What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-11 · 454 added, 340 removed, 67 unchanged (92% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Looking Statements

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

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,” “anticipate,” “expect,” “intend,” “goal,”

“plan,” and similar expressions.

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

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

A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking

statements, including, but not limited to risks relating to the impact of the COVID-19 pandemic (including the emergence of COVID-19

variants), 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.

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.

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

“our”, “registrant”, or “Company”.

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on

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

21E of the Securities Exchange Act of 1934, as amended, adopted pursuant to the Private Securities Litigation Reform Act of 1995.

that are not purely historical may be forward-looking.

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

“anticipate,” “expect,” “intend,” “goal,” “plan,” and similar expressions.

Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect

our future plans of operation, business strategy, results of operations and financial position.

A number of important factors could cause

actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not

limited to risks relating to the impact of the COVID-19 pandemic (including the emergence of COVID-19 variants), 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.

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

with its subsidiaries, is referred to in this Form 10-Q as “Neonode”, “we”, “us”, “our”,

“registrant”, or “Company”.

Our company provides advanced

optical sensing solutions for contactless touch, touch, gesture sensing, and remote sensing solutions for driver 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 remote sensing solutions using our MultiSensing technology platform.

Neonode offers customized optical touch and gesture control

solutions for many different markets and segments and mainly operates in the business-to-business (“B2B”) markets.

license our technology to Original Equipment Manufacturers (“OEMs”) and Tier 1 suppliers who embed our Human Machine Interface (“HMI”) technology into

products they develop, manufacture and sell.

Since 2010, our licensing customers have sold approximately 82 million devices that use

our patented technology.

of June 30, 2021, we had thirty-five valid technology license agreements with global OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers.

licensing customer base is primarily in the automotive and printer industries.

Thirteen of our licensing customers are currently shipping

products that embed our 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.

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

our embedded sensors components to OEMs, ODMs and Tier 1 suppliers for HMI use in their products.

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.

October 2017, we began selling embedded sensor modules to business customers in the industrial and consumer electronics markets.

time, we expect a significant portion of our revenues will be derived from product sales.

offerings include a consumer product, AirBar.

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

computers and other devices.

AirBar is powered by our sensor modules.

We have no current plans to develop new Neonode branded products

for the consumer markets.

Non-recurring

Engineering Services Sales

also offer engineering consulting services to our licensing and sensor module customers on a flat rate or hourly rate basis.

our licensing customers require engineering support during the development and initial manufacturing phase for their products using our

technology, while our sensor module 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.

Sensing Solutions

also 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.

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

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 impacted by COVID-19 and the emergence of new COVID-19 variants and their impact

on the global economy.

Although we have noted additional demand in our contactless touch products and some increases in sales of licensed

products, COVID-19 has negatively impacted some of our customers’ businesses and their sales volumes, which, in turn, has impacted

our business.

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 still work remotely.

The extent of the COVID-19 pandemic’s impact on

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

of the pandemic (including the emergence of new COVID-19 variants), all of which are uncertain and difficult to predict at this time.

optical sensing solutions for contactless touch, touch, gesture sensing, and scene analysis solutions using advanced machine learning

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

We market and sell our contactless

touch, touch, and gesture sensing products and solutions using our zForce technology platform, and our scene analysis solutions using

our MultiSensing technology platform.

We offer our solutions to customers in many different markets and segments including, but not limited

to, consumer electronics, office equipment, automotive, industrial automation, medical, military and avionics..

License Sales

We license our zForce technology

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

Since 2010, our licensing customers have sold approximately 83 million devices that use our patented technology.

As of September 30, 2021,

we had 35 valid technology license agreements with global OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers.

Our licensing customer base is primarily in the automotive and printer

Thirteen of our licensing customers are currently shipping products that embed our technology.

We anticipate current customers

will continue product shipments throughout the remainder of 2021 and in future years.

We also anticipate new customers will initiate product

shipments of new products incorporating our zForce and MultiSensing technologies as they complete final product development and release

cycles, which 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.

Product Sales

In addition to our technical

solutions business, we design and manufacture touch sensor modules (“TSMs”) that incorporate our patented technology.

our embedded sensors components to OEMs, ODMs and Tier 1 suppliers for use in their products.

We utilize a robotic manufacturing process designed specifically for

our components.

Our TSMs are commercial-off-the-shelf products based on a technology platform and provide hardware touch, gesture and

object sensing solutions that, paired with our technology licensing platform, give us a full range of options to enter and compete in

In October 2017, we began

selling our TSMs to customers in the industrial and consumer electronics segments.

Over time, we expect a significant portion of our revenues

will be derived from TSM sales.

Our product offerings also

include a consumer product, AirBar.

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

and other devices.

AirBar is powered by our TSM technology.

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

Non-recurring Engineering Services Sales

We also offer engineering

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

Typically, our licensing customers

require engineering support during the development and initial manufacturing phase for their products using our technology, while our

TSM 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.

Impact of COVID-19

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 impacted by COVID-19 and the emergence of new COVID-19 variants and their impact on the global economy.

we have noted additional demand for our TSMs for use in contactless touch products and some increases in sales of licensed products, COVID-19

has negatively impacted some of our customers’ businesses and their sales volumes, which, in turn, has impacted our business.

are experiencing challenges in obtaining deliveries of components needed to manufacture our TSMs 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 large extent still work remotely.

The extent of the COVID-19 pandemic’s impact on our operational and financial

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

the emergence of new COVID-19 variants), and the effectiveness, distribution and acceptance of COVID-19 vaccines, all of which are uncertain

and difficult to predict at this time.

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 the COVID-19 pandemic’s impact on our business, and our sales may not

increase in line with our expectations and our operating margins could fluctuate or decline.

of Operations

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

Non-recurring

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 the COVID-19 pandemic’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):

Three months ended

September 30,

Variance in Dollars

Variance in Percent

Percentage of revenue

Non-recurring engineering

Percentage of revenue

Total Revenue

Cost of Sales:

and development

and marketing

and administrative

Operating Expenses

for income taxes

Percentage of revenue

Non-recurring engineering

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

loss attributable to Neonode Inc.

loss per share attributable to Neonode Inc.

Non-recurring

Percentage of revenue

Preferred dividends

Percentage of revenue

Net loss attributable to common shareholders Neonode Inc.

Percentage of revenue

Net loss per share attributable to common shareholders Neonode Inc.

Percentage of revenue

Nine months ended

September 30,

Percentage of revenue

Non-recurring engineering

Percentage of revenue

Total Revenue

Cost of Sales:

and development

and marketing

and administrative

Operating Expenses

for income taxes

Percentage of revenue

Non-recurring engineering

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 for income taxes

Percentage of revenue

net loss attributable to noncontrolling interests

Loss attributable to Neonode Inc.

Loss per share attributable to Neonode Inc.

of our sales for the three and six months ended June 30, 2021 and 2020 were to customers located in the U.S., Europe and Asia.

increase of 127% and 65% in total net revenues for the three and six months ended June 30, 2021 as compared to the same periods in 2020

was related to higher license fees and higher sensor modules sales, partly offset by a decrease in non-recurring engineering revenues.

Percentage of revenue

Preferred dividends

Percentage of revenue

Net Loss attributable to Neonode Inc.

Percentage of revenue

Net Loss per share attributable to Neonode Inc.

Percentage of revenue

All of our sales for the three

and nine months ended September 30, 2021 and 2020 were to customers located in the U.S., Europe and Asia.

The decrease of (35.7)% in

total net revenues for the three months ended September 30, 2021 as compared to the same period in 2020 is mainly explained by component

shortage within the printer industry and automotive industry and lock-downs in key areas as a result of the pandemic.

For the nine months

ended September 30, 2021 as compared to the same period in 2020 we saw an increase of 22.6% in total net revenues, which was related to

higher license fees and higher TSM sales, partly offset by a decrease in non-recurring engineering revenues.

License Fees Revenues

The increase in license fees

revenues for the three and six months ended June 30, 2021 compared to the same periods in 2020 is mostly pandemic-related and within our

legacy business.

Licensing revenues in 2020 were depressed by the general economic slow-down associated with the pandemic.

For 2021, revenues

are still rebounding.

We have seen an increase in license fees revenues in the second quarter of 2021 compared to the first.

Touch Sensor Modules Revenues

The decrease in license fees

revenues for the three months ended September 30, 2021 compared to the same period in 2020 is mostly pandemic-related.

The component shortage

within the printer industry and automotive industry resulting from the pandemic reduced production volumes of printers and cars equipped

with our technology.

License fees revenues for the nine months ended September 30, 2021 were higher than those from the same period in

2020 mostly due to licensing fees revenues being depressed as a result of the general economic slow-down associated with the pandemic

in the first and second quarters of 2020.

The interest for contactless

touch is the main driver for the increase in revenues from sale of our TSMs.

We have seen Asia as the first adopter for our contactless

touch technology.

As expected, most of our sales are related to retrofit solutions due to long product development cycles.

touch is the main driver for our TSM sales, with Asia leading the way as the first adopter of our contactless touch technology.

most of our sales are related to retrofit solutions due to long product development cycles.

For the three months ended September 30, 2021

as compared to the three months ended September 30, 2020 we experienced a drop in sales mostly related to new lock-downs in Asia as a

result of the pandemic.

Non-recurring Engineering

Most of our non-recurring

revenues are related to both hardware and software related customization of our TSMs and decreased for the three and six months ended

June 30, 2021 compared to the same periods in 2020.

were no revenues related to Remote Sensing Solutions for the three and six months ended June 30, 2021.

following tables presents the net revenues by geographical area and revenue stream for the three and six months ended June 30, 2021 and

2020 (dollars in thousands):

revenues are related to both hardware and software related customization of our TSMs and decreased for the three and nine months ended

September 30, 2021 compared to the same periods in 2020.

There were no revenues related

to Remote Sensing Solutions for the three and nine months ended September 30, 2021.

The following tables presents

the net revenues by geographical area and revenue stream for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):

Three months ended

June 30, 2021

September 30, 2021

Three months ended

June 30, 2020

Sensor modules

September 30, 2020

Non-recurring engineering

Sensor modules

Non-recurring engineering

Six months ended

June 30, 2021

Six months ended

June 30, 2020

Sensor modules

Non-recurring engineering

Sensor modules

Nine months ended

September 30, 2021

Nine months ended

September 30, 2020

Non-recurring engineering

Sensor modules

Non-recurring engineering

Our combined total gross margin

was 87% and 85% for the three and six months ended June 30, 2021 and 84% and 92% for the three and six months ended June 30, 2020, respectively.

For the three and six months ended June 30, 2021, gross margin related to sensor module sales was 39% and 31% compared to (9)% and 34%

for the same periods in 2020.

The reason for the decrease in the six months ended June 30, 2021 compared to the same period 2020 is low-margin

AirBar sales during the first three months of 2021.

Our cost of revenues includes

was 90% and 86% for the three and nine months ended September 30, 2021, respectively, and 87% and 90% for the three and nine months ended

September 30, 2020, respectively.

For the three and nine months ended September 30, 2021, gross margin related to TSM sales was 28% and

31%, respectively, compared to 30% and 31% for the same periods in 2020, respectively.

Our cost of sales includes

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

engineering design contracts.

Cost of goods sold for sensor modules includes fully burdened manufacturing costs, outsourced final assembly

costs, and component costs of sensor modules.

and Development

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

and component costs of TSMs.

Research and Development

Research and development (“R&D”)

expenses for the three and six months ended June 30, 2021 were $1.4 million and $2.5 million, respectively.

For the same periods in 2020, the

R&D expenses were $1.0 million and $2.0 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

expenses for the three and nine months ended September 30, 2021 were $1.0 million and $3.5 million, respectively.

For the same periods

in 2020, the R&D expenses were $0.9 million and $2.9 million, respectively.

R&D expenses primarily consist of personnel-related

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

and building new product prototypes.

The increases were primarily

related to higher staff expenses for the three and six months ended June 30, 2021, which can be explained by the reduced working hours

associated with the governmental pandemic related support program in Sweden during 2020.

and Marketing

related to higher staff expenses for the three and nine months ended September 30, 2021, which can be explained by the reduced working

hours associated with the governmental pandemic related support program in Sweden during 2020.

Sales and Marketing

Sales and marketing expenses

for the three and six months ended June 30, 2021 were $0.8 million and $1.6 million, respectively.

The sales and marketing costs for the

same periods in 2020 were $0.6 million and $1.2 million, respectively.

Again, the increases for the three and six months ended June 30,

for the three and nine months ended September 30, 2021 were $0.6 million and $2.2 million, respectively.

The sales and marketing costs

for the same periods in 2020 were $0.6 million and $1.8 million, respectively.

The increases for the three and nine months ended September

30, 2021 were primarily due to higher staff expenses and the Swedish governmental support program during 2020

sales and marketing 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.

and Administrative

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

three and six months ended June 30, 2021 were $1.1 million and $2.2 million, respectively.

The G&A expenses for the three and six

months ended June 30, 2020 were $0.7 million and $1.5 million, respectively.

The increase was primarily due to higher costs related to

staff and in-house consultants in combination with high professional fees for the three and six months ended June 30, 2021.

Our sales and marketing activities

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

General and Administrative

General and administrative

(“G&A”) expenses for the three and nine months ended September 30, 2021 were $1.0 million and $3.3 million, respectively.

The G&A expenses for the three and nine months ended September 30, 2020 were $1.5 million and $3.0 million, respectively.

for the three months ended September 2021 is primarily due to one-time legal costs in 2020.

The increase for the nine months ended September

30, 2021 was primarily due to higher costs related to staff and in-house consultants in combination with higher professional fees.

Our effective tax rate was

(2)% and (2)% for the three and six months ended June 30, 2021, respectively, and 0% and (1)% for the three and six months ended June

30, 2020, respectively.

The negative tax rate in the three and six months ended June 30, 2021 and June 30, 2020 is due to withholding

taxes from sales.

We recorded valuation allowances for the three and six-month periods ended June 30, 2021 and June 30, 2020 for deferred

tax assets related to net operating losses due to the uncertainty of realization.

(2)% and 2% for the three and nine months ended September 30, 2021, respectively, and 1% and (0)% for the three and nine months ended

September 30, 2020, respectively.

The positive tax rate for the nine months ended September 30, 2021 and three months ended September

30, 2020 is due to decreased withholding taxes from sales.

The negative tax rate for the three months ended September 30, 2021 and the

nine months ended September 30, 2020 is due to increased withholding taxes from sales.

We recorded valuation allowances for the three

and nine-month periods ended September 30, 2021 and September 30, 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 $1.7 million and $3.2 million for the three and six months ended

June 30, 2021, respectively, and $1.6 million and $2.6 million for the same periods in 2020 respectively.

discussed above, we recorded a net loss attributable to Neonode of $1.7 million and $4.9 million for the three and nine months ended September

30, 2021, respectively, and $1.6 million and $4.3 million for the same periods in 2020, respectively.

Contractual Obligations and Off-Balance

Sheet Arrangements

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.

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.

Obligations and Commercial Commitments

Non-Recurring

Engineering Development Costs

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

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

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 June 30, 2021, we had made no payments

to TI under the NN1002 Agreement.

did not renew our lease for the office space located at 2880 Zanker Road, San Jose, CA 95134 in August 2020 and Neonode Inc.

through a virtual office.

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

Stockholm, Sweden.

The lease agreement 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.

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.

January 2015, our subsidiary Neonode Korea Ltd.

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

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

Operating Leases

We did not renew our lease

for the office space located at 2880 Zanker Road, San Jose, CA 95134 in August 2020 and we now operate through a virtual office in California.

On December 1, 2020, Neonode

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

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.

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

The lease was terminated on December 18, 2020 and we now only have a virtual office in South Korea.

December 1, 2015, Neonode Taiwan Ltd.

543-1, Seoul, South Korea.

The lease was terminated

on December 18, 2020 and we now only have a virtual office in South Korea.

On December 1, 2015, Neonode

entered into a lease agreement located at Rm.

2406, International Trade Building, Keelung Rd.,

Sec.1, Taipei, Taiwan.

The lease is renewed monthly.

September 1, 2019 we entered into a lease of office space located at NishiShinjuku Takagi Building, 1203 NishiShinjuku, Shinjukuku, Tokyo,

The lease is valid through August 31, 2021 and will not be renewed thereafter since we have decided to only have a virtual office

the three and months ended June 30, 2021, we recorded approximately $171,000 and $344,000 for rent expense.

For the three and six months

ended June 30, 2020, we recorded approximately $142,000 and $281,000 for rent expense.

Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussions.

Subject to Finance Lease

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.

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.

interest rate of the extended lease period is 9.85% per annum.

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 June and November 2016 when the equipment

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

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 was valid

through August 31, 2021 and was not renewed.

We now operate through a virtual office in Japan.

For the three and nine months

ended September 30, 2021, we recorded approximately $157,000 and $501,000 for rent expense, respectively.

For the three and nine months

ended September 30, 2020, we recorded approximately $154,000 and $435,000 for rent expense, respectively.

See Note 7 – 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 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 period began on July 1, 2016 when

the equipment went into service.

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

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.

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.

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

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.

Note 7 – Leases in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion.

and Capital Resources

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

liquidity will be affected by, among other things:

of our technology;

of our sensor products, including AirBar;

of our OEM customer product shipments;

of payment for our technology licensing agreements;

profit margin;

to raise additional capital, if necessary.

of June 30, 2021, we had cash of $6.6 million compared to $10.5 million as of December 31, 2020.

capital (current assets less current liabilities) was $7.1 million as of June 30, 2021, compared to $10.4 million as of December 31,

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.

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 (Part I, Item 1) for further discussion.

Liquidity and Capital Resources

Our liquidity is dependent

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

Our future liquidity will be affected

by, among other things:

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;

gross profit margin;

ability to raise additional

capital, if necessary.

As of September 30, 2021,

we had cash of $5.5 million compared to $10.5 million as of December 31, 2020.

Working capital (current assets

less current liabilities) was $6.1 million as of September 30, 2021, compared to $10.4 million as of December 31, 2020.

Net cash used in operating

activities for the six months ended June 30, 2021 was $3.4 million and was primarily the result of a net loss of $3.5 million and approximately

$0.7 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use

assets, partly offset by changes in operating assets and liabilities of $(0.6) million.

cash used in operating activities for the six months ended June 30, 2020 was $1.9 million and was primarily the result of a net loss

of $2.9 million and approximately $0.4 million in non-cash operating expenses, comprised of depreciation and amortization and amortization

of operating lease right-of-use assets.

receivable and unbilled revenues decreased by approximately $0.5 million as of June 30, 2021 compared to December 31, 2020.

due to estimated lower revenues.

activities for the nine months ended September 30, 2021 was $5.0 million and was primarily the result of a net loss of $5.4 million and

approximately $1.0 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating

lease right-of-use assets, partly offset by changes in operating assets and liabilities of $(0.6) million.

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.

Accounts receivable and unbilled

revenues decreased by approximately $1.0 million as of September 30, 2021 compared to December 31, 2020.

This was due to estimated lower

Inventory increased by approximately

$880,000 during the six months ended June 30, 2021 compared to December 31, 2020, primarily due to purchase of components to secure production

in line with estimated product sales.

$1.2 million during the nine months ended September 30, 2021 compared to December 31, 2020, primarily due to purchase of components to

secure production in line with estimated product sales.

Deferred revenues decreased

by approximately $6,000 during the six months ended June 30, 2021 compared to December 31, 2020.

During the six months ended

June 30, 2021, we purchased approximately $67,000 of property and equipment, primarily furniture and test equipment.

cash used in financing activities of $0.3 million during the six months ended June 30, 2021 was the result of principal payments on finance

cash provided by financing activities of $1.3 million during the six months ended June 30, 2020 was the result of short-term borrowings

of $966,000 and short-term tax credits of $542,000, offset by principal payments on finance leases of $164,000.

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

The Company incurred net losses

of approximately $1.7 million and $3.2 million and $1.6 million and $2.6 million for the three and six months ended June 30, 2021 and

2020, respectively, and had an accumulated deficit of approximately $199.4 million and $196.2 million as of June 30, 2021 and December

31, 2020, respectively.

In addition, operating activities used cash of approximately $3.4 million and $1.9 million for the six months

ended June 30, 2021 and 2020, respectively.

by approximately $1,000 during the nine months ended September 30, 2021 compared to December 31, 2020.

During the nine months ended

September 30, 2020 we purchased approximately $17,000 of property and equipment, primarily furniture and test equipment.

Net cash used in financing

activities of $0.2 million during the nine months ended September 30, 2021 was the result of principal payments on finance leases and

proceeds from issuance of preferred and common stock, net of offering.

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.

We have incurred significant

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

The Company incurred net losses of approximately $1.7 million

and $4.9 million and $1.6 million and $4.3 million for the three and nine months ended September 30, 2021 and 2020, respectively, and

had an accumulated deficit of approximately $201.1 million and $196.2 million as of September 30, 2021 and December 31, 2020, respectively.

In addition, operating activities used cash of approximately $5.0 million and $3.7 million for the nine months ended September 30, 2021

and 2020, respectively.

The condensed consolidated

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

In October 2021, the Company

received aggregate net proceeds of approximately $1.4 million from a registered direct offering and sales under its at the market offering

program, as described below.

In the future, we may require

15 unchanged sentences

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

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 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

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

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.

Registered Direct Offering

On October 21, 2021, we entered

into a placement agency agreement with Pareto Securities Inc.

and Pareto Securities AB pursuant to which we sold to certain Swedish and

other European investors an aggregate of 1,808,000 shares of our common stock at a price of $7.75 per share in a registered direct offering

that closed on October 26, 2021 (the “Offering”).

We received net proceeds of approximately $13.1 million from the Offering

after deducting placement agent fees and offering expenses.

At-the-Market Offering Program

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

Securities with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from

time to time, in our sole discretion, issue and sell through B.

Riley Securities, acting as sales agent, up to $25 million of shares of

our common stock.

to the Sale Agreement, B.

Riley Securities may sell the shares by any method permitted that is deemed an “at the market” offering

as defined in Rule 415 under the Securities Act.

Riley Securities will use commercially reasonable efforts consistent with its normal

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

or other customary parameters or conditions we may impose).

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

Riley Securities,

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

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

Riley Securities, acting as sales agent, up to

$25 million of shares of our common stock.

to the Sale Agreement, we may sell the shares through B.

Riley Securities by any method permitted that is deemed an “at the market”

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

Riley Securities will use commercially reasonable efforts

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

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

We will pay B.

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

per share sold under the Sales Agreement.

Riley Securities a commission of 3.0%

of the gross sales price per share sold under the Sales Agreement.

are not obligated to sell any shares under the Sale Agreement.

3 unchanged sentences

(ii) termination of the Sale Agreement in accordance with its terms.

On July 2 and 6, 2021 we sold

6,028 and 9,808 shares, respectively, under the ATM Facility with aggregate net proceeds to us of $100,000.

Accounting Policies

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.

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.

currently have no outstanding contracts with multiple performance obligations.

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.

Note 2 – Summary 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.

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, 2020.

Quantitative and Qualitative Disclosures about Market Risk

the three and nine months ended September 30, 2021, we sold an aggregate of 93,553 shares of common stock under the ATM Facility, resulting

in net proceeds of approximately $593,000 after payment of commissions to B.

Riley Securities of $18,000.

During October 2021 we sold

an aggregate of 142,169 shares under the ATM Facility with aggregate net proceeds to us of $1,396,000 after payment of commissions to

Riley Securities of $43,000.

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 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 (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 2. Management’s Discussion and Analysis