 and the consolidated statements of operations, comprehensive loss, stockholders’

equity and cash flows

for the years ended December 31, 2020 and 2019 include our accounts and those of our wholly owned subsidiaries as well as Pronode

Technologies AB.

The preparation of financial statements

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the net realizable value of inventory;

recoverability of capitalized project costs and long-lived asset;

recoverability of capitalized project costs and long-lived assets;

for leases, determining

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Concentration of Cash Balance Risks

Cash balances are maintained at various banks in the U.S., Japan,

Korea, Taiwan and Sweden.

Cash balances are maintained at various

banks in the U.S., Japan, Korea, Taiwan and Sweden.

For deposits held with financial institutions in the U.S., the U.S.

Federal Deposit Insurance Corporation,

provides basic deposit coverage with limits up to $250,000 per owner.

The Swedish government provides insurance coverage up to

100,000 Euro per customer and covers deposits in all types of accounts.

The Japanese government provides insurance coverage up

to 10,000,000 Yen per customer.

The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer.

The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer.

times, deposits held with financial institutions may exceed the amount of insurance provided.

Deposit Insurance Corporation, provides basic deposit coverage with limits up to $250,000 per owner.

The Swedish government provides

insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts.

The Japanese government provides

insurance coverage up to 10,000,000 Yen per customer.

The Korea Deposit Insurance Corporation provides insurance coverage up to

50,000,000 Won per customer.

The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan

Dollar per customer.

At times, deposits held with financial institutions may exceed the amount of insurance provided.

Accounts Receivable and Allowance

for Doubtful Accounts

Accounts receivable is stated at net realizable value.

is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments.

limits are established through a process of reviewing the financial history and stability of each customer.

Should all efforts

fail to recover the related receivable, we will write off the account.

We also record an allowance for all customers based on certain

other factors including the length of time the receivables are past due and historical collection experience with customers.

allowance for doubtful accounts was approximately $85,000 and $149,000 as of December 31, 2019 and 2018, respectively.

Accounts receivable is stated at net realizable

Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required

Credit limits are established through a process of reviewing the financial history and stability of each customer.

all efforts fail to recover the related receivable, we will write off the account.

We also record an allowance for all customers

based on certain other factors including the length of time the receivables are past due and historical collection experience with

Our allowance for doubtful accounts was approximately $79,000 and $85,000 as of December 31, 2020 and 2019, respectively.

Projects in Process

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costs and project-specific equipment costs.

These costs are capitalized on our balance sheet as an asset and deferred until revenue

for each project is recognized in accordance with our revenue recognition policy.

Costs capitalized in projects in process were

$8,000 as of December 31, 2019.

There were no costs capitalized in projects in process as of December 31, 2018.

Inventory is stated at the lower of cost and net realizable

value, using the first-in, first-out (“FIFO”) valuation method.

Net realizable value is the estimated selling prices

in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Any adjustments

to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.

These costs are capitalized on our consolidated balance sheet as an asset and deferred

until revenue for each project is recognized in accordance with our revenue recognition policy.

There were no costs capitalized

in projects in process as of December 31, 2020.

Costs capitalized in projects in process were $8,000 as of December 31, 2019.

Inventory is stated at the lower of cost

and net realizable value, using the first-in, first-out (“FIFO”) valuation method.

Net realizable value is the estimated

selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

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

Due to the low sell-through of our AirBar

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it is stored.

The AirBar inventory reserve was $0.8 million and $1.0 million for the years ended December 31, 2019 and 2018, respectively.

In order to protect our manufacturing partners from losses in

relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee.

Since the sale of AirBars

has been lower than expected, a major part of the inventory at the partner remained unused when the due date of the bank guarantee

neared and Neonode therefore agreed that the partner should keep inventory for the production of 20,000 AirBars and the rest be

purchased by us.

The AirBar inventory reserve was $0.9 million and $0.8 million as of December 31, 2020 and 2019, respectively.

In order to protect our manufacturing partners

from losses in relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee.

Since the sale

of AirBars has been lower than expected, a major part of the inventory at the partner remained unused when the due date of the

bank guarantee neared and Neonode therefore agreed that the partner should keep inventory for the production of 20,000 AirBars

and the rest be purchased by us.

The inventory value of these purchases has been fully reserved.

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Investment in Joint Venture

We invested $3,000 for a 50% interest in Neoeye AB.

for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence,

but not control, over the investee.

We are not required to guarantee any obligations of the joint venture.

There have been no operations

of Neoeye through December 31, 2019.

We invested $3,000, for a 50% interest in Neoeye AB which was

sold in November 2020.

We accounted for our investment using the equity method of accounting since the investment provided us the

ability to exercise significant influence, but not control, over the investee.

We were not required to guarantee any obligations

of the Joint Venture and there have been no operations of Neoeye during 2020.

Property and Equipment

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Furniture and fixtures

Equipment purchased under a finance lease is depreciated over

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

Equipment purchased under a finance lease

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

Upon retirement or sale of property and

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Right-of-Use Assets

A right-of-use asset represents a lessee’s right to use

a leased asset for the term of the lease.

A right-of-use asset represents a lessee’s

right to use a leased asset for the term of the lease.

Our right-of-use assets generally consist of operating leases for buildings.

Right-of-use assets

are measured initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial

direct costs, such as commissions paid to obtain a lease.

Right-of-use assets

are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent,

and any initial direct costs not yet expensed.

Right-of-use assets are measured initially

at the present value of the lease payments, plus any lease payments made before a lease began and any initial direct costs, such

as commissions paid to obtain a lease.

Right-of-use assets are subsequently measured

at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct

costs not yet expensed.

Long-Lived Assets

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31, 2020 and 2019, respectively.

Foreign currency translation gains or (losses) were $(183,000) and $(357,000) during the years

ended December 31, 2019 and 2018, respectively.

Foreign currency translation gains or (losses) were $235,000 and $(183,000) during the years ended

December 31, 2020 and 2019, respectively.

Concentration of Credit and Business

Our customers are located in United States,

Europe and Asia.

Our customers are located in the United

States, Europe and Asia.

As of December 31, 2020, four customers

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

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.

Customers who accounted for 10% or more

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Epson –

Canon –

Alpine –

The Company conducts business in the United

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defined in each contract.

License fees for products and sales of AirBar and sensor

modules are on a per-unit basis;

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

License fees for products and sales of AirBar

and sensor modules are on a per-unit basis;

therefore, we generally satisfy performance obligations as units are shipped to our

Non-recurring engineering service performance obligations are satisfied as work is performed and accepted by our customers.

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At the end of each reporting

period, we record unbilled license fees, using prior royalty revenue data by customer to make accurate estimates of those royalties.

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

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contracts that require modification or customization of the underlying technology to adapt that technology to customer use, we

determine whether the technology license or sensor module, and engineering consulting services represent separate performance

determine whether the technology license or sensor module, and engineering consulting services represent separate performance obligations.

We perform our analysis on a contract-by-contract basis.

If there are separate performance obligations, we determine

the standalone selling price (“SSP”) of each separate performance obligation to properly recognize revenue as each

performance obligation is satisfied.

We provide engineering consulting services to our customers under a signed Statement of Work

(“SOW”).

If there are separate performance obligations, we determine the standalone

selling price (“SSP”) of each separate performance obligation to properly recognize revenue as each performance obligation

is satisfied.

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

Deliverables and payment terms are specified in each SOW.

We generally charge an hourly rate for engineering

services, and we recognize revenue as engineering services specified in contracts are completed and accepted by our customers.

Any upfront payments we receive for future non-recurring engineering services are recorded as unearned revenue until that revenue

We generally charge an hourly rate for engineering services, and we recognize

revenue as engineering services specified in contracts are completed and accepted by our customers.

Any upfront payments we receive

for future non-recurring engineering services are recorded as unearned revenue until that revenue is earned.

We believe that recognizing non-recurring

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recognized in full as soon as they become evident.

In the years ended December 31, 2019 and 2018, no losses related to SOW projects

were recorded.

During the year ended December 31, 2020 we recorded $47,000 of losses and during

the year ended December 31, 2019, there were no losses related to SOW projects recorded.

Optical Sensor Modules Revenues:

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aggregations and approximations of returns data to accurately estimate returns.

Our AirBar 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

Our AirBar and Module returns and warranty experience

to date has enabled us to make reasonable returns estimates, which are supported by the fact that our product sales involve homogenous

transactions.

The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant

as of December 31, 2019 and 2018.

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.

The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was $78,000

as of December 31, 2020 and was insignificant as of December 31, 2019.

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.

The following table presents disaggregated

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Net revenues from non-recurring engineering

Other revenue

Significant Judgments

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our customers.

The following table presents accounts receivable, unbilled revenues

and deferred revenues as of December 31, 2019 and 2018 (dollars in thousands):

The following table presents accounts receivable,

unbilled revenues and deferred revenues as of December 31, 2020 and 2019 (in thousands):

Accounts receivable and unbilled revenues

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asset has been impaired.

The allowance for doubtful accounts reflects our best estimate

of probable losses inherent in the accounts receivable balance.

We determine the allowance based on known troubled accounts, historical

experience, and other currently available evidence.

The allowance for doubtful accounts reflects

our best estimate of probable losses inherent in the accounts receivable balance.

We determine the allowance based on known troubled

accounts, historical experience, and other currently available evidence.

Payment terms and conditions vary by the

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and accepted by our customers.

The following table presents our deferred revenues by source

(in thousands);

The following table presents our deferred

revenues by source (in thousands):

Deferred license revenues

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Deferred sensor modules revenues

Contracted revenue not yet recognized was $67,000 as of December

we expect to recognize approximately 100% of that revenue over the next twelve months.

The Company recognized revenues

of approximately $75,000 and $1.2 million, for 2019 and 2018 respectively, related to contract liabilities outstanding at the beginning

Contracted revenue not yet recognized was

$138,000 as of December 31, 2020;

we expect to recognize 100% of that revenue over the next twelve months.

The Company recognized

revenues of approximately $39,000 and $75,000, for 2020 and 2019, respectively, related to contract liabilities outstanding at

the beginning of the year.

Advertising costs are expensed as incurred.

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benefit to us from the reseller marketing allowance.

Advertising costs amounted to approximately $82,000 and $120,000 for

the years ended December 31, 2019 and 2018, respectively.

Advertising costs amounted to approximately $70,000 and $82,000 for the

years ended December 31, 2020 and 2019, respectively.

Research and Development

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Net income or loss;

Transactions with owners acting in their capacity

as owners, showing separately contributions from and distributions to owners;

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.

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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, 2019 and 2018.

effected a 1-for-10 reverse stock split on October 1, 2018.

All shares of common stock and potential common stock equivalents in

the calculations used to determine weighted average number of shares of common stock outstanding have been adjusted to reflect

the effects of the reverse stock split for all periods presented.

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, 2019 and 2018 exclude the potential common stock equivalents,

as the effect would be anti-dilutive (see Note 14).

Net loss per share amounts have been computed based on the weighted-average

number of shares of common stock outstanding during the years ended December 31, 2020 and 2019.

Net loss per share, assuming dilution

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

common stock equivalents outstanding during the period.

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

stock equivalents used in computing the net loss per share for years ended December 31, 2020 and 2019 exclude the potential common

stock equivalents, as the effect would be anti-dilutive (see Note 15).

Other Comprehensive Income (Loss)

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New Accounting Pronouncements

In February 2016, the FASB issued ASU No.

2016-02, “

Leases (Topic 842) ”

(“ASU 2016-02”).

Under ASU 2016-02 (and several subsequent accounting

standards updates), lessees are required to recognize the following for all leases (with the exception of short-term leases) at

the commencement date:

a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured

on a discounted basis;

and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control

the use of, a specified asset for the lease term.

The effective date of the new lease standard (ASC 842) was January

1, 2019, and we adopted the new standard on that date.

We used the required modified retrospective approach, which allowed us to

make any necessary transition adjustments at January 1, 2019.

We elected the optional transition method, which allowed us to continue

to use disclosures required by the prior standard during 2019, the year of adoption.

There were also several practical expedients

available to make the transition more efficient and cost-effective for companies.

We elected the package of three practical expedients

available to us;

doing so allowed us to not reassess existing leases.

We currently have a limited number of leased

capital assets, all of which were classified as finance leases under the new lease standard.

We maintain a lease inventory for

those assets;

they are currently reported on our consolidated balance sheets under the new standard.

We analyzed our operating

leases, and included two material operating leases on our consolidated balance sheets beginning January 1, 2019 which resulted

in recording operating lease right-of-use assets and operating lease obligations of approximately $0.9 million.

We did not have

any equity adjustment related to our implementation of the new standard, and we will continue to provide disclosures related to

Because of the small number of assets we lease, we did not need to make systems changes to comply with the new standard.

We continue to track leased assets outside of our accounting systems.

We did not experience material changes in financial ratios,

leasing practices, or tax reporting.

In September 2016, the FASB issued ASU No.

2016-13, “

Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments ”,

(“ASU 2016-13”), supplemented by ASU 2019-04, “

Codification Improvements to Topic 326, Financial Instruments—Credit

Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ”, (“ASU 2019-04”), ASU 2019-05,

Financial Instruments—Credit Losses (Topic 326) ”, (“ASU 2019-05”), and ASU 2018-19, “

Improvements to Topic 326, Financial Instruments –

Credit Losses ”, (“ASU 2018-19”), and ASU 2019-11,

“Codification Improvements to Topic 326, Financial Instruments –

Credit Losses”

(“ASU 2019-11”).

The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based

on historical experience, current conditions and reasonable and supportable forecasts.

ASU 2016-13 and the subsequent accounting

standards updates were scheduled to become effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

On October 16, 2019, the FASB voted to delay implementation of the new credit losses standard for smaller reporting companies,

among other organizations, until fiscal years beginning after December 15, 2022.

In the future, we will evaluate the impact ASU

2016-13, ASU 2019-04, ASU 2019-05 and ASU 2018-19 will have on our consolidated financial statements, specifically regarding our

trade receivables;

however, we do not expect any significant impact from implementation of the new standard.

In September 2016,

the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments ,

(“ASU 2016-13”), supplemented by subsequent accounting standards updates.

The new standard requires entities to measure

all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and

reasonable and supportable forecasts.

ASU 2016-13, as amended, is scheduled to become effective for fiscal years beginning after

December 15, 2023, with early adoption permitted.

In the future, we will evaluate the impact that ASU 2016-13, as amended, will

have on our consolidated financial statements, specifically regarding our trade receivables;

however, we do not expect any significant

impact from implementation of the new standard.

In December 2019, the FASB issued ASU 2019-12,

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Simplifying the Accounting for Income Tax , which simplifies the accounting for income taxes.

ASU 2019-12 will become effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

2019-12 will become effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

We are currently

evaluating the impact ASU 2019-12 will have on our consolidated financial statements.

Reclass of Presentation in our Condensed Consolidated

Statements of Operations

Since January 1, 2020, we have allocated

revenue to our new business areas, HMI Solutions, HMI Products and Remote Sensing Solutions rather than by our revenue streams,

license fees, sensor module sale and non-recurring engineering fees.

The presentation in our consolidated statements of operations

has therefore been changed accordingly.

Revenues from HMI Solutions include license fees and non-recurring engineering fees while

HMI Products include sensor module sale and non-recurring engineering fees.

We believe that future revenues from Remote Sensing

Solutions will include license fees and non-recurring engineering fees.

Prepaid Expenses and Other Current Assets

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VAT receivable

Prepaid inventory

Advances to suppliers

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Property and Equipment

Property and equipment consist of the following

(in thousands):

Property and equipment, net consist of the

following (in thousands):

As of December 31,

Computers, software, furniture and fixtures

Equipment under capital lease

Equipment under finance leases

Less accumulated depreciation and amortization

Property and equipment, net

Depreciation and amortization expense was $0.9 million and $1.0

million for the years ended December 31, 2019 and 2018, respectively.

Depreciation and amortization expense was

$0.8 million and $0.9 million for the years ended December 31, 2020 and 2019, respectively.

Accrued Expenses

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Total accrued expenses

Short-Term Borrowings

During the year ended

December 31, 2020, the Company was granted a credit from the Swedish Tax Authority covering social charges and staff withholding

taxes relating to January through March 2020 payroll, as part of Swedish governmental COVID-19 support.

The total amount was $563,000

and the credit was for 12 months but could be repaid earlier if desired.

There was a 1.25% annual non-deductible interest and a

credit fee of 0.2% from the seventh month of the granted credit.

The tax credit was repaid in August 2020 along with interest of

On June 17, 2020, the Company entered into

the Loan Agreements with two entities beneficially owned respectively by each of Ulf Rosberg and Peter Lindell, directors of Neonode

(each, a “Director”).

Pursuant to the Loan Agreements, each entity beneficially owned by the Director made approximately

$1.7 million in U.S.

dollars principal amount available to the Company.

The Company made an initial drawdown of an aggregate of

approximately $1.0 million under the Loan Agreements.

Each of the Loan Agreements

provided for a credit fee of 0.75% per annum, calculated on a daily basis from the date of the Loan Agreement, and any outstanding

amount incurred interest at a fixed rate of 3.25% per annum, calculated on a daily basis from the drawdown date.

Drawdowns under

the Loan Agreements became unavailable upon the earlier to occur of the execution of a capital raise by Neonode or December 31,

Upon completion of a capital raise before December 31, 2020, any outstanding amount under the Loan Agreements, including

any credit fee and interest, became payable as soon as practicably possible after such capital raise.

If a capital raise was not

completed by December 31, 2020, or if the funds from the capital raise were insufficient to repay the full outstanding amount under

the Loan Agreements, then the outstanding amount under the Loan Agreements, including any credit fee and interest, would have become

due and payable on February 28, 2021.

On August 7, 2020, we issued 517 shares of Series C-2 Preferred

Stock to UMR Invest AB, an entity beneficially owned by Ulf Rosberg, in satisfaction of the outstanding indebtedness and accrued

interest under the Loan Agreement with UMR Invest AB.

Cidro Förvaltning AB, an entity associated with Mr.

Lindell purchased

517 shares of Series C-2 Preferred Stock.

Following the closing, we used the proceeds from the sale of Series C-2 Preferred Stock

to Cidro Förvaltning AB to satisfy the outstanding indebtedness and accrued interest under the Loan Agreement with Cidro Holding

As a result of the repayments to each of UMR Invest AB and Cidro Holding AB, the Loan Agreements terminated in accordance with

Fair Value Measurements

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We had no Level 2 assets or liabilities.

Applies to assets or liabilities

for which inputs are unobservable, and those inputs that are significant to the measurement of the fair value of the assets or

Applies to assets or liabilities for which inputs are unobservable, and those inputs that are significant to the measurement

of the fair value of the assets or liabilities.

We had no Level 3 assets or liabilities.

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Stockholders’

On September 27, 2018, the Company filed the certificate of

amendment to its restated certificate of incorporation with the state of Delaware to effect a reverse stock split, effective October

The Company also filed a certificate of amendment to its restated certificate of incorporation with the state of Delaware

to reduce the number of authorized shares of common stock from 100,000,000 to 10,000,000 shares.

The filing did not affect the

number of authorized preferred stock of 1,000,000 shares.

As a result of the reverse stock split,

every ten shares of issued and outstanding common stock were converted into one share of common stock, without any change in the

par value per share.

No fractional shares were issued, therefore stockholders entitled to receive a fractional share in connection

with the reverse stock split received a cash payment instead.

There was no financial impact to the Company’s consolidated

financial statements.

All shares and per share information in this Form 10-K have been retroactively adjusted for all periods presented

to reflect the reverse stock split, including reclassifying any amount equal to the reduction in par value of common stock to additional

paid-in capital.

On December 28, 2018, we entered into a

Securities Purchase Agreement with foreign investors, as part of a non-brokered private placement pursuant to which a total of

2,940,767 shares of common stock were issued.

See Note 1 for more information.

Effective June 11,

2019, the Company further amended its restated certificate of incorporation to increase the number of authorized shares of common

stock to 15,000,000 shares.

At the Annual Meeting of our Company held

on September 29, 2020, stockholders approved a proposal to increase the number of authorized shares of our common stock to 25,000,000

Accordingly, on November 5, 2020, we filed an amendment to the Neonode Inc.

Restated Certificate of Incorporation, as amended

(our “Certificate of Incorporation”), with the Secretary of State of the State of Delaware to increase the number of

authorized shares of our common stock to 25,000,000 shares.

On December 29, 2020, we issued 37,288 shares

of our common stock to key employees pursuant to our 2020 long-term incentive program (“2020 LTIP”) –

Warrants and Other Common Stock Activity

During the year ended December 31, 2020,

325,000 warrants expired and no warrants were exercised.

During the year ended December 31, 2019, warrants to purchase 360,000

shares of common stock were exercised for proceeds of $36,000.

No warrants were exercised during 2018.

A summary of all warrant

activity is set forth below:

Outstanding and exercisable

Weighted Average Exercise Price

Weighted Average

Remaining Contractual Life

January 1, 2018

December 31, 2018

summary of all warrant activity is set forth below:

and exercisable

Expired/forfeited

Outstanding and exercisable, December 31, 2019

Outstanding Warrants to Purchase Common

Stock as of December 31, 2019:

August 2016 Purchase Warrants

August 2017 Purchase Warrants

Total Warrants Outstanding

Preferred Stock

During the year ended December 31, 2019,

the only shares of our preferred stock issued and outstanding were Series B Preferred Stock.

Effective July 1, 2019, as described

below, all outstanding shares of our Series B Preferred Stock were converted into shares of our common stock.

The terms of our

Series B Preferred Stock were as follows:

Dividends and Distributions

The holders of shares of Series B Preferred

stock are entitled to participate with the holders of our common stock with respect to any dividends declared on the common stock

in proportion to the number of shares of common stock issuable upon conversion of the shares of Series B Preferred stock held by

Liquidation Preference

In the event of any liquidation, dissolution, or winding up

of our operations, either voluntary or involuntary, subject to the rights of the Series B Preferred stock and Senior Preferred

stock, shall be entitled to receive, after any distribution to the holders of senior preferred stock and prior to and in preference

to any distribution to the holders of common stock, $0.001 for each share of Series B Preferred stock then outstanding.

The holders of shares of Series B Preferred

stock have one vote for each share of Series B Preferred stock held by them.

Initially, each share of Series B Preferred

stock was convertible into one share of our common stock.

On March 31, 2009, our stockholders approved a resolution to increase

the authorized share capital, and to increase the conversion ratio to 132.07 shares of our common stock for each share of Series

B Preferred stock.

In November 2018, a holder of 1 share of

Series B Preferred stock converted into 132 shares of our common stock.

On April 10, 2019, a holder of 2 shares

of Series B Preferred stock converted into 264 shares of our common stock.

Effective July 1, 2019, the Company implemented a conversion

of all outstanding shares of Series B Preferred Stock into shares of common stock.

Each share of Series B Preferred Stock was automatically

converted into 132.07 shares of common stock.

No fractional shares were issued.

In lieu of any fractional shares, the resulting

number of shares of common stock was rounded up to the nearest whole number.

Accordingly, 80 shares of Series B Preferred Stock

were converted into 10,577 shares of common stock.

As of December 31, 2019, there were no shares of series B Preferred Stock outstanding.

December 31, 2020

Warrants to Purchase Common Stock as of December 31, 2020:

2016 Purchase Warrants

the year ended December 31, 2019, the only shares of our preferred stock issued and outstanding were Series B Preferred Stock.

Effective July 1, 2019, all outstanding shares of our Series B Preferred Stock were converted into shares of our common stock.

August 6, 2020, in connection with the closing of the Private Placement, the Company designated (i) 365 shares of its authorized

and unissued preferred stock as Series C-1 Preferred Stock by filing a Series C-1 Certificate of Designation of Preferences, Rights

and Limitations with the Secretary of State of the State of Delaware and (ii) 4,084 shares of its authorized and unissued preferred

stock as Series C-2 Preferred Stock by filing a Series C-2 Certificate of Designation of Preferences, Rights and Limitations with

the Secretary of State of the State of Delaware.

September 24 and 29, 2020, respectively, the Series C-1 Preferred Stock and Series C-2 Preferred Stock (together, the “Series

C Preferred Shares”) were converted into 684,378 shares of Neonode common stock.

holders of the Series C-1 and C-2 Preferred Shares were entitled to receive dividends at the rate per share of 5% per annum, totaling

As of December 31, 2020, all of the preferred dividends had been paid.

On December 7, 2020,

we filed Certificates of Elimination with the Secretary of State of the State of Delaware to eliminate the Series A Preferred Stock,

Series B Preferred Stock, Series C-1 Preferred Stock and Series C-2 Preferred Stock.

shares of preferred stock were issued and outstanding as of December 31, 2020.

Details of the preferred stock activities

are set forth below:

Balances, December 31, 2018

Conversion of Series B Preferred Stock to common stock

Balances, December 31, 2019

Issuance of Preferred Shares for cash

Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest

Conversion of Preferred Shares to common stock

Balances, December 31, 2020

Stock-Based Compensation

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Stock Options

During the year ended December 31, 2015,

our stockholders approved the Neonode Inc.

2015 Stock Incentive Plan (the “2015 Plan”) which replaced our 2006 Equity

Incentive Plan (the “2006 Plan”).

Although no new awards can be made under the 2006 Plan, it is still operative for

previously granted awards.

Under the 2015 Plan, 210,000 shares of common stock have been reserved for awards, including nonqualified

stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants.

The terms of the

awards granted under the 2015 Plan are set by our compensation committee at its discretion.

/ Stock Awards

During the year ended December 31, 2020, our stockholders approved

the Neonode Inc.

2020 Stock Incentive Plan (the “2020 Plan”) which replaced our 2015 Stock Incentive Plan (the “2015

Plan”), which in turn replaced our Neonode Inc.

2006 Equity Incentive Plan (the “2006 Plan”).

Although no new

awards may be made under the 2015 or 2006 Plans, they are still operative for previously granted awards.

Under the 2020 Plan, 750,000

shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to

officers, employees, non-employee directors and consultants.

The terms of the awards granted under the 2020 Plan are set by our

compensation committee at its discretion.

Accordingly, as of December 31, 2020, we

had two equity incentive plans:

had three equity incentive plans:

The 2006 Equity Incentive Plan (the “2006 Plan”).

The 2015 Equity Incentive Plan (the “2015 Plan”).

The 2020 Equity Incentive Plan (the “2020 Plan”).

In 2020 we established the Neonode Inc.

2020 Long Term Incentive

Plan (the “2020 LTIP”) to provide eligible persons with the opportunity to acquire an equity interest, or otherwise

increase their equity interest, in the Company as an incentive for them to remain in the service of the Company.

Through the 2020

LTIP, eligible employees of Neonode may waive between 50% to 67% of future unearned bonuses that may be awarded to them under the

Company’s annual bonus arrangement in exchange for the grant of shares of the Company’s common stock.

On December 29, 2020, we issued 37,288 shares

of common stock to key employees pursuant to the 2020 LTIP.

The shares were immediately vested but subject to a two-year lock-up

period after issuance.

In the event the participant’s employment with Neonode is terminated by the participant during the

two-year lock-up period, the Company will repurchase the shares at a price equal to 30% of the lower of market value at issuance

and termination date.

The shares issued on December 29, 2020 represent two-thirds of the total shares available for issuance under

the 2020 LTIP and the last one-third is planned to be issued at the end of December 2021.

Neonode has reported and paid Swedish

social charges of $75,000 for the issued shares but only 30% of the stock-based compensation (totaling $77,000) is included in

the consolidated statement of operations for the year ended December 31, 2020, with the remainder to be recognized ratably over

the two-year lock-up period.

The following table summarizes information

with respect to all options to purchase shares of common stock outstanding under the 2006 Plan and the 2015 Plan at December 31,

with respect to all options to purchase shares of common stock outstanding under the 2006 Plan, the 2015 Plan and the 2020 Plan

at December 31, 2020:

Options Outstanding

Range of Exercise Price

Number Outstanding and exercisable at 12/31/19

Weighted Average Remaining Contractual Life (years)

Weighted Average Exercise Price

$ 0 - $ 15.00

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December 31, 2020

No stock options were granted during the year ended December

There were 30,000 stock options granted in 2018.

The assumptions used to value stock options granted to directors, employees

and consultants during the year ended December 31, 2018 are as follows:

For the year ended

December 31, 2018

Annual dividend yield

Expected life (years)

Risk-free interest rate

Expected volatility

No stock options were granted during the

years ended December 31, 2020 and 2019, respectively.

During the years ended December 31, 2020

and 2018, we recorded $0 and $29,000, respectively, of compensation expense related to the vesting of stock options.

The estimated

fair value of the stock-based compensation was calculated using the Black-Scholes option pricing model as of the grant date of

the stock option.

and 2019, we recorded no stock-based compensation expense related to the vesting of stock options.

The estimated fair value of

the stock options was calculated using the Black-Scholes option pricing model as of the grant date of the stock option.

Stock options granted under the 2006 and

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The stock-based compensation expense for

the years ended December 31, 2019 and 2018 reflects the estimated fair value of the vested portion of options granted to directors,

employees and non-employees.

the years ended December 31, 2020 and 2019 reflects the estimated fair value of the vested portion of common stock granted to

directors and employees (in thousands):

Years ended December 31,

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Stock-based compensation expense

There is no remaining unrecognized compensation expense related

to stock options as of December 31, 2019.

The estimated fair value of stock-based

awards is calculated using the Black-Scholes option pricing model, even though this model was developed to estimate the fair value

of freely tradable, fully transferable options without vesting restrictions, which differ significantly from our stock options.

The Black-Scholes model also requires subjective assumptions, including future stock price volatility and expected time to exercise,

which greatly affect the calculated values.

The risk-free rate is based on the U.S.

Treasury rates in effect during the corresponding

period of grant.

The expected volatility is based on the historical volatility of our stock price.

These factors could change in

the future, which would affect fair values of stock options granted in such future periods and could cause volatility in the total

amount of the stock-based compensation expense reported in future periods.

There is no remaining unrecognized compensation

expense related to stock options as of December 31, 2020.

Unrecognized compensation expense related to the 2020 LTIP as of December

31, 2020 was $177,000, which will be recognized over two years.

Commitments and Contingencies

On August 26, 2020,

a putative stockholder of Neonode filed a purported class action lawsuit (C.A.

2020-0701-AGB) in the Delaware Court of Chancery

(the “Court”) against Neonode and the Board of Directors of Neonode for alleged breach of fiduciary duty in connection

with disclosure of information concerning Proposal 5 and Proposal 6 in the proxy statement filed with the SEC by Neonode on August

20, 2020 for the 2020 Annual Meeting of Stockholders of Neonode (the “Proxy Statement”).

These proposals for shareholder

approval related to the Private Placement by Neonode on August 5, 2020 in which two directors and the chief executive officer of

Neonode participated.

The relief sought by the plaintiff included a preliminary injunction to enjoin the stockholder votes on Proposal

5 and Proposal 6.

On September 13, 2020, the plaintiff amended his complaint to also enjoin the stockholder vote on Proposal 1

in the Proxy Statement concerning election of directors.

N eonode and the other named defendants

believe that the disclosures set forth in the Proxy Statement complied fully with all applicable law, that no supplemental disclosure

was required, and that the plaintiffs’

allegations are without merit.

However, in an effort to avoid the nuisance and ongoing

expense relating to the claims in the lawsuit, Neonode filed definitive additional materials to the Proxy Statement on September

The plaintiff withdrew his motion to preliminarily enjoin the stockholder votes on Proposals 1, 5, and 6 based upon the

definitive additional materials to the Proxy Statement.

On November 23, 2020, the Court entered an order to dismiss the lawsuit.

On September 2, 2020,

a separate putative stockholder of Neonode filed a purported class action lawsuit (Case No.

1:20-cv-01174-UNA) in the United States

District Court for the District of Delaware against Neonode, the Board of Directors of Neonode, and the Chief Executive Officer

of Neonode for alleged violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, in connection

with disclosure of information concerning Proposal 5 and Proposal 6 in the Proxy Statement, and generally containing the same substantive

allegations as in the above previously-filed Delaware Court of Chancery action.

On October 20, 2020, the plaintiff claimed to voluntarily

dismiss the lawsuit in the United States District Court.

However, on February 5, 2021, the plaintiff made contact again regarding

mootness discussions, which are still ongoing.

Operating expenses

for the year ended December 31, 2020 include costs in relation to the above-referenced lawsuits.

and Guarantees

Our bylaws require that we indemnify each

of our executive officers and directors for certain events or occurrences arising as a result of the officer or director serving

in such capacity.

The term of the indemnification period is for the officer’s or director’s lifetime.

The maximum potential

amount of future payments we could be required to make under these indemnification agreements is unlimited.

However, we have a

directors’

bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising as a result

of the officer or director serving in such capacity.

The term of the indemnification period is for the officer’s or director’s

The maximum potential amount of future payments we could be required to make under these indemnification agreements

is unlimited.

However, we have a directors’

and officers’

liability insurance policy that should enable us to recover a portion of future amounts paid.

As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal

and we have no liabilities recorded for these agreements as of December 31, 2019 and 2018.

We enter into indemnification provisions

under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers

and landlords.

Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred

by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities

under the agreement.

These indemnification provisions often include indemnifications relating to representations made by us with

regard to intellectual property rights.

These indemnification provisions generally survive termination of the underlying agreement.

The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited.

We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

we believe the estimated fair value of these agreements is minimal.

Accordingly, we have no liabilities recorded for these indemnification

provisions as of December 31, 2019 and 2018.

liability insurance policy that should enable us to recover

a portion of future amounts paid.

As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification

agreements is minimal and we have no liabilities recorded for these agreements as of December 31, 2020 and 2019.

enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically

with business partners, contractors, customers and landlords.

Under these provisions we generally indemnify and hold harmless

the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases,

as a result of the indemnified party’s activities under the agreement.

These indemnification provisions often include indemnifications

relating to representations made by us with regard to intellectual property rights.

These indemnification provisions generally

survive termination of the underlying agreement.

The maximum potential amount of future payments we could be required to make

under these indemnification provisions is unlimited.

We have not incurred material costs to defend lawsuits or settle claims related

to these indemnification agreements.

As a result, we believe the estimated fair value of these agreements is minimal.

we have no liabilities recorded for these indemnification provisions as of December 31, 2020 and 2019.

One of our manufacturing partners has previously

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we agreed to secure the value of the inventory in a bank guarantee.

The initial guarantee was for $345,000 and valid until December

Since the sale of AirBars has been lower than expected, a major part of the inventory at the manufacturer remained unused

when the due date of the bank guarantee neared.

In November 2019, we agreed to purchase the excess AirBar inventory

for approximately $141,000 and in conjunction with this, the bank guarantee was decreased to $210,000 and is valid until December

Management’s judgment is that the bank guarantee is a

contingent guarantee and management will record a liability when it is probable we will have to purchase the inventory.

11, 2020, management’s judgment is that we will sell the remaining AirBars during 2020 and thereby purchase the components

and the assembly service from the manufacturing partner throughout the year.

No liability has therefore been recorded for the period

ended December 31, 2019.

At December 31, 2020, the guaranteed amount is $100,000 and

represents the value of the remaining material in inventory at December 31, 2020.

Management’s judgment

is that the bank guarantee is a contingent guarantee and management will record a liability when it is probable we will have to

purchase the inventory.

As of March 10, 2021, management’s judgment is that we will sell the remaining AirBars during 2021

and thereby purchase the components and the assembly service from the manufacturing partner throughout the year.

has therefore been recorded as of December 31, 2020.

Patent Assignment

On May 6, 2019,

the Company assigned a portfolio of patents to Aequitas Technologies LCC.

The portfolio contains two patent families comprising

patents, five non-U.S.

patents and three pending U.S.

patent applications.

The assignment provides the Company the right

to share potential proceeds generated from a licensing and monetization program.

Non-Recurring

Engineering Development Costs

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

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

pursuant to which TI agreed to integrate our intellectual property into an ASIC.

Under the terms of the NN1002 Agreement, we agreed

to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold.

On May 6, 2019, the Company assigned a portfolio

of patents to Aequitas Technologies LLC.

The assignment provides the Company the right to share potential proceeds generated from

a licensing and monetization program.

On June 8, 2020, Neonode Smartphone LLC,

a subsidiary of Aequitas Technologies LLC filed complaints against Apple and Samsung in the Western District of Texas for infringing

These litigation matters are still ongoing.

Non-Recurring Engineering Development

On April 25, 2013, we entered into an Analog

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

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

Under the terms of the NN1002

Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first

2 million ASICs sold.

As of December 31, 2020, we had made no payments to TI under the NN1002 Agreement.

We have operating leases

for our corporate offices and our manufacturing facility, and finance leases for equipment.

Our leases have remaining lease terms

of one year to three years, and our two primary operating leases include options to extend the leases for one to three years;

operating leases also include options to terminate the leases within one year.

Future renewal options that are not likely to be

executed as of the balance sheet date are excluded from right-of-use assets and related lease liabilities.

Our operating leases

represent building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility.

Our corporate office lease

is automatically renewed at a cost increase of 2% on a yearly basis, unless we provide written notice nine months prior to expiration

We report operating leased assets, as well as operating lease

current and noncurrent obligations on our consolidated balance sheets for the right to use those buildings in our business.

finance leases represent manufacturing equipment;

we report the manufacturing equipment, as well as finance lease current and noncurrent

obligations on our consolidated balance sheets for our manufacturing equipment.

Generally, interest

rates are stated in our leases for equipment.

When no interest rate is stated in a lease, however, we review the interest rates

implicit in our recent finance leases to estimate our incremental borrowing rate.

We determine the rate implicit in a lease by

using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate.

The components of lease

expense were as follows (in thousands):

For the year ended

We have operating leases for our corporate

offices and our manufacturing facility, and finance leases for equipment.

Our leases have remaining lease terms of six months to

One of our primary operating leases includes options to extend the lease for one to three years and the other primary

lease includes an option to annually prolong;

those operating leases also include options to terminate the leases within one year.

Future renewal options that are not likely to be executed as of the balance sheet date are excluded from right-of-use assets and

related lease liabilities.

Our operating leases represent building

leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility.

Our Stockholm corporate office lease has

a remaining lease term of two years and both of our leases are automatically renewed at a cost increase of 2% on an annual basis,

unless we provide written notice nine months prior to the respective expiration dates.

We report operating lease right-of-use assets,

as well as current and noncurrent operating lease obligations on our consolidated balance sheets for the right to use those buildings

in our business.

Our finance leases represent manufacturing equipment;

we report the manufacturing equipment, as well as current

and noncurrent finance lease obligations on our consolidated balance sheets for our manufacturing equipment.

Generally, interest rates are stated in

our leases for equipment.

When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent

finance leases to estimate our incremental borrowing rate.

We determine the rate implicit in a lease by using the most recent finance

lease rate, or other method we think most closely represents our incremental borrowing rate.

The components of

lease expense were as follows (in thousands):

Years ended December 31,

Operating lease cost (1)

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Total finance lease cost

(1) Includes short term lease costs of $122,000 for the year

(1) Includes short term lease costs of $145,000 and $122,000 for

the years ended December 31, 2020 and 2019, respectively.

cash flow information related to leases was as follows (in thousands):

ended December 31,

Supplemental cash flow

information related to leases was as follows (in thousands):

Cash paid for amounts included in leases:

Operating cash flows from operating leases

Operating cash flows from finance leases

Financing cash flows from finance leases

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

Finance leases

paid for amounts included in leases:

cash flows from operating leases

cash flows from finance leases

assets obtained in exchange for lease obligations:

balance sheet information related to leases was as follows (in thousands):

Operating leases

Operating lease right-of-use assets

Current portion of operating lease obligations

Operating lease liabilities, net of current portion

Total operating lease liabilities

Finance leases

Property and equipment, at cost

Accumulated depreciation

Property and equipment, net

Current portion of finance lease obligations

Finance lease obligations, net of current portion

Total finance lease liabilities

of December 31,

lease right-of-use assets

portion of operating lease obligations

lease liabilities, net of current portion

operating lease liabilities

and equipment, at cost

and equipment, net

portion of finance lease obligations

lease liabilities, net of current portion

finance lease liabilities

Weighted-Average Remaining Lease Term

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Finance leases

(2) Upon adoption of the new lease standard, discount rates

used for existing leases were established at January 1, 2019.

A summary of future minimum payments under

non-cancellable operating lease commitments as of December 31, 2019 is as follows (in thousands):

Years ending December 31,

Less imputed interest

Total lease liabilities

Less current portion

The following is a schedule of minimum

future rentals on the non-cancelable finance leases as of December 31, 2019 (in thousands):

Year ending December 31,

Total minimum payments required:

Less amount representing interest:

Present value of net minimum lease payments:

Less current portion

Disclosures related to periods prior

to adoption of ASC 842

Minimum future lease

payments under capital and operating lease obligations as of December 31, 2018 were as follows:

Year ending December 31,

Total minimum payments required

Less amount representing interest

Present value of net minimum lease payments

Less current portion

Upon adoption of the

new lease standard, discount rates used for existing leases were established at January 1, 2019.

summary of future minimum payments under non-cancellable operating lease commitments as of December 31, 2021 is as follows (in

ending December 31,

imputed interest

lease liabilities

current portion

following is a schedule of minimum future rentals on the non-cancelable finance leases as of December 31, 2020 (in thousands):

ending December 31,

minimum payments required:

amount representing interest:

value of net minimum lease payments:

current portion

Segment Information

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which is comprised of the touch technology licensing and sensor module business.

We report revenues from external customers based on the country

where the customer is located.

The following table presents revenues by geographic region for the years ended December 31, 2019

and 2018 (dollars in thousands):

We report revenues from external customers

based on the country where the customer is located.

The following table presents revenues by geographic region for the years ended

December 31, 2020 and 2019 (dollars in thousands):

United States

Loss before income taxes was distributed

geographically for the years ended December 31, as follows (in thousands):

Loss before provision for income taxes

was distributed geographically for the years ended December 31, as follows (in thousands):

The provision (benefit)

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Effective tax rate

Significant components of the deferred tax

asset balances at December 31 are as follows (in thousands):

Significant components of the deferred

tax asset balances at December 31 are as follows (in thousands):

Deferred tax assets:

1 unchanged sentence

Net operating losses

Basis difference in fixed assets

Total deferred tax assets

4 unchanged sentences

Management applies

a full valuation allowance for the accumulated losses of Neonode Inc., and its subsidiaries, since it is not determinable using

a full valuation allowance for the accumulated losses of Neonode Inc.

and its subsidiaries, since it is not determinable using

the “more likely than not”

6 unchanged sentences

loss carryforward begins to expire in 2030.

Federal net operating losses generated for tax years ending after December 31, 2017

do not expire.

The foreign loss carryforward, which is generated in Sweden, does not expire.

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the amount to be limited under the provision.

We follow the provisions of accounting guidance which includes

a two-step approach to recognizing, derecognizing and measuring uncertain tax positions.

There were no unrecognized tax benefits

for the years ended December 31, 2019 and 2018.

We follow the policy to classify accrued interest and penalties

as part of the accrued tax liability in the provision for income taxes.

For the years ended December 31, 2019 and 2018 we did not

recognize any interest or penalties related to unrecognized tax benefits.

Our continuing practice is to recognize

interest and/or penalties related to income tax matters in income tax expense.

As of December 31, 2019 and 2018, we had no accrued

interest and penalties related to uncertain tax matters.

We follow the provisions of accounting

guidance which includes a two-step approach to recognizing, derecognizing and measuring uncertain tax positions.

There were no

unrecognized tax benefits for the years ended December 31, 2020 and 2019.

We follow the policy to classify accrued

interest and penalties as part of the accrued tax liability in the provision for income taxes.

For the years ended December 31,

2020 and 2019 we did not recognize any interest or penalties related to unrecognized tax benefits.

As of December 31, 2020, we had no uncertain

1 unchanged sentence

We file income tax returns in the U.S.

federal jurisdiction, California, Sweden, Japan, South Korea, and Taiwan.

The 2008 through 2018 tax years are open and may be

subject to potential examination in one or more jurisdictions.

We are not currently under any federal, state or foreign income

tax examinations.

jurisdiction, California, Sweden, Japan, South Korea, and Taiwan.

The 2009 through 2019 tax years are open and may be subject to

potential examination in one or more jurisdictions.

We are not currently under any federal, state or foreign income tax examinations.

Employee Benefit Plans

We participate in a number of individual defined contribution

pension plans for our employees in Sweden.

We contribute five percent (5%) of the employee’s annual salary to these pension

For the Swedish management we contribute up to fifteen percent (15%) of the employee’s annual salary.

Contributions

relating to these defined contribution plans for the years ended December 31, 2019 and 2018 were $395,000 and $413,000, respectively.

We participate in a number of individual

defined contribution pension plans for our employees in Sweden.

We contribute between 4.5% and 30% of the employee’s annual

salary to these pension plans depending on age and salary level.

Contributions relating to these defined contribution plans for

the years ended December 31, 2020 and 2019 were $459,000 and $395,000, respectively.

We match U.S.

employee contributions to a 401(K) retirement plan up to a maximum of six percent (6%) of an employee’s annual

Contributions relating to the matching 401(K) contributions for the years ended December 31, 2019 and 2018 were $6,000

and $6,000, respectively.

In Taiwan, we contribute six percent (6%) of the employee’s annual salary to a pension fund which

agrees with Taiwan’s Labor Pension Act.

Contributions relating to the Taiwanese pension fund for the years ended December

31, 2019 and 2018 were $3,000 and $4,000, respectively.

employee contributions to a

401(K) retirement plan up to a maximum of six percent (6%) of an employee’s annual salary.

Contributions relating to the

matching 401(K) contributions for the years ended December 31, 2020 and 2019 were $6,000 and $6,000, respectively.

In Taiwan, we

contribute six percent (6%) of the employee’s annual salary to a pension fund which agrees with Taiwan’s Labor Pension

Contributions relating to the Taiwanese pension fund for the years ended December 31, 2020 and 2019 were $4,000 and $3,000,

respectively.

Net Loss Per Share

Basic net loss per common share for the

years ended December 31, 2019 and 2018 was computed by dividing the net loss attributable to Neonode Inc.

for the relevant period

by the weighted average number of shares of common stock outstanding during the year.

Diluted loss per common share is computed

by dividing net loss attributable to Neonode Inc.

for the relevant period by the weighted average number of shares of common stock

and common stock equivalents outstanding during the year.

years ended December 31, 2020 and 2019 was computed by dividing the net loss attributable to common shareholders of Neonode Inc.

for the relevant period by the weighted average number of shares of common stock outstanding during the year.

Diluted loss per

common share is computed by dividing net loss attributable to common shareholders of Neonode Inc.

for the relevant period by the

weighted average number of shares of common stock and common stock equivalents outstanding during the year.

Potential common stock equivalents of approximately

0 and 350,000 outstanding stock warrants, 0 and 11,000 shares issuable upon conversion of preferred stock and 0 and 0 stock options

are excluded from the diluted earnings per share calculation for the years ended December 31, 2019 and 2018, respectively, due

to their anti-dilutive effect.

0 and 0 outstanding stock warrants, 0 and 0 shares issuable upon conversion of preferred stock and 0 and 0 stock options are excluded

from the diluted earnings per share calculation for the years ended December 31, 2020 and 2019, respectively, due to their anti-dilutive

(In thousands, except per share amounts)

Years ended December 31,

BASIC AND DILUTED

Weighted average number of common shares outstanding

Net loss attributable to Neonode Inc.

Net loss attributable to common shareholders of Neonode Inc.

Net loss per share basic and diluted

1 unchanged sentence

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 8. Financial Statements and Supplementary Data