What changed in this filing

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Item 1. Financial Statements

2021-05-12 compared with 2020-11-10 · 1062 added, 1452 removed, 368 unchanged (87% of the section changed)

1 unchanged sentence

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share

September 30,

(In thousands, except share and per share amounts)

Current assets:

Accounts receivable and unbilled revenue, net

Projects in process

Prepaid expenses and other current assets

Total current assets

Investment in joint venture

Property and equipment, net

15 unchanged sentences

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

11,467,377 and 9,171,154 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

11,504,665 shares issued and outstanding at March 31, 2021 and December 31, 2020

Additional paid-in capital

6 unchanged sentences

Total liabilities and stockholders’

The accompanying notes are an integral part

of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF

The accompanying notes are an integral part of

these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Three months ended

September 30,

Nine months ended

September 30,

HMI Solutions

3 unchanged sentences

Total cost of revenues

Total gross margin

Total gross profit

Operating expenses:

7 unchanged sentences

Total other expense

Loss before provision (benefit) for income taxes

Provision (benefit) for income taxes

Loss before provision for income taxes

Provision for income taxes

Net loss including noncontrolling interests

1 unchanged sentence

Net loss attributable to Neonode Inc.

Preferred dividends

Net loss attributable to common shareholders of Neonode Inc.

Loss per common share:

2 unchanged sentences

weighted average number of common shares outstanding

The accompanying notes are an integral part

of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE LOSS

The accompanying notes are an integral part of

these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE

(In thousands)

Three months ended

September 30,

Nine months ended

September 30,

Other comprehensive income (loss):

Net loss including noncontrolling interests

Other comprehensive loss:

Foreign currency translation adjustments

2 unchanged sentences

Comprehensive loss attributable to Neonode Inc.

The accompanying notes are an integral part

of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF

STOCKHOLDERS’

(In thousands, except for Preferred Stock

Shares Issued 1 )

For the Quarter to Date periods ended

September 30, 2019 through September 30, 2020

Preferred Stock

Shares Issued

Preferred Stock

Common Stock Shares

Common Stock Amount

Additional Paid-in

Comprehensive

The accompanying notes are an integral part of

these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

(In thousands, except for Preferred Stock Shares

For the Quarter to Date periods ended March

31, 2020 through March 31, 2021

Stock Shares Issued

Paid-in Capital

Other Comprehensive Income

Stockholders’

1 unchanged sentence

Stockholders’

Balances, December 31,

Foreign currency translation

December 31, 2019

currency translation adjustment

March 31, 2020

Conversion of Series B Preferred

Stock to common stock

Foreign currency translation

currency translation adjustment

June 30, 2020

Conversion of Series B Preferred

Stock to common stock

Foreign currency translation

of shares for cash, net of offering costs

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

of Series C-1 and C-2 Preferred Stock to common stock

currency translation adjustment

September 30, 2020

Common stock issued upon exercise

of common stock warrants

Foreign currency translation

currency translation adjustment

December 31, 2020

Foreign currency translation

currency translation adjustment

March 31, 2021

Foreign currency translation

June 30, 2020

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 C-2 Preferred Stock to common stock

Preferred dividends

Foreign currency translation

September 30, 2020

The accompanying notes are an integral part

of these condensed consolidated financial statements.

1 Preferred Shares Issued per series can be found under

the equity footnote (see Note 4).

CONDENSED CONSOLIDATED STATEMENTS OF

The accompanying notes are an integral part of

these condensed consolidated financial statements.

Shares Issued per series can be found under the equity footnote (see Note 3).

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Nine months ended

September 30,

Three months ended

Cash flows from operating activities:

1 unchanged sentence

Adjustments to reconcile net loss to net cash used in operating activities:

Bad debt expense

Stock based compensation expense

Depreciation and amortization

12 unchanged sentences

Cash flows from financing activities:

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

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

Payment of preferred dividend

Net cash provided by (used in) financing activities

Net cash used in financing activities

Effect of exchange rate changes on cash

Net increase (decrease) in cash

Net decrease in cash

Cash at beginning of period

3 unchanged sentences

Cash paid for interest

Supplemental disclosure of non-cash investing and financing activities:

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

Accrual of dividends

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

The accompanying notes are an integral part

of these condensed consolidated financial statements.

The accompanying notes are an integral part of

these condensed consolidated financial statements.

Notes to the Condensed Consolidated Financial

1 unchanged sentence

The accompanying unaudited

interim condensed consolidated financial statements include all adjustments consisting of normal recurring adjustments that are,

in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows

for the interim periods presented.

The results of operations for the nine months ended September 30, 2020 are not necessarily indicative

of results for a full fiscal year or any other period.

interim condensed consolidated financial statements include all adjustments consisting of normal recurring adjustments that are, in the

opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim

periods presented.

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of results for a

full fiscal year or any other period.

The accompanying condensed

consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 have been prepared by us, pursuant

to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”).

Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting

principles generally accepted in the U.S.

consolidated financial statements for the three months ended March 31, 2021 and 2020 have been prepared by us, pursuant to the rules and

regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”).

Certain information and

footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in

GAAP”) have been condensed or omitted.

These condensed consolidated

financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained

in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

These condensed consolidated financial statements should be read in

conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal

year ended December 31, 2020.

Neonode Inc., collectively

with its subsidiaries is referred to as “Neonode”

or the “Company”, develops optical touch and gesture

control solutions for human interaction with devices and remote sensing solutions for driver monitoring and cabin monitoring features

in automotive and other applications.

Our operations from

January 1, 2020 focused on three different business areas, human machine interface (“HMI”) Solutions, HMI Products

and Remote Sensing Solutions.

In HMI Solutions, Neonode offers customized optical touch and gesture control solutions for many

different markets and segments.

In HMI Products, the Company provides plug-and-play sensor modules that enable touch on any surface,

in-air touch, and gesture control for a wide range of applications.

In Remote Sensing Solutions, Neonode offers driver and cabin

monitoring solutions for vehicles based on the Company’s flexible, scalable and hardware-agnostic software platform.

or the “Company”, develops advanced optical sensing solutions

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

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

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

Neonode offers customized optical touch and gesture control solutions for many different markets and segments.

In our operations for the

three months ended March 31, 2021, we focused on three different business areas, human machine interface (“HMI”) Solutions,

HMI Products and Remote Sensing Solutions.

On May 4, 2021, we announced a new strategy and organizational update targeting an increased

focus on the Company’s contactless touch business and on current market opportunities in North America, Asia, and Europe.

changed to a regional sales organization to replace our business area structure going forward.

In HMI Solutions, Neonode

offered customized optical touch and gesture control solutions for many different markets and segments.

In HMI Products, the Company provided

plug-and-play sensor modules that enable touch on any surface, in-air touch, and gesture control for a wide range of applications.

Remote Sensing Solutions, Neonode offered driver and cabin monitoring solutions for vehicles based on the Company’s flexible, scalable

and hardware-agnostic software platform.

Revenues are derived from

three different revenue streams:

license fees, non-recurring engineering fees and the sale of sensor modules.

We have incurred significant

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

The Company incurred net losses attributable to

of approximately $1.6 million and $4.3 million and $1.1 million and $2.9 million for the three and nine months ended

September 30, 2020 and 2019, respectively, and had an accumulated deficit of approximately $194.8 million and $190.5 million as

of September 30, 2020 and December 31, 2019, respectively.

In addition, operating activities used cash of approximately $3.7 million

and $2.9 million for the nine months ended September 30, 2020 and 2019, respectively.

On June 17, 2020, the

Company 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 (each, a “Director”).

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.

On August 5, 2020,

the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with institutional and

accredited investors as part of a private placement (the “Private Placement”).

On August 6, 2020,

in connection with the Private Placement, Neonode designated (i) 365 shares of its authorized and unissued preferred stock as Series

C-1 5% Convertible Preferred Stock (the “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 5% Convertible Preferred Stock (the “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.

The Series C-1 Preferred Stock and Series C-2 Preferred Stock are substantially the same, except the conversion of the Series C-2

Preferred Stock requires additional shareholder approval in accordance with Nasdaq listing rules.

On August 7, 2020,

Neonode issued 517 shares of Series C-2 Preferred Stock to UMR Invest AB, the entity beneficially owned by Ulf Rosberg, to repay

the indebtedness and accrued interest under the Loan Agreement.

To effect a similar transaction with entities beneficially owned

by the other Director, Peter Lindell, (i) on August 7, 2020, at the closing of the Private Placement, Cidro Förvaltning AB

paid for an additional 517 shares of Series C-2 Preferred Stock, and (ii) on August 10, 2020, the next business day after the closing

of the Private Placement, Neonode repaid to Cidro Holding AB the debt and accrued interest due under the Loan Agreement, an amount

that equaled the price of the 517 shares of Series C-2 Preferred Stock.

As a result of the repayments to each Director, the Loan

Agreements terminated in accordance with their terms.

The closing of

the Private Placement occurred on August 7, 2020.

Pursuant to the Securities

Purchase Agreement, Neonode issued a total of 1,611,845 shares of common stock (the “Common Shares”) at a price of

$6.50 per Common Share, and a total of 3,415 shares with a conversion price of $6.50 per share and a stated value of $1,000 of

Series C-1 Preferred Stock and Series C-2 Preferred Stock, for an aggregate purchase price of $13.9 million in gross proceeds.

Ulf Rosberg and Peter Lindell, directors of Neonode, and Urban

Forssell the Chief Executive Officer of Neonode purchased an aggregate of $3.1 million of the Series C-2 Preferred Stock pursuant

to the Securities Purchase Agreement.

The net proceeds of

the Private Placement are being used for working capital purposes.

Pursuant to their terms

and the provisions of the Securities Purchase Agreement, the Series C-1 Preferred Stock and Series C-2 Preferred Stock (together,

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

The holders of the Preferred Shares

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

As of September 30, 2020, $2,000 of

preferred dividends had been paid and $31,000 was accrued.

In connection with

the Securities Purchase Agreement, Neonode entered into a Registration Rights Agreement (the “Registration Rights Agreement”)

pursuant to which Neonode filed a registration statement with the Securities and Exchange Commission (the “SEC”) relating

to the offer and sale by the holders of the Common Shares, and the shares of common stock that were underlying the Preferred Shares.

Pursuant to the Registration Rights Agreement, Neonode was obligated to file the registration statement within 30 calendar days

and to use reasonable best efforts to cause the registration statement to be declared effective within 75 calendar days.

The registration

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

Failure to maintain the effective registration of the Common

Shares and the shares of common stock underlying the Preferred Shares will subject Neonode to payment for liquidated damages.

In connection with

the Private Placement, Neonode incurred total offering costs of $879,000.

The Company incurred net losses attributable to Neonode

of approximately $1.6 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively, and had an accumulated

deficit of approximately $197.7 million and $196.2 million as of March 31, 2021 and December 31, 2020, respectively.

In addition, operating

activities used cash of approximately $2.0 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.

The condensed consolidated

financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and

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

financial statements included in this report have been prepared on a going concern basis, which contemplates continuity of operations

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

Management evaluated the significance

of the Company’s operating loss and determined that the Company’s 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.

of the Company’s operating loss and determined that the Company’s 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.

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 to us on acceptable terms,

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

and financial condition.

If funds are available through the issuance of equity or debt securities, the issuance of equity securities or

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

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

We expect revenues will enable

us to reduce our operating losses in coming years.

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

efficiencies.

No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating

Summary of Significant Accounting Policies

Principles of

Consolidation

The condensed consolidated

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

GAAP”) and include the accounts of Neonode Inc.

and its wholly owned subsidiaries, as well as Pronode Technologies

AB, a 51% majority owned subsidiary of Neonode Technologies AB.

The remaining 49% of Pronode Technologies AB is owned by 2X Communication

AB, located in Gothenburg, Sweden.

Pronode Technologies AB was organized to manufacture and sell our sensor modules.

All inter-company

accounts 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.

Principles of Consolidation

The consolidated financial statements have been prepared in accordance

with accounting principles generally accepted in the U.S.

GAAP and include the accounts of Neonode Inc.

and its wholly owned subsidiaries,

as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies AB.

The remaining 49% of Pronode Technologies

AB is owned by 2X-Communication AB, located in Kungsbacka, Sweden.

Pronode Technologies AB was organized to sell engineering services

within the automotive markets.

All inter-company accounts and transactions have been eliminated in consolidation.

Neonode consolidates entities

in which it has a controlling financial interest.

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

of the voting rights.

The condensed consolidated

balance sheets at September 30, 2020 and December 31, 2019 and the condensed consolidated statements of operations, comprehensive

loss, stockholders’

equity for the three and nine months ended September 30, 2020 and 2019 and the condensed consolidated

statements of cash flows for the nine months ended September 30, 2020 and 2019 include our accounts and those of our wholly owned

subsidiaries as well as Pronode Technologies AB.

Estimates and

The preparation of

financial statements in conformity with U.S.

GAAP requires making estimates and judgments that affect, at the date of the financial

statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts

of revenue and expenses.

balance sheets at March 31, 2021 and December 31, 2020 and the condensed consolidated statements of operations, comprehensive loss, stockholders’

equity and cash flows for the three months ended March 31, 2021 and 2020 include our accounts and those of our wholly owned subsidiaries

as well as Pronode Technologies AB.

Estimates and Judgments

The preparation of financial

statements in conformity with U.S.

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

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

Actual results could differ from these estimates and judgments.

Significant estimates

and judgments include, but are not limited to:

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

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

measuring variable consideration and other obligations such as product returns and refunds, and product warranties;

for uncollectible receivables;

Significant estimates and

judgments include, but are not limited to:

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

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

measuring variable

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

provisions for uncollectible receivables;

determining the net realizable value of inventory;

recoverability of capitalized project costs and

long-lived assets;

for leases, determining whether a contract contains a lease, allocating consideration between lease and non-lease

components, determining incremental borrowing rates, and identifying reassessment events, such as modifications;

the valuation

allowance related to our deferred tax assets;

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

Cash and Cash

We have not had any

liquid investments other than normal cash deposits with bank institutions to date.

The Company considers all highly liquid investments

with original maturities of three months of less to be cash equivalents.

Concentration

of Cash Balance Risks

recoverability of capitalized project costs and long-lived assets;

for leases, determining

whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing

rates, and identifying reassessment events, such as modifications;

the valuation allowance related to our deferred tax assets;

fair value of options issued for stock-based compensation.

Cash and Cash Equivalents

We have not had any liquid

investments other than normal cash deposits with bank institutions to date.

The Company considers all highly liquid investments with original

maturities of three months of less to be cash equivalents.

Concentration of Cash

Balance Risks

Cash balances are maintained

1 unchanged sentence

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 950,000 Krona per customer and covers deposits in all types of accounts.

For bank accounts of

the category held by Neonode, the Japanese government provides full insurance coverage.

The 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.

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

customers to make required payments.

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

of each customer.

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

The Swedish government provides

insurance coverage up to 950,000 Krona per customer and covers deposits in all types of accounts.

For bank accounts of the category held

by Neonode, the Japanese government provides full insurance coverage.

The 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 receivable is stated

at net realizable value.

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

required payments.

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

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

We also record an allowance

for all customers based on certain other factors including the length of time the receivables are past due and historical collection

experience with customers.

Our allowance for doubtful accounts was approximately $82,000 as of September 30, 2020 and $85,000 as

of December 31, 2019.

Projects in Process

We also record an allowance for all customers

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

Our allowance for doubtful accounts was approximately $79,000 as of March 31, 2021 and December 31, 2020, respectively.

Projects in Process

consist of costs incurred toward the completion of various projects for certain customers.

These costs are primarily comprised

of direct engineering labor costs and project-specific equipment costs.

These costs are capitalized on our 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 $11,000 and $8,000 as of September 30, 2020 and December 31, 2019, respectively.

Inventory is stated

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

Net realizable

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

and transportation.

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

in the current period.

Due to the low sell-through

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

Management has further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in

which location it is stored.

To protect our manufacturing

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

the production of 20,000 AirBars.

Projects in process consist

of costs incurred toward the completion of various projects for certain customers.

These costs are primarily comprised of direct engineering

labor costs and project-specific equipment costs.

These costs are capitalized on our 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 as of March

31, 2021 and December 31, 2020, respectively.

The Company’s inventory

consists primarily of components that will be used in the manufacturing of our sensor modules.

We classify inventory for reporting purposes

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

Inventory is stated at the

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

Net realizable value is the

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

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

Due to the low sell-through of our AirBar products,

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

Management has

further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location it is stored.

AirBar inventory reserve was $0.8 million and $0.9 million as of March 31, 2021 and December 31, 2020, respectively.

To protect our manufacturing partner from losses

in relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee covering the production of 20,000

Excess inventory was purchased from our manufacturing partner in 2019 and has been fully reserved.

In total, the AirBar

reserve was $0.7 million and $0.8 million as of September 30, 2020 and December 31, 2019, respectively.

The Company’s

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

We classify inventory

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

Raw materials, work-in-process, and finished

goods are as follows (in thousands):

September 30,

Raw materials, work-in-process,

and finished goods are as follows (in thousands):

Raw materials

2 unchanged sentences

Ending inventory

Investment in Joint Venture

We invested $3,000

in a 50% interest in Neoeye AB.

We account for our investment using the equity method of accounting because 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 and there have been no operations of Neoeye through September 30, 2020.

Property and Equipment

Property and equipment

are stated at cost, net of accumulated depreciation and amortization.

Depreciation and amortization are computed using the straight-line

method based upon estimated useful lives of the assets as follows:

Property and equipment are

stated at cost, net of accumulated depreciation and amortization.

Depreciation and amortization are computed using the straight-line method

based upon estimated useful lives of the assets as follows:

Estimated useful lives

1 unchanged sentence

Furniture and fixtures

Equipment purchased

under a finance lease is recognized over the term of the lease if that lease term is shorter than the estimated useful life.

Upon retirement or

sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains

or losses are reflected in the condensed consolidated statement of operations.

Maintenance and repairs are charged to expense as

Right of Use Assets

A right-of-use asset

represents a lessee’s right to use a leased asset for the term of the lease.

Our right-of-use assets generally consist of

operating leases for buildings and finance leases for manufacturing equipment.

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.

Equipment purchased under

a finance lease is recognized over the term of the lease if that lease term is shorter than the estimated useful life.

Upon retirement or sale of

property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected

in the condensed consolidated statement of operations.

Maintenance and repairs are charged to expense as incurred.

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.

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 and finance leases for manufacturing equipment.

Right-of-use assets are measured initially at the present value of

the lease payments, plus any lease payments made before a lease begins and any initial direct costs, such as commissions paid to obtain

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 Asset Recoverability

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of long-lived assets by estimating the future cash flow from the associated assets in accordance with relevant accounting guidance.

If the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally

estimated, we may incur charges for impairment of these assets.

As of September 30, 2020, we believe there was no impairment

of our long-lived assets.

There can be no assurance, however, that market conditions will not change or sufficient demand for our

products and services will continue, which could result in impairment of long-lived assets in the future.

Foreign Currency Translation and Transaction Gains and

The functional currency

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

Taiwan Dollar.

the estimated undiscounted future cash flow related to these assets decreases or the useful life is shorter than originally estimated,

we may incur charges for impairment of these assets.

As of March 31, 2021, we believe there was no impairment of our long-lived assets.

There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue,

which could result in impairment of long-lived assets in the future.

Foreign Currency Translation and Transaction Gains and Losses

The functional currency of

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

The translation from Swedish Krona, Japanese Yen, South Korean Won and Taiwan Dollar to U.S.

Dollars is performed

for balance sheet accounts using current exchange rates in effect at the balance sheet date and for income statement accounts using

a weighted-average exchange rate during the period.

Gains or (losses) resulting from translation are included as a separate component

of accumulated other comprehensive income (loss).

Foreign currency translation gains (losses) were $(228,000) and $(251,000) and

$(145,000) and $(300,000) during the three and nine months ended September 30, 2020 and 2019, respectively.

(losses) resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed

consolidated statements of operations and were $(135,000) and $(149,000) during the three and nine months ended September 30, 2020,

respectively, compared to $56,000 and $170,000 during the same periods in 2019, respectively.

Dollars is performed for balance sheet accounts

using current exchange rates in effect at the balance sheet date and for income statement accounts using a weighted-average exchange rate

during the period.

Gains or (losses) resulting from translation are included as a separate component of accumulated other comprehensive

income (loss).

Foreign currency translation gains (losses) were $(166,000) and $(87,000) during the three months ended March 31, 2021

and 2020, respectively.

Gains (losses) resulting from foreign currency transactions are included in general and administrative expenses

in the accompanying condensed consolidated statements of operations and were $82,000 and $49,000 during the three months ended March 31,

2021 and 2020, respectively.

Concentration of Credit and Business Risks

Our customers are located in U.S., Europe

As of September 30,

2020, four customers represented approximately 75% 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.

Customers who accounted

for 10% or more of our net revenues during the three months ended September 30, 2020 are as follows:

Hewlett-Packard Company –

LG Electronics Inc.

Seiko Epson Corporation –

Alpine Electronics, Inc –

Customers who accounted

for 10% or more of our net revenues during the nine months ended September 30, 2020 are as follows:

Hewlett-Packard Company –

Seiko Epson Corporation –

Alpine Electronics, Inc –

Customers who accounted

for 10% or more of our net revenues during the three months ended September 30, 2019 are as follows:

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

As of March 31, 2021, five

customers represented approximately 78% of our consolidated accounts receivable and unbilled revenues.

As of December 31, 2020, three

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

Customers who accounted for

10% or more of our net revenues during the three months ended March 31, 2021 are as follows:

Hewlett Packard Company –

Seiko Epson Corporation –

Alpine Electronics, Inc –

Customers who accounted

for 10% or more of our net revenues during the nine months ended September 30, 2019 are as follows:

Lexmark Intl Inc –

Alpine –

Customers who accounted for 10% or more of our

net revenues during the three months ended March 31, 2020 are as follows:

Hewlett Packard Company –

Seiko Epson Corporation –

Alpine Electronics, Inc –

Epson –

Alpine –

Revenue Recognition

We recognize revenue

when control of products is transferred to our customers, and when services are completed and accepted by our customers.

of revenue we recognize reflects the consideration we expect to receive for those products or services.

Our contracts with customers

may include combinations of products and services, for example, a contract that includes products and related engineering services.

We structure our contracts such that distinct performance obligations, such as product sales or license fees, and related engineering

services, are clearly defined in each contract.

Sales of license fees

and AirBar and sensor modules are on a per-unit basis;

therefore, we generally satisfy performance obligations as units are shipped

to our customers.

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

our customers.

We recognize revenue

net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

We treat all product shipping and handling charges (regardless of when they occur) as activities to fulfil the promise to transfer

goods, therefore we treat all shipping and handling charges as expenses.

We recognize revenue when

control of products is transferred to our customers, and when services are completed and accepted by our customers.

The amount of revenue

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

Our contracts with customers may include

combinations of products and services, for example, a contract that includes products and related engineering services.

We structure our

contracts such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly

defined in each contract.

License fees for products and sales of AirBar and sensor modules are

recognized on a per-unit basis;

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

Non-recurring

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

We recognize revenue net of

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

product shipping and handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods, therefore

we treat all shipping and handling charges as expenses.

Revenues from our business

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Licensing Revenues:

We earn revenue from

licensing our internally developed intellectual property (“IP”).

We enter into IP licensing agreements that generally

provide licensees the right to incorporate our IP components in their products, with terms and conditions that vary by licensee.

Fees under these agreements may include license fees relating to our IP, and royalties payable to us following the distribution

by our licensees of products incorporating the licensed technology.

The license for our IP has standalone value and can be used

by the licensee without maintenance and support.

For technology license

arrangements that do not require significant modification or customization of the underlying technology, we recognize technology

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

of each reporting period, we record unbilled license fees, using prior royalty revenue data by customer to make accurate estimates

of those royalties.

Explicit return rights are not offered to

There have been no returns through September 30, 2020.

We earn revenue from licensing

our internally developed intellectual property (“IP”).

We enter into IP licensing agreements that generally provide licensees

the right to incorporate our IP components in their products, with terms and conditions that vary by licensee.

Fees under these agreements

may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products

incorporating the licensed technology.

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

For technology license arrangements

that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when

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

At the end of each reporting period, we

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

Explicit return rights are not offered to customers.

There have been no returns through March 31, 2021.

Engineering Services:

For technology license

or sensor module 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 obligations.

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

If there are separate performance obligations,

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

as each performance obligation is satisfied.

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

of Work (“SOW”).

Deliverables and payment terms are specified in each SOW.

We generally charge an hourly rate for engineering

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

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

We believe that recognizing

non-recurring engineering services revenues as progress towards completion of engineering services and customer acceptance of those

services occurs best reflects the economics of those transactions, because engineering services as tracked in our systems correspond

directly with the value to our customers of our performance completed to date.

Hours performed for each engineering project are

tracked and reflect progress made on each project and are charged at a consistent hourly rate.

For technology license or sensor module contracts that require modification

or customization of the underlying technology to adapt that technology to the customer’s desired use, we 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”).

Deliverables and payment terms are specified

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

contracts are completed and accepted by our customers.

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

recorded as unearned revenue until that revenue is earned.

We believe that recognizing non-recurring engineering service revenues

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

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

performance completed to date.

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

are charged at a consistent hourly rate.

Revenues from engineering

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to produce such deliverables are recognized as they are completed and accepted by customers.

Estimated losses on

all SOW projects are recognized in full as soon as they become evident.

During the three and nine months ended September 30, 2020

and 2019, no losses related to SOW projects were recorded.

Estimated losses on all SOW

projects are recognized in full as soon as they become evident.

During the three months ended March 31, 2021 and 2020, no losses related

to SOW projects were recorded.

Optical Sensor Modules

We earn revenue from

sales of sensor modules hardware products to our OEM and Tier 1 supplier customers, who embed our hardware into their products,

and from sales of branded consumer products (AirBar) that incorporate our sensor modules sold through distributors.

We earn revenue from sales of sensor modules hardware products to our

Original Equipment Manufacturers (“OEM”) and Tier 1 supplier customers, who embed our hardware into their products, and from

sales of branded consumer products that incorporate our sensor modules sold through distributors or directly to end users.

These distributors

are generally given business terms that allow them to return unsold inventory, receive credits for changes in selling prices, and

participate in various cooperative marketing programs.

Our sales agreements generally provide customers with limited rights of

return and warranty provisions.

Because we generally

use distributors to provide AirBar and sensor modules to our customers, we analyze the terms of distributor agreements to determine

when control passes from us to our distributors.

For sales of AirBar and sensor modules sold through distributors, revenues are

recognized when our distributors obtain control over our products.

Control passes to our distributors when we have a present right

to payment for products sold to distributors, the distributors have legal title to and physical possession of products purchased

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

GAAP, companies

may make reasonable aggregations and approximations of returns data to accurately estimate returns.

Our sensor modules 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 September 30, 2020 and 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 tables

present disaggregated revenues by market for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):

are generally given business terms that allow them to return unsold inventory, receive credits for changes in selling prices, and participate

in various cooperative marketing programs.

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

The timing of revenue recognition related to AirBar

modules depends upon how each sale is transacted - either point-of-sale or through distributors.

We recognize revenue for AirBar modules

sold point-of-sale when we provide the promised product to the customer.

We generally use distributors to provide AirBar and sensor modules

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

of AirBar and sensor modules sold through distributors, revenues are recognized when our distributors obtain control over our products.

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

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

products purchased.

Distributors participate in various cooperative

marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs.

If actual credits received

by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue

could be adversely affected.

GAAP, companies may make reasonable aggregations and approximations

of returns data to accurately estimate returns.

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 $74,000 as of March 31, 2021 and $74,000 as of December

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 revenues by market for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three months ended

September 30,

March 31, 2021

Three months ended

September 30,

HMI Solutions

Net revenues from automotive

Net revenues from consumer electronics

Net revenues from automotive

Net revenues from medical

Net revenues from distributors and other

Nine months ended

September 30,

Nine months ended

September 30,

March 31, 2020

HMI Solutions

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Net revenues from consumer electronics

Net revenues from automotive

Net revenues from medical

Net revenues from distributors and other

Net revenues from distributors

Net revenues from other

Significant Judgments

Our contracts with

customers may include promises to transfer multiple products and services to a customer, particularly when the contract is for

a product and related engineering services fees for customizing that product for our customer.

Determining whether products and

services are considered distinct performance obligations that should be accounted for separately may require significant judgment.

Judgment may also be required to determine the SSP for each distinct performance obligation identified, although we generally structure

our contracts such that performance obligations and pricing for each performance obligation are specifically addressed.

have no outstanding contracts with multiple performance obligations.

Our contracts with customers

may include promises to transfer multiple products and services to a customer, particularly when the contract is for a product and related

engineering services fees for customizing that product for our customer.

Determining whether products and services are considered distinct

performance obligations that should be accounted for separately may require significant judgment.

Judgment may also be required to determine

the SSP for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations

and pricing for each performance obligation are specifically addressed.

We currently have no outstanding contracts with multiple performance

Judgment is also required

to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned

Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could

result in variability when determining the amount of revenue to recognize.

At the end of each reporting period, we use product

returns history and additional information that becomes available to estimate returns and credits.

We do not recognize revenue

if it is probable that a significant reversal of any incremental revenue would occur.

Judgment is further required to determine

the amount of unbilled license fees at the end of each reporting period.

to determine when control of products passes from us to our distributors, as well as the amounts of product that may be returned to us.

Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability

when determining the amount of revenue to recognize.

At the end of each reporting period, we use product returns history and additional

information that becomes available to estimate returns and credits.

We do not recognize revenue if it is probable that a significant reversal

of any incremental revenue would occur.

Finally, judgment is required to determine the

amount of unbilled license fees at the end of each reporting period.

Contract Balances

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may differ from the timing of invoicing to customers.

We record a receivable when we have an unconditional right to receive future

payments from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services

from our customers.

We record a receivable when we have an unconditional right to receive future payments

from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our

The following table presents accounts receivable

and deferred revenues as of September 30, 2020 and December 31, 2019 (in thousands):

September 30,

and deferred revenues as of March 31, 2021 and 2020 (in thousands):

Accounts receivable and unbilled revenue

Deferred revenues

The timing of revenue

recognition, billings and cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer

advances and deposits or deferred revenue (contract liabilities) on the consolidated balance sheets.

Generally, billing occurs

subsequent to revenue recognition, resulting in contract assets which are generally classified as current.

The Company sometimes

receives advances or deposits from its customers before revenue is recognized, which are reported as contract liabilities and are

generally classified as current.

These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract

basis at the end of each reporting period.

We do not anticipate

impairment of our contract asset related to license fee revenues, given the creditworthiness of our customers whose invoices comprise

the balance in that asset account.

We will continue to monitor the timeliness of receipts from those customers, however, to assess

whether the contract asset has been impaired.

The timing of revenue recognition, billings and

cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits or deferred

revenue (contract liabilities) on the consolidated balance sheets.

Generally, billing occurs subsequent to revenue recognition, resulting

in contract assets;

contract assets are generally classified as current.

The Company sometimes receives advances or deposits from its

customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current.

and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.

We do not anticipate impairment

of our contract asset related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance

in that asset account.

We will continue to monitor the timeliness of receipts from those customers, however, to assess whether the contract

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.

Our allowance for doubtful accounts

was approximately $82,000 as of September 30, 2020 and $85,000 as of December 31, 2019.

We determine the allowance based on

known troubled accounts, historical experience, and other currently available evidence.

Our allowance for doubtful accounts was approximately

$79,000 as of March 31, 2021 and December 31, 2020.

Payment terms and conditions

vary by the type of contract;

however, payments generally occur 30-60 days after invoicing for license fees and sensor modules

to our resellers and distributors.

Where revenue recognition timing differs from invoice timing, we have determined that our contracts

do not include a significant financing component.

Our intent is to provide our customers with consistent invoicing terms for the

convenience of our customers, not to receive financing from our customers.

however, payments generally occur 30-60 days after invoicing for license fees and sensor modules to our

resellers and distributors.

Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not

include a significant financing component.

Our intent is to provide our customers with consistent invoicing terms for the convenience

of our customers, not to receive financing from our customers.

Costs to Obtain Contracts

We record the incremental

costs of obtaining a contract with a customer as an asset, if we expect the benefit of those costs to cover a period greater than

costs of obtaining a contract with a customer as an asset, if we expect the benefit of those costs to cover a period greater than one

We currently have no incremental costs that must be capitalized.

We expense as incurred

costs of obtaining a contract when the amortization period of those costs would have been less than or equal to one year.

We expense as incurred costs

of obtaining a contract when the amortization period of those costs would have been less than or equal to one year.

Product Warranty

The following table

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

September 30,

The following table summarizes

the activity related to the product warranty liability (in thousands):

Balance at beginning of period

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Balance at end of period

The Company accrues

for warranty costs as part of its cost of sales of sensor modules based on estimated costs.

The Company’s products are generally

covered by a warranty for a period of 12 to 36 months from the customer receipt of the product.

The Company accrues for warranty

costs as part of its cost of sales of sensor modules based on estimated costs.

The Company’s products are generally covered by a

warranty for a period of 12 months from the customer receipt of the product.

Deferred Revenues

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when we transfer control of the product or service.

Deferred revenues may also include upfront payments for consulting services

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

We defer license fees

until we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer

and that customer has a right to use the license.

Engineering development fee revenues are deferred until engineering services

have been completed and accepted by our customers.

The following table

presents our deferred revenues (in thousands):

September 30,

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

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

We defer license fees until

we have met all accounting requirements for revenue recognition, which is when a license is made available to a customer and that customer

has a right to use the license.

Engineering development fee revenues are deferred until engineering services have been completed and accepted

by our customers.

The following table presents

our deferred revenues (in thousands):

Deferred revenues HMI Solutions

Deferred revenues HMI Products

During the three and

nine months ended September 30, 2020, the Company recognized revenues of approximately $7,000 and $39,000, respectively, related

to contract liabilities outstanding at the beginning of the year.

Product Backlog

Our sensor module product backlog at September 30, 2020 was

approximately $495,000.

The product backlog includes orders confirmed for products planned to be shipped within the next 3 quarters

to 3 customers.

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

As a result, we do not believe that our product backlog, as of any particular date, is necessarily indicative of actual product

revenue for any future period.

Advertising costs are

expensed as incurred.

Advertising costs for the three and nine months ended September 30, 2020 and 2019 amounted to approximately

$27,000 and $43,000 and $18,000 and $66,000, respectively.

Research and Development

During the three months ended

March 31, 2021, the Company recognized revenues of approximately $18,000 related to contract liabilities outstanding at the beginning

Advertising costs are expensed

Advertising costs for the three months ended March 31, 2021 and 2020 amounted to approximately $19,000 and $7,000, respectively.

Research and Development

(“R&D”) costs are expensed as incurred.

R&D costs consist primarily of personnel related costs in addition

to external consultancy costs such as testing, certifying and measurements.

Research and development (“R&D”)

costs are expensed as incurred.

R&D costs consist primarily of personnel related costs in addition to external consultancy costs such

as testing, certifying and measurements.

Stock-Based Compensation Expense

We measure the cost

of employee services received in exchange for an award of equity instruments, including share options, based on the estimated fair

value of the award on the grant date, and recognize the value as compensation expense over the period the employee is required

to provide services in exchange for the award, usually the vesting period.

We account for equity

instruments issued to non-employees at their estimated fair value.

We measure the cost of employee

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

on the grant date, and recognize the value as compensation expense over the period the employee is required to provide services in exchange

for the award, usually the vesting period.

We account for equity instruments

issued to non-employees at their estimated fair value.

When determining stock-based

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Noncontrolling Interests

The Company recognizes

noncontrolling interests as equity in the condensed consolidated financial statements separate from the parent company’s

Noncontrolling interests’

partners have less than 50% share of voting rights at any one of the subsidiary level companies.

The amount of net income (loss) attributable to non-controlling interests is included in consolidated net income (loss) on the

face of the condensed consolidated statements of operations.

Changes in a parent entity’s ownership interest in a subsidiary

that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial

The Company recognizes a gain or loss in net income (loss) when a subsidiary is deconsolidated.

Such gain or loss is

measured using the fair value of the noncontrolling equity investment on the deconsolidation date.

Additionally, operating losses

are allocated to noncontrolling interests even when such allocation creates a deficit balance for the noncontrolling interest partner.

The Company provides

either in the condensed consolidated statement of stockholders’

equity, if presented, or in the notes to condensed consolidated

financial statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets),

equity (net assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately

We recognize any noncontrolling interest, also

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

A noncontrolling interest represents

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

Generally, any interest that holds less

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

however, there are other factors, such as decision-making

rights, that are considered as well.

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

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

The Company provides either

in the condensed consolidated statement of stockholders’

equity, if presented, or in the notes to condensed consolidated financial

statements, a reconciliation at the beginning and the end of the period of the carrying amount of total equity (net assets), equity (net

assets) attributable to the parent, and equity (net assets) attributable to the noncontrolling interest that separately discloses:

Net income or loss;

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Each component of other comprehensive income or loss.

We recognize deferred

tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial

statements or tax returns.

We recognize deferred tax

liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements

or tax returns.

We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate.

Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax

bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income.

allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based on the “more

likely than not”

Deferred income tax

assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities

using enacted tax rates in effect for the year in which the differences are expected to reverse.

The realization of deferred tax assets

is based on historical tax positions and expectations about future taxable income.

Valuation allowances are recorded against net deferred

tax assets when, in our opinion, realization is uncertain based on the “more likely than not”

criteria of the accounting guidance.

Based on the uncertainty

of future pre-tax income, we fully reserved our net deferred tax assets as of September 30, 2020 and December 31, 2019.

event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred

tax asset would increase income in the period such determination was made.

The provision for income taxes represents the net change

in deferred tax amounts, plus income taxes paid or payable for the current period.

Based on the uncertainty of

future pre-tax income, we fully reserved our net deferred tax assets as of March 31, 2021 and December 31, 2020.

In the event we were

to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase

income in the period such determination was made.

The provision for income taxes represents the net change in deferred tax amounts, plus

income taxes paid or payable for the current period.

We follow U.S.

related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing

and measuring uncertainty in income taxes.

accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring

uncertainty in income taxes.

As a result, we did not recognize a liability for unrecognized tax benefits.

As of September

30, 2020, and December 31, 2019, we had no unrecognized tax benefits.

Net Loss per Share

As of March 31, 2021 and December

31, 2020, we had no unrecognized tax benefits.

Net Loss per Share

amounts has been computed based on the weighted average number of shares of common stock outstanding during the three and nine

months ended September 30, 2020 and 2019, respectively.

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 weighted-average number of shares of common stock and potential common stock equivalents used in computing the

net loss per share for the three and nine months ended September 30, 2020 and 2019 exclude the potential common stock equivalents,

as the effect would be anti-dilutive (see Note 9).

Net loss per share amounts

has been computed based on the weighted average number of shares of common stock outstanding during the three months ended March 31, 2021

Net loss per share, assuming dilution amounts from common stock equivalents, is computed based on the weighted-average

number of shares of common stock and potential common stock equivalents outstanding during the period.

The weighted-average number of

shares of common stock and potential common stock equivalents used in computing the net loss per share for the three months ended March

31, 2021 and 2020 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8).

Other Comprehensive Income (Loss)

Our other comprehensive

income (loss) includes foreign currency translation gains and losses.

The cumulative amount of translation gains and losses

are reflected as a separate component of stockholders’

Our other comprehensive income

(loss) includes foreign currency translation gains and losses.

The cumulative amount of translation gains and losses are reflected

as a separate component of stockholders’

equity in the condensed consolidated balance sheets.

Cash Flow Information

Cash flows in foreign

currencies have been converted to U.S.

Cash flows in foreign currencies

have been converted to U.S.

Dollars at an approximate weighted-average exchange rate for the respective reporting periods.

The weighted-average exchange rate for the condensed consolidated statements of operations was as follows:

Nine months ended

September 30,

The weighted-average

exchange rate for the condensed consolidated statements of operations was as follows:

Three months ended

Swedish Krona

1 unchanged sentence

Taiwan Dollar

Exchange rate for the consolidated balance

sheets was as follows:

September 30,

Exchange rate for the consolidated balance sheets

was as follows:

Swedish Krona

4 unchanged sentences

fair values for all financial instruments for which it is practicable to estimate fair value.

Financial instruments including cash,

accounts receivable, accounts payable, accrued expenses and short-term borrowings and are deemed to approximate fair value due

to their short maturities.

Financial instruments including cash, accounts

receivable, accounts payable and accrued expenses and are deemed to approximate fair value due to their short maturities.

New Accounting Pronouncements

In 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, Income Taxes (Topic 740):

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.

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 condensed consolidated

statements of operations has been changed accordingly.

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

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

We expect that future revenues within our

Remote Sensing Solutions business area will be derived from license fees and non-recurring engineering fees.

Short-Term Borrowings

During the nine months

ended September 30, 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 short-term loan facilities

(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 Agreement.

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, 2020.

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, Neonode issued 517 shares of Series C-2 Preferred

Stock to UMR Invest AB, the entity beneficially owned by Ulf Rosberg, to repay the indebtedness and accrued interest under the

Loan Agreement.

To effect a similar transaction with entities beneficially owned by the other Director, Peter Lindell, (i) on August

7, 2020, at the closing of the Private Placement, Cidro Förvaltning AB paid for an additional 517 shares of Series C-2 Preferred

Stock, and (ii) on August 10, 2020, the next business day after the closing of the Private Placement, Neonode repaid to Cidro Holding

AB the debt and accrued interest due under the Loan Agreement, an amount that equaled the price of the 517 shares of Series C-2

Preferred Stock.

As a result of the repayments to each Director, the Loan Agreements terminated in accordance with their terms.

In September 2016, the FASB issued ASU No.

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, Income Taxes (Topic 740):

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

We adopted ASU 2019-12 on January 1, 2021 and the adoption of this ASU did not have a significant impact on our consolidated financial

Stockholders’

See Note 1 for activities

that affected common stock during the three and nine months ended September 30, 2020.

At the Annual Meeting of our Company held on September 29, 2020,

stockholders approved a proposal to increase the number of authorized common stock to 25,000,000 shares.

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 to 25,000,000 the number of authorized

shares of our common stock.

On August 7, 2020, we closed

a private placement (the “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 aggregate gross proceeds.

At our annual meeting of our stockholders held on September 29, 2020,

stockholders approved a proposal to increase the number of authorized shares of our common stock to 25,000,000 shares.

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”) see Note 4.

During the three months ended

March 31, 2021, there were no activities that affected common stock.

Preferred Stock

On 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.

The Series C-1 Preferred

Stock and Series C-2 Preferred Stock (together, the “Preferred Shares”) were converted into 684,378 shares of Neonode

common stock.

As of September 30, 2020, our Certificate of Incorporation authorized

Series A Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, and Series C-2 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, all outstanding shares of our Series B Preferred Stock were converted into shares of our common stock.

The holders of the Preferred Shares were entitled to receive

dividends at the rate per share of 5% per annum, totaling $33,000.

As of September 30, 2020, $2,000 of preferred dividends had

been paid and $31,000 was accrued.

No shares of preferred stock were

issued and outstanding as of September 30, 2020.

On 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.

On 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.

The 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 $33,000.

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.

There were no transactions in our preferred stock during the three

months ended March 31, 2021 and 2020.

No shares of preferred stock were issued and outstanding as of March 31, 2021.

Details of the preferred stock activities

are set forth below:

Series B Preferred Stock Shares Issued

Series B Preferred Stock Amount

Series C-1 Preferred Stock Shares Issued

Series C-1 Preferred Stock Amount

Series C-2 Preferred Stock Shares Issued

Series C-2 Preferred Stock Amount

Balances, December 31, 2019

Balances, March 31, 2019

Conversion of Series B Preferred Stock to common stock

Balances, June 30, 2019

Conversion of Series B Preferred Stock to common stock

Balances, September 30, 2019

Balances, December 31, 2019

Balances, March 31, 2020

Balances, June 30, 2020

Issuance of Preferred Shares for cash

1 unchanged sentence

Conversion of Preferred Shares to common stock

Balances, September 30, 2020

As of September 30,

2020 and December 31, 2019, the Company had 431,368 warrants to purchase common stock outstanding.

Balances, December 31, 2020

As of March 31, 2021 and December

31, 2020, there were 431,368 warrants to purchase common stock outstanding.

Stock-Based Compensation

stock-based compensation expense for the three and nine months ended September 30, 2020 and 2019 and there is no remaining

unrecognized stock-based compensation expense related to stock options as of September 30, 2020.

The estimated fair

value of stock-based awards is calculated using the Black-Scholes option pricing model, even though this model was developed to

estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly

from our stock options.

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

expected time to exercise, which greatly affect the calculated values.

The expected term and forfeiture rate of options granted

is derived from historical data on employee exercises and post-vesting employment termination behavior, as well as expected behavior

on outstanding options.

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

Treasury rates in effect during the corresponding period of grant.

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

These factors could change in the future, which

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

stock-based compensation expense reported in future periods.

Stock Options

We have adopted equity

incentive plans for which stock options and restricted stock awards are available to grant to employees, consultants and directors.

All employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market

value of the underlying common stock on the grant date.

There are no vesting provisions tied to performance conditions for any

options, as vesting for all outstanding option grants was based only on continued service as an employee, consultant or director.

All of our outstanding stock options and restricted stock awards are classified as equity instruments.

As of September 30, 2020, we had three equity

incentive plans:

We have adopted equity incentive plans under which we may grant stock

options and restricted stock awards to employees, consultants and directors.

Except for certain options granted to certain Swedish employees,

all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value

of the underlying common stock on the grant date.

There are no vesting provisions tied to performance conditions for any options, as vesting

for all outstanding option grants was based only on continued service as an employee, consultant or director.

All of our outstanding stock

options and restricted stock awards are classified as equity instruments.

Stock Options / 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, these plans 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 March 31, 2021, we had three

equity incentive plans:

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

The 2015 Stock Incentive Plan (the “2015 Plan”);

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

Both the 2006 Plan and the 2015 Plan have

terminated with respect to additional awards.

However, shares issuable pursuant to previously awarded stock options may still be

exercised in accordance with their terms.

A summary of the combined activity under

all of the stock option plans is set forth below:

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

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

In 2020 we established the Neonode Inc.

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.

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 the 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) was 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.

For the three months ended March 31, 2021, $23,000

of stock-based compensation was included in our condensed consolidated statement of operations.

Unrecognized compensation expense related

to the 2020 LTIP as of March 31, 2021 was $154,000, which will be recognized over two years from issuance of the shares of common stock.

A summary of the combined activity under all of

the stock option plans is set forth below:

Outstanding at January 1, 2021

Outstanding at September 30, 2020

The aggregate

intrinsic value of the 10,500 stock options that are outstanding, vested and expected to vest as of September 30, 2020 was $0.

For the three

and nine months ended September 30, 2020 and 2019, we recorded no compensation expense related to the vesting of stock options.

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

of the stock option.

the three and nine months ended September 30, 2020, we did not grant any options to purchase shares of our common stock to employees

or members of our board of directors.

options granted under the 2006 and 2015 Plans are exercisable over a maximum term of ten years from the date of grant, vest in

various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common

stock on the date of grant.

Outstanding at March 31, 2021

The aggregate intrinsic value of the 9,500 stock

options that are outstanding, vested and expected to vest as of March 31, 2021 was $0.

For the three months ended March 31, 2021 and 2020,

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

The estimated fair value of the stock options

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

During the three months ended

March 31, 2021, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.

Stock options granted under

the 2006 and 2015 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one

to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

Commitments and Contingencies

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 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.

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 18, 2020.

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.

The lawsuit remains subject to

final disposition, including the potential award of fees to the attorneys for the plaintiff.

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 voluntarily dismissed the lawsuit in the United States District Court.

expenses for the three and nine months ended September 30, 2020 include actual and estimated costs in relation to the above-referenced

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.

relief sought by the plaintiff included a preliminary injunction to enjoin the stockholder votes on Proposal 5 and Proposal 6.

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’

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 18, 2020.

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.

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 voluntarily dismissed the lawsuit in the United

States District Court.

However, on February 11, 2021, the plaintiff’s counsel informed Neonode that they would file a fee petition

as a result of Neonode filing the definitive additional materials to the Proxy Statement on September 18, 2020.

Neonode intends

to vigorously defend against any attempt by the plaintiff’s counsel to obtain any fee award.

Indemnities and Guarantees

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

of the officer or director serving in such capacity.

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

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

is unlimited.

Our bylaws require that we

indemnify each of our executive officers and directors for certain events or occurrences arising because of the officer or director serving

in such capacity.

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

The maximum potential

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

However, we have a directors’

and officers’

liability insurance policy that should enable us to recover

a portion of future amounts paid.

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

agreements is minimal and we have no liabilities recorded for these agreements as of September 30, 2020 and December 31, 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 regarding intellectual property rights.

These indemnification provisions generally survive

termination of the underlying agreement.

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

indemnification provisions is unlimited.

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

indemnification agreements.

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

Accordingly, we have

no liabilities recorded for these indemnification provisions as of September 30, 2020 and December 31, 2019.

of our manufacturing partners has previously purchased material for the final assembly of AirBars.

To protect the manufacturer

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

guarantee was for $345,000 and valid until December 31, 2019.

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.

November 2019, we agreed to decreased the bank guarantee to $210,000, covering the value of inventory for the production of 20,000

AirBars and in conjunction with this purchase the excess AirBar inventory for approximately $141,000.

The current bank guarantee

is valid until 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 November 10, 2020, management’s judgment is that we will sell the remaining AirBars

during 2020 and 2021 and thereby purchase the components and the assembly service from the manufacturing partner throughout the

The bank guarantee is expected to be renewed at a lower amount reflecting the value of the remaining inventory at year-end.

No liability has been recorded for the period ended September 30, 2020.

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 March 31, 2021 and December 31, 2020.

We enter into indemnification

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

customers and landlords.

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

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

under the agreement.

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

intellectual property rights.

These indemnification provisions generally survive termination of the underlying agreement.

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

We have not incurred

material costs to defend lawsuits or settle claims related to these indemnification agreements.

As a result, we believe the estimated

fair value of these agreements is minimal.

Accordingly, we have no liabilities recorded for these indemnification provisions as of March

31, 2021 and December 31, 2020.

One of our manufacturing partners has previously

purchased material for the final assembly of AirBars.

To protect the manufacturer from losses in relation to AirBar production, we agreed

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

At March 31, 2021, the guaranteed amount is $100,000 and represents the value

of the remaining material in inventory at March 31, 2021.

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 May 12, 2021, management’s judgment is that we will sell the remaining AirBars and thereby purchase the components

and the assembly service from the manufacturing partner.

No liability has therefore been recorded for the period ended March 31, 2021.

Patent Assignment

On May 6, 2019, the

Company assigned a portfolio of patents to Aequitas Technologies LCC (“Aequitas”).

The portfolio contains two patent

families comprising nine U.S.

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.

As of September 30, 2020,

there have been no proceeds from the agreement with Aequitas.

On July 11, 2020, Aequitas

assigned 10 patents belonging to the one of the patent families back to Neonode based upon a determination by Aequitas not to enforce

those particular patents.

On September 8, 2020,

an Aequitas subsidiary, Neonode Smartphone LLC, filed patent infringement lawsuits against Apple Inc., and Samsung Electronics

and Samsung Electronics America, Inc., in U.S.

federal court in the Western District of Texas.

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 application-specific

integrated circuit (“ASIC”).

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

engineering costs at the rate of $0.25 per ASIC for each of the first 2 million ASICs sold.

As of September 30, 2020, we had made

no payments to TI under the NN1002 Agreement.

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 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.

As of March 31, 2021, we had made no payments to TI under the NN1002 Agreement.

Segment Information

We have one reportable

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

All of our sales for the three and nine

months ended September 30, 2020 and 2019, respectively, were to customers located in the U.S., Europe and Asia.

The Company reports

revenues from external customers based on the country where the customer is located.

The following table

presents net revenues by geographic area for the three and nine months ended September 30, 2020 and 2019, respectively, (dollars

in thousands):

We have one reportable segment,

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

All of our sales for the three months ended March 31,

2021 and 2020 were to customers located in the U.S., Europe and Asia.

The Company reports revenues from external customers based on the

country where the customer is located.

The following table presents

net revenues by geographic area for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three months ended

September 30,

March 31, 2021

Three months ended

September 30,

United States

Nine months ended

September 30,

Nine months ended

September 30,

March 31, 2020

United States

The following table presents our total assets

by geographic region as of September 30, 2020 and December 31, 2019 (in thousands):

September 30,

We have operating leases

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

Our leases have remaining lease terms

of two months to 2.42 years, and one of our two primary operating leases includes an option to extend the lease for another three

This primary operating lease also includes an option to terminate the lease by October 1, 2021.

The other primary operating

lease has been terminated effective November 30, 2020 and a new lease has been signed for three years beginning December 1, 2020.

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.

We report operating

lease 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.

by geographic region as of March 31, 2021 and December 31, 2020 (in thousands):

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 two years.

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 extend;

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 finance lease current and noncurrent obligations on our consolidated balance sheets.

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):

September 30,

Nine Months Ended

September 30,

Operating lease cost (1)

Finance lease cost:

Amortization of leased assets

Interest on lease liabilities

Total finance lease cost

Includes short term lease costs of $30,000 and $81,000 for the three and nine months ended September 30, 2020, respectively.

September 30,

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

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

Generally, interest rates

are stated in our leases for equipment.

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

our recent finance leases to estimate our incremental borrowing rate.

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

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

The components of lease expense

were as follows (in thousands):

Operating lease cost (1)

3 unchanged sentences

Total finance lease cost

Includes short term lease costs of $27,000 and $93,000 for the three and nine months ended September 30, 2019, respectively.

Supplemental cash flow

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

September 30,

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

September 30,

short term lease costs of $38,000 and $24,000 for the three months ended March 31, 2021 and 2020, respectively.

Supplemental cash flow information

related to leases was as follows (in thousands):

Cash paid for amounts included in leases:

4 unchanged sentences

Operating leases

Supplemental balance

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

September 30,

Supplemental balance sheet

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

Operating leases

10 unchanged sentences

Total finance lease liabilities

September 30,

Weighted Average Remaining Lease Term

4 unchanged sentences

Finance leases

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 September 30, 2020 is as follows (in thousands):

A summary of future minimum

payments under non-cancellable operating lease commitments as of March 31, 2021 is as follows (in thousands):

Years ending December 31,

2 unchanged sentences

Total lease liabilities

The following is a

schedule of minimum future rentals on the non-cancellable finance leases as of September 30, 2020 (in thousands):

Less current portion

The following is a schedule

of minimum future rentals on the non-cancellable finance leases as of March 31, 2021 (in thousands):

Year ending December 31,

5 unchanged sentences

Net Loss per Share

Basic net loss per

common share for the three and nine months ended September 30, 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.

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

by the weighted

average number of shares of common stock and common stock equivalents outstanding.

Basic net loss per common

share for the three months ended March 31, 2021 and 2020 was computed by dividing the net loss attributable to Neonode Inc.

for the relevant

period by the weighted average number of shares of common stock outstanding.

Diluted loss per common share is computed by dividing net

loss attributable to Neonode Inc.

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

Potential common stock

equivalents of approximately 0 and 0 outstanding stock options and 0 and 0.3 million outstanding stock warrants under the treasury

stock method, and 0 and 0 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share calculation

for the three and nine months ended September 30, 2020 and 2019, respectively, due to their anti-dilutive effect.

(in thousands, except per share amounts)

equivalents of approximately 0 and 0 outstanding stock options and 0 and 0 outstanding stock warrants under the treasury

stock method, and 0 and 0 shares issuable upon conversion of preferred stock are excluded from the diluted earnings per share

calculation for the three months ended March 31, 2021 and 2020, respectively, due to their anti-dilutive effect.

Three months ended

September 30,

BASIC AND DILUTED

Weighted average number of common shares outstanding

Net loss attributable to common shareholders of Neonode Inc.

Net loss per share - basic and diluted

(in thousands, except per share amounts)

Nine months ended

September 30,

BASIC AND DILUTED

Weighted average number of common shares outstanding

Net loss attributable to common shareholders of Neonode Inc.

Net loss attributable to Neonode Inc.

Net loss per share - basic and diluted

Subsequent Events

We have evaluated subsequent

events through the filing date of this Form 10-Q, and determined that no subsequent events have occurred that would require recognition

in the condensed consolidated financial statements or disclosure in the notes thereto other than as discussed elsewhere in the

accompanying notes.

The extent of COVID-19’s

effect on the Company's operational and financial performance will depend on future developments, including the duration, spread

and intensity of the pandemic, all of which are uncertain and difficult to predict considered the rapidly evolving landscape.

Company is constantly analyzing the potential impacts to all of its business areas.

At this time, it is not possible to determine

the magnitude of the overall impact of COVID-19 on the Company.

The situation could have a material adverse effect on the Company’s

condensed consolidated balance sheets, liquidity, and condensed consolidated statements of operations, comprehensive income, stockholders’

equity, and cash flows.

The pandemic has, however, created an increased interest in the Company’s technology, which allows

germ-free contactless touch on any surface.

Management’s Discussion

and Analysis of Financial Condition and Results of Operations

On May 10, 2021, the Company

entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with B.

Riley Securities, Inc.

(“B Riley”),

under which the Company may offer and sell from time to time, at its sole discretion, shares of its common stock having an aggregate offering

price of up to $25 million through B.

Riley as its sales agent.

The Company agreed to pay B.

Riley a commission of 3.0% of the gross proceeds

of the sales price per share of any common stock sold through B.

Riley under the ATM Agreement.

In connection its entering

into the ATM Agreement, on May 10, 2021, the Company filed a shelf registration statement on Form S-3 with the SEC for a maximum aggregate

offering price of $100,000,000, which included a base prospectus and a sales agreement prospectus covering the shares to be sold under

the ATM Agreement.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Forward Looking Statements

This Quarterly Report

on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and

Section 21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act

This Quarterly Report on Form 10-Q contains forward-looking statements

within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as

amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995.

Statements that are not purely historical may be forward-looking.

You can identify some forward-looking statements by

the use of words such as “believe,”

You can identify some forward-looking statements by the use of words such as “believe,”

“anticipate,”

4 unchanged sentences

and similar expressions.

Forward-looking statements involve inherent risks and uncertainties regarding events,

conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial

A number of important factors could cause actual results to differ materially from those included within or contemplated

by such forward-looking statements, including, but not limited to risks relating to the impact of the COVID-19 pandemic, our history

of losses since inception, our dependence on a limited number of customers, our reliance on our customers’

ability to develop

and sell products that incorporate our touch technology, the length of a product development and release cycle, our and our customers’

reliance on component suppliers, the difficulty in verifying royalty amounts owed to us, our limited experience manufacturing hardware

devices, our ability to remain competitive in response to new technologies, our dependence on key members of our management and

development team, the costs to defend, as well as risks of losing, patents and intellectual property rights, our ability to obtain

adequate capital to fund future operations, the outcome and expense of lawsuits against us and our directors and officers (including

the pending lawsuit in the Delaware Court of Chancery related to the Private Placement), our ability to terminate our registration

public company, and the future status of our common stock listing on the Nasdaq Stock Market and potential listing on

the Nasdaq Stockholm.

For a discussion of these and other factors that could cause actual results to differ from those contemplated

in the forward-looking statements, please see the discussion under “Risk Factors”

and elsewhere in this Quarterly Report

on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in our publicly available filings

with the Securities and Exchange Commission.

Forward-looking statements involve inherent risks

and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy,

results of operations and financial position.

A number of important factors could cause actual results to differ materially from those

included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the impact of the

COVID-19 pandemic, our history of losses since inception, our dependence on a limited number of customers, our reliance on our customers’

ability to develop and sell products that incorporate our touch technology, the length of a product development and release cycle, our

and our customers’

reliance on component suppliers, the difficulty in verifying royalty amounts owed to us, our limited experience

manufacturing hardware devices, our ability to remain competitive in response to new technologies, our dependence on key members of our

management and development team, the costs to defend, as well as risks of losing, patents and intellectual property rights and our ability

to obtain adequate capital to fund future operations.

For a discussion of these and other factors that could cause actual results to differ

from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors”

and elsewhere in

this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in our publicly available

filings with the Securities and Exchange Commission.

Forward-looking statements reflect our analysis only as of the date of this Quarterly

Report on Form 10-Q.

Because actual events or results may differ materially from those discussed in or implied by forward-looking

statements made by us or on our behalf, you should not place undue reliance on any forward-looking statement.

We do not undertake

responsibility to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether

as a result of new information, future events or otherwise.

The following discussion

and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included

elsewhere in this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2019 included

in our Annual Report on Form 10-K.

Because actual events or results may differ materially from those discussed in or implied by forward-looking statements

made by us or on our behalf, you should not place undue reliance on any forward-looking statement.

We do not undertake responsibility

to update or revise any of these factors or to announce publicly any revision to forward-looking statements, whether as a result of new

information, future events or otherwise.

The following discussion and

analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in Item 1 of

this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2020 included in our Annual Report

on Form 10-K.

Neonode Inc., collectively

1 unchanged sentence

“registrant”, or “Company”.

Neonode provides advanced

Our company provides advanced

optical sensing solutions for human-machine interface (“HMI”) and remote sensing solutions for driver and cabin monitoring

features in automotive and other application areas.

We mainly operate in

the business-to-business (“B2B”) markets.

We mainly operate in the business-to-business

(“B2B”) markets.

HMI Solutions

We license our technology

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

manufacture and sell.

Since 2010, our HMI Solutions customers have sold approximately 77 million devices that use our technology

and within this business area we derive revenues through technology licensing and engineering consulting services.

As of September 30,

2020, we had thirty-six valid technology license agreements with global OEMs, ODMs and Tier 1 suppliers.

Our licensing customer

base is primarily in the automotive and printer industries.

Fifteen of our licensing customers are currently shipping products

that embed our touch and gesture technology.

We anticipate current and new customers will initiate product shipments throughout

2020 and in future years as they complete final product development and release cycles.

Customer product development and release

cycles typically take between 6 months to 36 months.

We earn our license fees on a per unit basis when our customers ship products

using our technology.

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

Since 2010, our HMI Solutions customers have sold over 80 million devices that use our technology and within this business area

we derive revenues through technology licensing and engineering consulting services.

As of March 31, 2021, we had entered into 42 technology license agreements

with global OEMs, Global Design Manufacturers (“ODMs”) and Tier 1 suppliers.

Our licensing customer base

is primarily in the automotive and printer industries.

Thirteen of our licensing customers are currently shipping products that embed

our touch and gesture technology.

We anticipate current and new customers will initiate product shipments throughout 2021 and in future

years as they complete final product development and release cycles.

Customer product development and release cycles typically take between

6 months to 36 months.

We earn our license fees on a per unit basis when our customers ship products using our technology.

We also offer engineering

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

Typically, our customers require engineering

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

In addition to our

technical solutions business, we design and manufacture sensor modules that incorporate our patented technology.

We sell our embedded

sensors components to OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers for use in their products.

Within this business area we derive revenues through selling embedded sensor modules and engineering consulting services.

We utilize a robotic

manufacturing process designed specifically for our components.

Industry specific sensor modules with a common technology platform

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

range of options to enter and compete in key markets.

Typically, our customers require engineering support

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

In addition to our technical solutions business, we design and manufacture

sensor modules that incorporate our patented technology.

We sell our embedded sensors components to OEMs, ODMs and Tier 1 suppliers

for use in their products.

Within this business area we derive revenues through selling embedded sensor modules and engineering consulting

We utilize a robotic manufacturing

process designed specifically for our components.

Industry specific sensor modules with a common technology platform provides hardware

touch, gesture and object sensing solutions that, paired with our technology licensing platform, gives us a full range of options to enter

and compete in key markets.

We also offer engineering

consulting services to our sensor module customers on a flat rate or hourly rate basis.

Typically, our customers require hardware

or software modifications of our standard products or support during the development and initial manufacturing phase for their

products using our technology.

In October 2017, we

began selling embedded sensor modules to business customers in the industrial and consumer electronics markets.

Over time, we expect

a significant portion of our revenues will be derived from the HMI Products business area.

Our offerings include

a consumer product, AirBar.

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

AirBar is powered by our sensor modules.

In 2016 and 2017, we began shipping 15.6 inch, 13.3 inch and 14 inch AirBar to distributors

and customers in the United States and Europe.

We have no current plans to develop new Neonode branded products for the consumer

Typically, our customers require hardware or software

modifications of our standard products or support during the development and initial manufacturing phase for their products using our

In October 2017, we began

selling embedded sensor modules to business customers in the industrial and consumer electronics markets.

Over time, we expect a significant

portion of our revenues will be derived from the HMI Products business area.

Our offerings include a consumer

product, AirBar, powered by our sensor modules.

As a plug and play accessory, AirBar enables touch and gesture functionality for notebook

In 2016 and 2017, we began shipping 15.6 inch, 13.3 inch and 14 inch AirBar to distributors and customers in the United States

We have no current plans to develop new Neonode branded products for the consumer markets.

Remote Sensing Solutions

With this newly formed

business area, we intend to address the demand for cost-effective driver and cabin monitoring systems.

We have developed a software

platform for driver and cabin monitoring that is flexible, scalable and hardware-agnostic, and uses computationally efficient machine-learning

With this newly formed business

area, we intend to address the demand for cost-effective driver and cabin monitoring systems.

We have developed a software platform for

driver and cabin monitoring that is flexible, scalable and hardware-agnostic, and uses computationally efficient machine-learning algorithms.

Within this business area we expect to derive revenues through technology licensing and engineering consulting services.

Impact of COVID-19

In December 2019, a

novel strain of coronavirus disease (“COVID-19”) was first reported in Wuhan, China.

Less than four months later, on

March 11, 2020, the World Health Organization declared COVID-19 a global pandemic.

Our near term growth and overall business is

being adversely impacted and we expect will continue to be adversely impact by COVID-19 and the related global economic slowdown.

Although we anticipate potential additional demand in our contactless touch products, we expect COVID-19 will have negative effects

on our customers’

On March 11, 2020, the World Health Organization declared COVID-19

a global pandemic.

Our near term growth and overall business has been and is continuing to be adversely impacted by COVID-19 and we expect

it will continue to be adversely impact by COVID-19 and the related global economic slowdown.

Although we have noted additional demand

in our contactless touch products and some increases in sales of licensed products, COVID-19 has negative impacted some of our customers’

businesses and their sales volumes.

We are experiencing challenges in obtaining deliveries of components

needed to manufacture our sensor modules and we may have difficulties delivering our products to our customers in time and at a

reasonable cost.

Our operations have been impacted as we paused business-related travel and our employees to a high extent work

The extent of COVID-19’s impact on our operational and financial performance will depend on future developments,

including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considered the

rapidly evolving landscape.

To mitigate the financial effects of the COVID-19 pandemic, we have undertaken cost-reduction measures.

In particular, we implemented a Swedish government-backed program of short-term layoffs that resulted in the reduction of staff

working hours by 20% between mid-April to mid-August.

We are monitoring the impact of the COVID-19 pandemic and we may take further

actions in response.

There is a risk that we will not be successful in mitigating COVID-19’s impact on our business, and

our sales may not increase in line with our expectations and our operating margins could fluctuate or decline.

We are experiencing challenges in obtaining deliveries of components needed to manufacture our sensor

modules and we may have difficulties delivering our products to our customers in time and at a reasonable cost.

Our operations were impacted

as we paused business-related travel and our employees to a high extent work remotely.

The extent of COVID-19’s impact on our operational

and financial performance going forward will depend on future developments, including the duration, spread and intensity of the pandemic,

all of which are uncertain and difficult to predict at this time considering the rapidly evolving landscape.

To mitigate the financial

effects of the COVID-19 pandemic, we have undertaken cost-reduction measures.

In particular, we implemented a Swedish government-backed

program of short-term layoffs that resulted in the reduction of staff working hours by 20% between mid-April to mid-August last year.

We are continuing to monitor the impact of the COVID-19 pandemic and we may take further actions in response.

There is a risk that we

will not be successful in mitigating COVID-19’s impact on our business, and our sales may not increase in line with our expectations

and our operating margins could fluctuate or decline.

Results of Operations

A summary of our financial results is as

follows (in thousands, except percentages):

A summary of our financial results is as follows

(in thousands, except percentages):

Three months ended

September 30,

HMI Solutions

Percentage of revenue

Total Revenue

Cost of Sales:

HMI Solutions

Percentage of revenue

Total Cost of Sales

Total Gross Margin

Operating Expense:

Research and development

Percentage of revenue

Sales and marketing

Percentage of revenue

General and administrative

Percentage of revenue

Total Operating Expenses

Percentage of revenue

Operating Loss

Percentage of revenue

Interest expense

Percentage of revenue

Provision (benefit) for income taxes

Percentage of revenue

Net loss attributable to noncontrolling interests

Percentage of revenue

Preferred dividends

Percentage of revenue

Net loss attributable to common shareholders of Neonode Inc.

Percentage of revenue

Net loss per share attributable to Neonode Inc.

Percentage of revenue

Nine months ended

September 30,

Variance in Dollars

Variance in Percent

HMI Solutions

7 unchanged sentences

Total Cost of Sales

Total Gross Margin

Total Gross Profit

Operating Expense:

15 unchanged sentences

Percentage of revenue

Preferred Dividends

Percentage of revenue

Net Loss attributable to common shareholders of Neonode Inc.

Net Loss attributable to Neonode Inc.

Percentage of revenue

1 unchanged sentence

Percentage of revenue

All of our sales for

the three and nine months ended September 30, 2020 and 2019 were to customers located in the U.S., Europe and Asia.

Since January 1, 2020,

we have allocated revenues to three different business areas.

Revenues allocated to HMI Solutions consist of license fees and related

non-recurring engineering revenues while revenues allocated to HMI Products are derived from the sale of sensor modules and related

non-recurring engineering revenues.

We expect that future revenues within our Remote Sensing Solutions business area will be derived

from license fees and non-recurring engineering revenues.

The increase of 14.12%

in total net revenues for the three-month period in 2020 as compared to the same period in 2019 was primarily related to significantly

higher revenues from sensor module sales offset by slightly lower license revenues.

The decrease of 29.51% in total net revenues

for the nine-month period in 2020 as compared to the same period in 2019 was primarily related to lower license revenues within

our HMI Solutions business area.

The following tables

present the net revenues distribution per business area and revenue stream for the three and nine months ended September 30, 2020

and 2019 (dollars in thousands):

All of our sales for the three

months ended March 31, 2021 and 2020 were to customers located in the U.S., Europe and Asia.

The increase of 29% in total

net revenues for the first quarter 2021 as compared to the same period in 2020 was primarily related to higher module and Airbar sales

within our HMI Products business area.

Revenues within our HMI Solutions

business area during the three-month period ended March 31, 2021 was somewhat higher than the same period last year, mainly driven by

strong sales within the automotive market segment.

There were no revenues from

our Remote Sensing Solutions business area for the three months ended March 31, 2021.

The following table presents the net revenues by business area and

revenue stream for the three months ended March 31, 2021 and 2020 (dollars in thousands):

Three months ended

September 30,

March 31, 2021

Three months ended

September 30,

March 31, 2020

HMI Solutions

2 unchanged sentences

Non-recurring engineering

Nine months ended

September 30,

Nine months ended

September 30,

Three months ended

March 31, 2021

Three months ended

March 31, 2020

HMI Solutions

Non-recurring engineering

Sensor modules

Non-recurring engineering

Our combined total

gross margin was 87% and 90% for the three and nine months ended September 30, 2020, respectively, and 95% for the three and nine

months ended September 30, 2019, respectively.

The decrease in total gross margin in 2020 as compared to 2019 was primarily due

to higher costs relating to write off of inventory in 2020.

For the three and nine months ended September 30, 2020, revenues from

HMI Solutions business area accounted for 81% and 87%, respectively, of total revenue compared to 93% and 92%, respectively, in

the same periods in 2019 and revenues from HMI Products business area accounted for 19% and 13%, respectively, of total revenue

compared to 7% and 8%, respectively, in the same periods 2019.

There were no revenues from our Remote Sensing Solutions business

area for the three or nine months ended September 30, 2019 and 2020.

Our cost of revenues

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

to complete the engineering design contracts and cost of goods sold for sensor modules includes fully burdened manufacturing costs,

outsourced final assembly costs, and component costs of sensor modules.

Research and Development

Net revenues from automotive

Net revenues from consumer electronics

Net revenues from medical

Net revenues from distributors

Net revenues from other

Our combined total gross

margin was 83% and 97% for the three months ended March 31, 2021 and 2020, respectively.

The decrease in total gross margin in 2021

as compared to 2020 was primarily due to higher product sales with lower margins.

For the three months ended March 31, 2021,

revenues from our HMI Solutions business area accounted for 78% of total revenue compared to 91% in the same period in 2020 and

revenues from our HMI Products business area accounted for 22% of total revenue compared to 9% in the same period 2020.

no revenues from our Remote Sensing Solutions business area for the three months ended March 31, 2021 and 2020.

Our cost of revenues includes

the direct cost of production of certain customer prototypes, costs of engineering personnel, engineering consultants to complete the

engineering design contracts and cost of goods sold for sensor modules includes fully burdened manufacturing costs, outsourced final assembly

costs, and component costs of sensor modules.

Research and Development

(“R&D”) expenses for the three and nine months ended September 30, 2020 were $0.9 million and $2.9 million, respectively.

For the same periods in 2019, the R&D expenses were $1.2 million and $3.9 million.

The decrease was primarily

related to lower staff expenses for the nine months ended September 30, 2020 and a large number of scrapped inventory during the

three months ended September 30, 2019.

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

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

Sales and Marketing

Research and development (“R&D”)

expenses for the three months ended March 31, 2021 and 2020 were $1.1 million and $1.0 million, respectively.

R&D expenses primarily

consist of personnel-related costs in addition to external consultancy costs, such as testing, certifying and measurements, along with

costs related to developing and building new product prototypes.

Sales and Marketing

expenses for the three and nine months ended September 30, 2020 were $0.6 million and $1.8 million, respectively.

The sales and

marketing costs for the same periods in 2019 were $0.5 million and $1.4 million.

The increase was primarily due to higher staff

expenses due to a reallocation of employees to the marketing function.

Our sales activities

focus on OEM, ODM and Tier 1 customers who will license our technology or purchase and embed our touch sensor modules into their

Our customers will then sell and market their products incorporating our technology to their customers.

expand our HMI Solutions and Product sales and marketing activities in 2020 and future years to capture market share in our target

Sales and marketing expenses

for the three months ended March 31, 2021 and 2020 were $0.8 million and $0.5 million, respectively.

The increase was primarily due to

higher staff expenses due to a reallocation of employees to the marketing function.

Our sales activities focus

on OEM, ODM and Tier 1 customers who will license our technology or purchase and embed our touch sensor modules into their products.

General and Administrative

General and administrative (“G&A”) expenses

for the three and nine months ended September 30, 2020 were $1.5 million and $3.0 million, respectively.

The G&A expenses for

the three and nine months ended September 30, 2019 were $0.8 million and $2.7 million, respectively.

General and administrative (“G&A”)

expenses for the three months ended March 31, 2021 and 2020 were $1.1 million and $0.8 million, respectively.

The increase was primarily

due to costs relating to a lawsuit further described in Note 8 –

Commitments and Contingencies –

Litigation in the

Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Our effective tax rate

was 0% and 0% for the three and nine months ended September 30, 2020, respectively, and (0)% and (0)% for the three and nine months

ended September 30, 2019, respectively.

The negative tax rate in the three and nine months ended September 30, 2020 and September

30, 2019 is due to withholding taxes from sales.

We recorded valuation allowances for the three and nine-month periods ended September

30, 2020 and September 30, 2019 for deferred tax assets related to net operating losses due to the uncertainty of realization.

Preferred Dividends

Pursuant to the Securities

Purchase Agreement entered into on August 7, 2020, Neonode issued Series C-1 Preferred Stock and Series C-2 Preferred Stock (together,

the “Preferred Shares”).

The holders of the Preferred Shares were entitled to receive dividends at the rate per share

of 5% per annum until conversion into common stock.

As of September 30, 2020, $2,000 of preferred dividends had been paid and $31,000

As a result of the

factors discussed above, we recorded a net loss attributable to common shareholders of Neonode Inc.

of $1.6 million and $4.3 million

for the three and nine months ended September 30, 2020, respectively, and $1.1 million and $2.9 million for the same periods in

Off-Balance Sheet Arrangements

We have a bank guarantee

of $210,000 for AirBar packaging material held at a manufacturing partner.

We do not have any other transactions, arrangements,

or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other

than the operating leases incurred in the normal course of business

We have no special

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

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

reflected on the face of the consolidated financial statements.

Contractual Obligations and Commercial

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.

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 September 30, 2020, we had made no payments to TI under the NN1002 Agreement.

due to higher costs related to staff and in-house consultants.

Our effective tax rate was

(1%) and (1%) for the three months ended March 31, 2021 and 2020, respectively.

The negative tax rate in the three months ended March

31, 2021 and March 31, 2020 was due to withholding taxes from sales.

We recorded valuation allowances for the three-month periods ended

March 31, 2021 and March 31, 2020 for deferred tax assets related to net operating losses due to the uncertainty of realization.

As a result of the factors

discussed above, we recorded a net loss attributable to Neonode Inc.

of $1.6 million and $1.0 million for the three months ended March

31, 2021 and 2020, respectively.

Contractual Obligation and Off-Balance Sheet

We previously agreed to secure

the value of inventory purchased by one of our AirBars manufacturing partners.

At December 31, 2020, the guaranteed amount was decreased

from $210,000 to $100,000.

We do not have any other transactions, arrangements, or other relationships with unconsolidated entities that

are reasonably likely to affect our liquidity or capital resources other than the operating leases incurred in the normal course of business.

We have no special purpose

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

We do not engage in

leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face

of the consolidated financial statements.

Contractual Obligations and Commercial Commitments

Non-Recurring Engineering Development Costs

On April 25, 2013, we entered

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

Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC, which is used in our licensed technology.

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 March 31, 2021, we had made no payments to TI under the NN1002 Agreement.

Operating Leases

On July 1, 2014, Neonode

Technologies AB entered into a lease for 7,007 square feet of office space located at Storgatan 23C, Stockholm, Sweden.

agreement was renegotiated and renewed in December 2019 and is valid through November 2020.

The lease agreement has been terminated

and will not be extended.

On December 1, 2015,

Pronode Technologies AB entered into a lease agreement for 9,040 square feet of workshop located at Faktorvägen 17, Kungsbacka,

The lease is valid through December 9, 2020 and can be terminated with nine months’

written notice before the termination

In January 2015, our

subsidiary Neonode Korea Ltd.

We did not renew our lease for the office space

located at 2880 Zanker Road, San Jose, CA 95134 in August 2020 and Neonode Inc.

now operates through a virtual office.

On December 1, 2020, Neonode

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

agreement is valid through November 2022.

The lease is extended on a yearly basis unless written notice is given nine months prior to

the expiration date.

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

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

The lease can be terminated with nine months’

written notice prior to the termination date.

In January 2015, our subsidiary Neonode Korea Ltd.

entered into a lease agreement located at B-1807, Daesung D-Polis.

543-1, Seoul, South Korea.

lease may be cancelled with 2 months’

On December 1, 2015,

Neonode Taiwan Ltd.

entered into a lease agreement located at Rm.

2406, International Trade Building, Keelung Rd., Sec.1, Taipei,

The lease was terminated on December 18,

2020 and we now only have a virtual office in South Korea.

On December 1, 2015, Neonode Taiwan Ltd.

into a lease agreement located at Rm.

2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan.

The lease is renewed monthly.

On September 1, 2019,

we entered into a lease of office space located at NishiShinjuku Takagi Building, 1203 NishiShinjuku, Shinjukuku, Tokyo, Japan.

The lease is valid through August 31, 2021 and is extended on a yearly basis unless written notice three months prior to expiration

On September 1, 2020,

we entered into a lease of a mailbox at 2880 Zanker Road, San Jose, CA 95134.

On September 1, 2019 we entered into a lease of office space located

at NishiShinjuku Takagi Building, 1203 NishiShinjuku, Shinjukuku, Tokyo, Japan.

The lease is valid through August 31, 2021 and is extended

on a yearly basis unless written notice three months prior to expiration date.

Effective December

1, 2020, we have agreed to enter into a new lease for 621 square meters of office space located at Karlavägen 100, Stockholm,

The lease agreement is valid through November 2022 and may be extended on a yearly basis unless written notice nine months

prior to expiration date.

In connection to the new office, we have also entered into a lease for a storage facility, valid through

November 2022 and extended on a yearly basis unless written notice nine months prior to expiration date.

For the three and nine months ended September

30, 2020, we recorded approximately $154,000 and $435,000, respectively, for rent expense for all leased properties compared to

$130,000 and $461,000 for the same periods in 2019.

on a yearly basis unless written notice is given three months prior to the expiration date.

For the months ended March

31, 2021 and 2020, we recorded approximately $173,000 and $139,000, respectively, for rent expense.

See Note 7 –

Leases in the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form

10-Q for further discussions of our operating leases.

Finance Leases

in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions.

Equipment Subject to Finance Lease

In April 2014, we entered

into a lease for certain specialized milling equipment.

Under the terms of the lease agreement we are obligated to purchase the

equipment at the end of the original six-year lease term for 10% of the original purchase price of the equipment.

In accordance

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

The lease payments and depreciation period began

on July 1, 2014 when the equipment went into service.

The implicit interest rate of the lease is 4% per annum.

Between the second

and the fourth quarters of 2016, we entered into six leases for component production equipment.

Under the terms of five of the

lease agreements entered into during 2016, we are obligated to purchase the equipment at the end of the original three to five

years lease terms for 5-10% of the original purchase price of the equipment.

In accordance with relevant accounting guidance these

five leases are classified as finance leases.

The lease payments and depreciation periods began between September and November

2016 when the equipment went into service.

The implicit interest rate of these five leases is currently approximately 3% per annum.

The additional lease entered into during 2016 is a hire-purchase agreement that requires the equipment to be paid off after five

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

The lease payments and depreciation

period began on July 1, 2016 when the equipment went into service.

The implicit interest rate of this lease is approximately 3%

In 2017, we entered

into one lease for component production equipment.

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

year of the end of the original four-year lease term.

Under the terms of the lease agreement, we are obligated to purchase the equipment

at the end of the original six-year lease term for 10% of the original purchase price of the equipment.

In accordance with relevant accounting

guidance, the lease is classified as a finance lease.

The lease payments and depreciation period began on July 1, 2014 when the equipment

went into service.

On July 1, 2020, the lease contract was extended for one year.

The implicit interest rate of the extended lease period

is 9.85% per annum.

Between the second and the

fourth quarters of 2016, we entered into six leases for component production equipment.

Under the terms of five of the lease agreements

entered into during 2016, we are obligated to purchase the equipment at the end of the original three to five years lease terms for 5-10%

of the original purchase price of the equipment.

In accordance with relevant accounting guidance these five leases are classified as finance

The lease payments and depreciation periods began between June and November 2016 when the equipment went into service.

interest rate of these five leases is currently approximately 3% per annum.

The additional lease entered into during 2016 is a hire-purchase

agreement that requires the equipment to be paid off after five years.

In accordance with relevant accounting guidance the lease is classified

as a finance lease.

The lease payments and depreciation periods began in May 2017 when the equipment went into service.

interest rate of the lease is approximately 1.5% per annum.

In 2018, we entered

into one lease for component production equipment.

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

The lease payments and depreciation period began on July 1, 2016 when the equipment went into service.

interest rate of this lease is approximately 3% per annum.

In 2017, we entered into one

lease for component production equipment.

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

of the original four-year lease term.

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

The lease payments and depreciation periods began in August 2018 when the equipment went into service.

The implicit interest rate

of the lease is approximately 1.5% per annum.

lease payments and depreciation periods began in May 2017 when the equipment went into service.

The implicit interest rate of the lease

is approximately 1.5% per annum.

In 2018, we entered into one

lease for component production equipment.

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

four-year lease term.

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

The lease payments

and depreciation periods began in August 2018 when the equipment went into service.

The implicit interest rate of the lease is approximately

1.5% per annum.

See Note 7 –

Leases in the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form

10-Q for further discussion of our finance leases.

in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.

Liquidity and Capital Resources

1 unchanged sentence

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

Our future liquidity will

be affected by, among other things:

actual versus anticipated licensing of our technology;

actual versus anticipated sales of sensor products, including AirBar;

actual versus anticipated operating expenses;

Our future liquidity will be affected

by, among other things:

licensing of our technology;

purchases of our sensor products, including AirBar;

operating expenses;

timing of our OEM customer product shipments;

timing of payment for our technology licensing agreements;

actual versus anticipated gross profit margin;

gross profit margin;

ability to raise additional capital, if necessary.

As of September 30, 2020, we had cash of

$12.2 million compared to $2.4 million as of December 31, 2019.

Working capital (current

assets less current liabilities) was $12.0 million as of September 30, 2020, compared to $2.4 million as of December 31, 2019.

Net cash used in operating

activities for the nine months ended September 30, 2020 was $3.7 million and was primarily the result of a net loss of $4.6 million

and approximately $0.8 million in non-cash operating expenses, comprised of depreciation and amortization and amortization

of operating lease right-of-use assets.

As of March 31, 2021, we had cash of $8.1 million

compared to $10.5 million as of December 31, 2020.

Working capital (current assets

less current liabilities) was $8.8 million as of March 31, 2021, compared to $10.4 million as of December 31, 2020.

Net cash used in operating activities for the three months ended March

31, 2021 was $2.0 million and was primarily the result of a net loss of $1.7 million and approximately $0.4 million in non-cash operating

expenses, comprised of stock based compensation expense, depreciation and amortization and amortization of operating lease right-of-use

Net cash used in operating

activities for the nine months ended September 30, 2019 was $2.9 million and was primarily the result of a net loss of $3.2 million

and offset by approximately $1.0 million in non-cash operating expenses, comprised primarily of depreciation and amortization of

operating lease right-of-use assets.

Accounts receivable

and unbilled revenues decreased by approximately $0.3 million as of September 30, 2020 compared to December 31, 2019.

due to estimated lower revenues.

Inventory increased

by approximately $98,000 during the nine months ended September 30, 2020 compared to December 31, 2019.

Deferred revenues increased

by approximately $76,000 during the nine months ended September 30, 2020 compared to December 31, 2019, primarily due to increased

sale of sensor modules with return rights.

During the nine months

ended September 30, 2020 we purchased approximately $17,000 of property and equipment, primarily furniture and test equipment.

Net cash provided by financing activities of $13.7 million during

the nine months ended September 30, 2020 was the result of proceeds from short-term borrowings of $1.0 million and proceeds of

issuance of preferred and common stock net of offering costs of $13.5 million, offset by principal payments on short-term borrowings

and finance leases of $742,000.

activities for the three months ended March 31, 2020 was $1.0 million and was primarily the result of a net loss of $1.1 million and approximately

$0.3 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use

Accounts receivable and unbilled

revenues decreased by approximately $0.4 million as of March 31, 2021 compared to December 31, 2020.

This was due to some large customer

invoices outstanding at year end 2020 that settled during the first three months of 2021.

Inventory increased by approximately

$0.5 million during the three months ended March 31, 2021 due to purchased components to secure our estimated sales for the coming twelve

Deferred revenues decreased

by approximately $15,000 during the three months ended March 31, 2021.

During the three months ended

March 31, 2021 and 2020, we purchased approximately $62,000 and $5,000, respectively, of property and equipment, primarily new leasehold

improvements for the new Stockholm office and demo equipment.

Net cash used in financing

activities of $403,000 during the nine months ended September 30, 2019 was the result of principal payments on finance leases.

activities of $148,000 and $132,000 during the three months ended March 31, 2021 and 2020, respectively, was the result of principal payments

on finance leases.

We have incurred significant

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

The Company incurred net losses of approximately

$1.6 million and $4.3 million and $1.1 million and $2.9 million for the three and nine months ended September 30, 2020 and 2019,

respectively, and had an accumulated deficit of approximately $194.8 million and $190.5 million as of September 30, 2020 and December

31, 2019, respectively.

In addition, operating activities used cash of approximately $3.7 million and $2.9 million for the nine

months ended September 30, 2020 and 2019, respectively.

On June 17, 2020, the

Company 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 (each, a “Director”).

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.

On August 5, 2020,

the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with institutional and

accredited investors as part of a private placement (the “Private Placement”).

On August 6, 2020,

in connection with the Private Placement, Neonode designated (i) 365 shares of its authorized and unissued preferred stock as Series

C-1 5% Convertible Preferred Stock (the “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 5% Convertible Preferred Stock (the “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.

The Series C-1 Preferred Stock and Series C-2 Preferred Stock are substantially the same, except the conversion of the Series C-2

Preferred Stock required additional shareholder approval in accordance with Nasdaq listing rules.

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

Stock to UMR Invest AB, the entity beneficially owned by Ulf Rosberg, to repay the indebtedness and accrued interest under the

Loan Agreement.

To effect a similar transaction with entities beneficially owned by the other Director, Peter Lindell, (i) on August

7, 2020, at the closing of the Private Placement, Cidro Förvaltning AB paid for an additional 517 shares of Series C-2 Preferred

Stock, and (ii) on August 10, 2020, the next business day after the closing of the Private Placement, Neonode repaid to Cidro Holding

AB the debt and accrued interest due under the Loan Agreement, an amount that equaled the price of the 517 shares of Series C-2

Preferred Stock.

As a result of the repayments to each Director, the Loan Agreements terminated in accordance with their terms.

The closing of the

Private Placement occurred on August 7, 2020.

Pursuant to the Securities

Purchase Agreement, Neonode issued a total of 1,611,845 shares of common stock (the “Common Shares”) at a price of

$6.50 per Common Share, and a total of 3,415 shares with a conversion price of $6.50 per share and a stated value of $1,000 of

Series C-1 Preferred Stock and Series C-2 Preferred Stock, for an aggregate purchase price of $13.9 million in gross proceeds.

Ulf Rosberg and Peter

Lindell, directors of Neonode, and Urban Forssell the Chief Executive Officer of Neonode purchased an aggregate of $3.1 million

of the Series C-2 Preferred Stock pursuant to the Securities Purchase Agreement.

The net proceeds of

the Private Placement are being used for working capital purposes.

Pursuant to their terms

and the provisions of the Securities Purchase Agreement, the Series C-1 Preferred Stock and Series C-2 Preferred Stock (together,

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

The holders of the Preferred Shares

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

As of September 30, 2020, $2,000 of

preferred dividends had been paid and $31,000 was accrued.

In connection with

the Securities Purchase Agreement, Neonode entered into a Registration Rights Agreement (the “Registration Rights Agreement”)

pursuant to which Neonode filed a registration statement with the Securities and Exchange Commission (the “SEC”) relating

to the offer and sale by the holders of the Common Shares, and the shares of common stock that were underlying the Preferred Shares.

Pursuant to the Registration Rights Agreement, Neonode was obligated to file the registration statement within 30 calendar days

and to use reasonable best efforts to cause the registration statement to be declared effective within 75 calendar days.

The registration

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

Failure to maintain the effective registration of the Common

Shares and the shares of common stock underlying the Preferred Shares will subject Neonode to payment for liquidated damages.

In connection with

the Private Placement, Neonode incurred total offering costs of $879,000.

The Company incurred net losses of approximately $1.7 million

and $1.1 million for the three months ended March 31, 2021 and 2020, respectively, and had an accumulated deficit of approximately $197.7

million and $196.2 million as of March 31, 2021 and December 31, 2020, respectively.

In addition, operating activities used cash of approximately

$2.0 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.

The condensed consolidated

financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and

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

We aim to grow our

revenues in all business areas and 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.

Historically, we have been

able to access the capital markets through sales of common stock and warrants to generate liquidity.

Our management believes it

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

No assurances can be

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

If adequate funds are not

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

on our business, results of operations and financial condition.

In addition, no assurance can be given that stockholders will approve

an increase in the number of our authorized shares of common stock.

If funds and sufficient authorized shares are available, the

issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause

the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability

to engage in certain business transactions.

The functional currency

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

Taiwan Dollar.

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.

We aim to grow our revenues

in all business areas and 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.

Historically, we have been able to access the capital

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

Our management believes it could raise capital through public

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

No assurances can be given

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

If adequate funds are not available

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

results of operations and financial condition.

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

number of our authorized shares of common stock.

If funds and sufficient authorized shares are available, the issuance of equity securities

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

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

The functional currency of

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

They are subject to foreign currency exchange rate risk.

Any increase or decrease in the exchange rate of the U.S.

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

Dollar compared to

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

Critical Accounting Policies

Our contracts with

customers may include promises to transfer multiple products and services to a customer, particularly when the contract covers

a product and related engineering services fees for customizing that product for our customer.

Determining whether products and

services are considered distinct performance obligations that should be accounted for separately may require significant judgment.

Judgment may also be required to determine the stand-alone selling price for each distinct performance obligation identified, although

we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically

We currently have no outstanding contracts with multiple performance obligations;

however, we recently negotiated a

contract that may include multiple performance obligations in the future.

Our products are sold

with a right of return, and we may provide other credits or incentives to our customers, which could result in variability when

determining the amount of revenue to recognize.

At the end of each reporting period, we use product returns history and additional

information that becomes available to estimate returns and credits.

We do not recognize revenue if it is probable that a significant

reversal of any incremental revenue would occur.

Our contracts with customers

may include promises to transfer multiple products and services to a customer, particularly when the contract covers a product and related

engineering services fees for customizing that product for our customer.

Determining whether products and services are considered distinct

performance obligations that should be accounted for separately may require significant judgment.

Judgment may also be required to determine

the stand-alone selling price for each distinct performance obligation identified, although we generally structure our contracts such

that performance obligations and pricing for each performance obligation are specifically addressed.

We currently have no outstanding

contracts with multiple performance obligations.

Our products are sold with

a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining

the amount of revenue to recognize.

At the end of each reporting period, we use product returns history and additional information that

becomes available to estimate returns and credits.

We do not recognize revenue if it is probable that a significant reversal of any incremental

revenue would occur.

See Note 2 –

Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere

in this Quarterly Report on Form 10-Q for further discussion of critical accounting policies and discussion of estimates.

There have been no

other changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year

ended December 31, 2019.

Quantitative and Qualitative

Disclosures about Market Risk

of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further

discussion of critical accounting policies and discussion of estimates.

There have been no other changes

from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31,

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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

What changed 10-Q

Item 1. Financial Statements