What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-10 compared with 2021-03-10 · 1007 added, 1088 removed, 267 unchanged (89% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to the Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 20 19

Consolidated Statements of Operations for the years ended December 31, 2020 and 20 19

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 201 9

Consolidated Statements of Stockholders’

Equity for the years ended December 31, 2020 and 201 9

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 201 9

Notes to the Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

Board of Directors and Stockholders

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated

balance sheets of Neonode Inc.

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

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

equity and cash flows for

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

financial statements”).

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

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

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

United States of America.

Basis for Opinion

These consolidated financial statements

are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial

statements based on our audits.

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

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

STATEMENTS AND SUPPLEMENTARY DATA

Index to the Consolidated Financial Statements Page

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Balance Sheets as of December 31, 2021 and 2020 F-3

Consolidated Statements of Operations for the years ended December 31, 2021 and 2020 F-4

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2021 and 2020 F-5

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020 F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 F-7

Notes to the Consolidated Financial Statements F-8

OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Directors and Stockholders

on the Consolidated Financial Statements

We have audited

the accompanying consolidated balance sheets of Neonode Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as

of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive loss, stockholders’ equity

and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the

“consolidated financial statements”).

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

respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash

flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in

the United States of America.

These consolidated

financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated

financial statements based on our audits.

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

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

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

We conducted our audits in accordance with

the standards of the PCAOB.

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

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

The Company is not required

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

As part of our audits we are

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

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

our audits in accordance with the standards of the PCAOB.

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

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

is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits

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

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

Accordingly, we express no such opinion.

Our audits included performing procedures

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

procedures that respond to those risks.

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

disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant

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

that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated

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

to be communicated to the audit committee and that:

included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to

error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles

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

We believe that our audits provide a reasonable basis for our opinion.

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

or required to be communicated to the audit committee and that:

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

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The communication of the critical

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

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

or disclosures to which it relates.

Accounting for Licensing Revenues

Critical Audit Matter Description

As described further in Note 2 to the consolidated

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

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

with terms and conditions that vary by licensee.

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

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

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

to make estimates of those royalties.

Auditing management’s evaluation

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

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

How the Critical Audit Matter Was Addressed

The primary procedures we performed to

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

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

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

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

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

and trends of the license customers’

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

customers’

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

the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which

for Licensing Revenues

Audit Matter Description

further in Note 2 to the consolidated financial statements, the Company earns revenue from licensing its internally developed intellectual

property (“IP”) by entering into IP licensing agreements that generally provide licensees the right to incorporate IP components

in their products, with terms and conditions that vary by licensee.

Fees under these agreements may include license fees relating to

the Company’s IP, and royalties payable to the Company following the distribution by the licensees of products incorporating the

licensed technology.

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

data by customer to make estimates of those royalties.

management’s evaluation of unbilled license revenues was challenging due to the lack of objectively verifiable evidence used in

the estimation process.

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

the Critical Audit Matter Was Addressed in the Audit

procedures we performed to address this critical audit matter included assessing the accuracy of royalty estimates made in prior reporting

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

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

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

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

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

representatives.

/s/ KMJ Corbin & Company LLP

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

Irvine, California

March 10, 2021

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share

We have served

as the Company’s auditor since 2009.

BALANCE SHEETS

thousands, except share and per share amounts)

Current assets:

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Total current assets

Investment in joint venture

Property and equipment, net

Operating lease right-of-use assets

LIABILITIES AND STOCKHOLDERS’

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

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Commitments and contingencies

Stockholders’

Stockholders’ equity:

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

4 unchanged sentences

Total Neonode Inc.

stockholders’

stockholders’ equity

Noncontrolling interests

Total stockholders’

Total liabilities and stockholders’

The accompanying notes are an integral part

of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

HMI Solutions

Total stockholders’ equity

Total liabilities and stockholders’ equity

accompanying notes are an integral part of these consolidated financial statements.

STATEMENTS OF OPERATIONS

thousands, except per share amounts)

Non-Recurring Revenue

Total revenues

Cost of revenues:

HMI Solutions

Non-Recurring Revenue

Total cost of revenues

19 unchanged sentences

Basic and diluted loss per share

Basic and diluted –

weighted average number of common shares outstanding

The accompanying notes are an integral part

of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE

(In thousands)

Basic and diluted – weighted average number of common shares outstanding

accompanying notes are an integral part of these consolidated financial statements.

STATEMENTS OF COMPREHENSIVE LOSS

Net loss including noncontrolling interests

4 unchanged sentences

Comprehensive loss attributable to Neonode Inc.

The accompanying notes are an integral part

of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

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

Shares Issued

Common Stock Shares

Common Stock Amount

Additional Paid-in

Accumulated Other

Comprehensive Income (Loss)

Accumulated Deficit

Stockholders’

Noncontrolling Interests

Stockholders’

Balances, January 1,

Common stock issued upon exercise

of common stock warrants

Conversion of Series B Preferred

Stock to common stock

Foreign currency translation

Balances, December 31, 2019

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

accompanying notes are an integral part of these consolidated financial statements.

STATEMENTS OF STOCKHOLDERS’ EQUITY

thousands, except for Preferred Stock Shares Issued 1 )

Comprehensive

Income (Loss)

Stockholders’

Noncontrolling

Stockholders’

January 1, 2020

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

Preferred dividends

Stock-based compensation

Foreign currency translation

currency translation adjustment

December 31, 2020

The accompanying

notes are an integral part of these consolidated financial statements.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

of shares for cash, net of offering costs

currency translation adjustment

December 31, 2021

accompanying notes are an integral part of these consolidated financial statements.

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

STATEMENTS OF CASH FLOWS

Cash flows from operating activities:

Net loss (including noncontrolling interests)

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

Stock-based compensation expense

Bad debt expense

Write-off of prepaids

Depreciation and amortization

Amortization of operating lease right-of-use assets

Loss on disposal of property and equipment

Changes in operating assets and liabilities:

Accounts receivable and unbilled revenue, net

Projects in process

Prepaid expenses and other current assets

Accounts payable and accrued expenses

Deferred revenues

Operating lease obligations

Net cash used in operating activities

Cash flows from investing activities:

Purchase of property and equipment

Sale of investment in joint venture

Net cash used in investing activities

loss (including noncontrolling interests)

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

compensation expense

and amortization

of operating lease right-of-use assets

on disposal of property and equipment

in operating assets and liabilities:

receivable and unbilled revenue, net

expenses and other current assets

payable and accrued expenses

lease obligations

cash used in operating activities

Cash flows from investing

of property and equipment

of investment in joint venture

cash used in investing activities

Cash flow from financing activities:

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

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

Preferred dividends

Proceeds from short-term borrowings

Proceeds from short-term tax credits

Payments on short-term borrowings

Payments on short-term tax credits

Principal payments on finance lease obligations

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash

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

from short-term borrowings

from short-term tax credits

on short-term borrowings

on short-term tax credits

payments on finance lease obligations

cash provided by financing activities

of exchange rate changes on cash

Net change in cash

Cash at beginning of year

Cash at end of year

Supplemental disclosure of cash flow information:

Cash paid for interest

Cash paid for income taxes

Supplemental disclosure of non-cash investing and financing activities:

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

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

The accompanying notes are an integral part

of these consolidated financial statements.

Notes to the Consolidated Financial Statements

at beginning of year

at end of year

disclosure of cash flow information:

paid for interest

paid for income taxes

disclosure of non-cash investing and financing activities:

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

asset obtained in exchange for lease obligations

accompanying notes are an integral part of these consolidated financial statements.

Notes to the Consolidated

Financial Statements

Nature of the Business and Operations

Background and Organization

(“we”, “us”,

“our”, or the “Company”) was incorporated in the State of Delaware in 1997 as the parent of Neonode AB,

a company founded in February 2004 and incorporated in Sweden.

“our”, or the “Company”) was incorporated in the State of Delaware in 1997 as the parent of Neonode AB, a company

founded in February 2004 and incorporated in Sweden.

We have the following wholly owned subsidiaries:

Neonode Technologies

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

Neonode Technologies AB (Sweden)

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

Neonode Japan Inc.

2 unchanged sentences

(South Korea) (established in 2014).

and Neonode Taiwan Ltd.

(Taiwan) (established in 2015).

In 2015, we established

Pronode Technologies AB, a majority-owned subsidiary of Neonode Technologies AB.

In 2016, we entered into a joint venture, named

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

Neonode Inc., collectively with its subsidiaries

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

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

Neonode’s main business model is to

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

into systems and products they develop, manufacture and sell.

In addition, Neonode designs and manufactures

sensor modules that incorporate our zForce AIR technology and sells the embedded sensors to OEMs, Original Design Manufacturers

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

Neonode began shipping sensor modules in October

Neonode also manufactures and sells through

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

We incurred net losses of approximately

$5.6 million and $5.3 million for the years ended December 31, 2020 and 2019, respectively, and had an accumulated deficit of approximately

$196.2 million as of December 31, 2020.

In addition, we used cash in operating activities of approximately $5.8 million and $3.5

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

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

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

Peter Lindell, Directors of Neonode.

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

is approximately $1.7 million in U.S.

dollars, principal amount available to the Company.

The Company made an initial drawdown

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

See Note 6 to our consolidated financial statements for

additional details on the Loan Agreements.

On August 7, 2020, we closed a private placement

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

We issued a total of 1,611,845

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

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

$13.9 million in gross proceeds.

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

Ulf Rosberg and Peter Lindell, directors

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

Stock in the August 2020 Private Placement.

We issued 517 shares of Series C-2 Preferred

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

interest under the Loan Agreement with UMR Invest AB.

Cidro Förvaltning AB, an entity associated with Mr.

Lindell purchased

517 shares of Series C-2 Preferred Stock.

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

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

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

Pursuant to the terms and the provisions

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

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

In 2015, we established Pronode Technologies AB, a majority-owned subsidiary of Neonode Technologies

Neonode Inc., which is collectively with its subsidiaries

referred to as “Neonode” or the “Company” in this report, develops advanced 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 based on our zForce technology platform, and our scene analysis solutions based on our MultiSensing technology

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

automotive, industrial automation, medical, military and avionics.

We incurred net losses of approximately $ 6.5 million and $ 5.6 million

for the years ended December 31, 2021 and 2020, respectively, and had an accumulated deficit of approximately $ 202.6 million as of December

In addition, we used cash in operating activities of approximately $ 7.7 million and $ 5.8 million for the years ended December

31, 2021 and 2020, respectively.

Prior to their conversion, the holders of

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

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

We entered into a Registration Rights Agreement

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

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

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

of the Series C Preferred Shares.

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

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

In connection with the August 2020 Private Placement, we incurred

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

The consolidated financial statements included herein have been

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

of liabilities in the ordinary course of business.

Management evaluated the significance of the Company’s operating loss

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

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

We expect our revenues

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

In addition, we intend to continue

to implement various measures to improve our operational efficiencies.

No assurances can be given that management will be successful

in meeting its revenue targets and reducing its operating loss.

In the future, we may

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

If our operations

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

No assurances can be given

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

If adequate funds are not available

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

business, results of operations and financial condition.

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

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

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

transactions.

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.

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

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

Riley Securities, Inc.

Riley Securities”) with respect to

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

issue and sell through B.

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

Pursuant to the 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.

We are not obligated to sell any shares under the

Sale Agreement.

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

sale, through B.

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

with its terms.

During the twelve months ended December 31, 2021,

we sold an aggregate of 235,722 shares of common stock under the ATM Facility, resulting in net proceeds of approximately $ 1,984,000 after

payment of commissions to B.

Riley Securities and other expenses of $ 66,000 .

The consolidated financial statements included

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

repayment of liabilities in the ordinary course of business.

Management evaluated the significance of the Company’s operating loss

and determined that the Company’s cash position following the Offering and considering the Company’s current operating

plan and other sources of potential capital, including the ATM Facility, would be sufficient to alleviate concerns about the Company’s

ability to continue as a going concern.

We expect our revenues from our three business

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

In addition, we intend to continue to implement various measures

to improve our operational efficiencies.

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

and reducing its operating loss.

In the future, we may require sources of capital

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

If our operations do not become cash flow positive,

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

No assurances can be given that we will be successful in obtaining such

additional financing on reasonable terms, or at all.

If adequate funds are not available on acceptable terms, or at all, we may be unable

to adequately fund our business plans and it could have a negative effect on our business, results of operations and financial condition.

In addition, if funds are available, the issuance of equity securities or securities convertible into equity could dilute the value of

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

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

Summary of Significant Accounting policies

Principles of

Consolidation

The consolidated financial statements have

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

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 Propoint AB, located in Gothenburg,

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.

Principles of Consolidation

The consolidated financial statements have been

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

GAAP”) and include

the accounts of Neonode Inc.

and its wholly owned subsidiaries, as well as Pronode Technologies AB, a 51 % majority owned subsidiary of

Neonode Technologies AB.

The remaining 49 % of Pronode Technologies AB is owned by Propoint AB, located in Gothenburg, Sweden.

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 consolidated balance sheets at December 31,

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

equity and cash flows

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

Technologies AB.

The preparation of financial statements

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.

Actual results could differ from these estimates and judgments.

Significant estimates and judgments include, but are not limited

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;

2021 and 2020 and the consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years

ended December 31, 2021 and 2020 include our accounts and those of our wholly owned subsidiaries as well as Pronode Technologies AB.

The preparation of financial statements in conformity

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

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

Actual results could

differ from these estimates and judgments.

Significant estimates and judgments include, but

are not limited to:

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

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

measuring variable consideration and

1 unchanged sentence

provisions for uncollectible receivables;

the net realizable value of inventory;

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;

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.

and the fair value

of shares and 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.

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 at various

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

Cash balances are maintained at various banks in

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

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

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

The Swedish government provides

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

The Japanese government provides

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

The Korea Deposit Insurance Corporation provides insurance coverage up to

50,000,000 Won per customer.

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

Dollar per customer.

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

Accounts Receivable and Allowance

for Doubtful Accounts

Federal Deposit Insurance

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

The Swedish government provides insurance coverage

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

The Japanese government provides insurance coverage up to

10,000,000 Yen per customer.

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

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

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

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.

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

We also record an allowance for all customers

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

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

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

Projects in Process

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 consolidated balance sheet as an asset and deferred

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

There were no costs capitalized

in projects in process as of December 31, 2020.

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

Inventory is stated at the lower of cost

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

Net realizable value is the estimated

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

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

Due to the low sell-through of our AirBar

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.

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 consolidated balance sheet as an asset and deferred until revenue for each project

is recognized in accordance with our revenue recognition policy.

There were no costs capitalized in projects in process as of December

31, 2021 and 2020.

The Company’s inventory

consists primarily of components that will be used in the manufacturing of our touch sensor modules (“TSMs”).

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

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

Net realizable

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

transportation.

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

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

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

In order to protect our manufacturing partners

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

Since the sale

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

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

and the rest be purchased by us.

The inventory value of these purchases has been fully reserved.

As of December 31, 2020, the Company’s

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

We segregate inventory

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

Raw materials, work-in-process, and finished

goods are as follows (in thousands):

decided to reserve for TSM inventory related to a quality issue in production.

The TSM inventory reserve was $ 0.2 million as of December

Raw materials, work-in-process, and finished goods

are as follows (in thousands):

Raw materials

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Ending inventory

Investment in Joint Venture

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

sold in November 2020.

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

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

We were not required to guarantee any obligations

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

Property and Equipment

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

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:

Computer equipment

Furniture and fixtures

Equipment purchased under a finance lease

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

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 consolidated statement of operations.

Equipment purchased under a finance lease is depreciated

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

Upon retirement or sale of property and equipment,

cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the consolidated

statement of operations.

Maintenance and repairs are charged to expense as incurred.

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.

Right-of-use assets are measured initially

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

as commissions paid to obtain a lease.

Right-of-use assets are subsequently measured

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

costs not yet expensed.

Right-of-use assets are measured initially at the

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

paid to obtain a lease.

Right-of-use assets are subsequently measured at

the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct costs not

yet expensed.

Long-Lived Assets

We assess any impairment by estimating the

future cash flow from the associated asset 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 December 31, 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 Losses

We assess any impairment by estimating the future

cash flow from the associated asset 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.

of December 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 or the Taiwan Dollar to U.S.

Dollars is performed for balance sheet accounts

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

rate during the period.

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

comprehensive income (loss).

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

expenses in the accompanying consolidated statements of operations and were $(252,000) and $105,000 during the years ended December

31, 2020 and 2019, respectively.

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

December 31, 2020 and 2019, respectively.

Concentration of Credit and Business

Our customers are located in the United

States, Europe and Asia.

As of December 31, 2020, four customers

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

As of December 31, 2019, three customers

The translation from

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

Dollars is performed for balance sheet accounts using current

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

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

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

consolidated statements of operations and were $( 66,000 ) and $( 252,000 ) during the years ended December 31, 2021 and 2020, respectively.

Foreign currency translation gains (losses) were $( 4,000 ) and $ 235,000 during the years ended December 31, 2021 and 2020, respectively.

Concentration of Credit and Business Risks

Our customers are located in the United States,

Europe and Asia.

As of December 31, 2021, four of our customers represented approximately

76 % of our consolidated accounts receivable and unbilled revenues.

As of December 31, 2020, four of our 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 year ended December 31, 2020 are as follows.

Hewlett-Packard Company –

Epson –

Alpine –

Customers who accounted for 10% or more

of our net revenues during the year ended December 31, 2019 are as follows.

Hewlett-Packard Company –

Epson –

Alpine –

The Company conducts business in the United

States, Europe and Asia.

At December 31, 2020, the Company maintained approximately $6,923,000, $4,903,000 and $64,000 of its net

assets in the United States, Europe and Asia, respectively.

At December 31, 2019, the Company maintained approximately $2,637,000,

$1,148,000 and $62,000 of its net assets in the United States, Europe and Asia, respectively.

Customers who accounted for 10 % or more of our

revenues during the year ended December 31, 2021 are as follows.

● Hewlett-Packard Company – 32 %

● Seiko Epson – 18 %

Customers who accounted for 10 % or more of our

revenues during the year ended December 31, 2020 are as follows.

● Hewlett-Packard Company – 27 %

● Epson – 19 %

● Alpine – 11 %

The Company conducts business in the United States, Europe and Asia.

As of December 31, 2021, the Company maintained approximately $ 17,198,000 , $ 2,611,000 and $ 28,000 of its net assets in the United States,

Europe and Asia, respectively.

As of December 31, 2020, the Company maintained approximately $ 6,923,000 , $ 4,903,000 and $ 64,000 of its

net assets in the United States, Europe and Asia, respectively.

Revenue Recognition

We recognize revenue when control of products

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

the amount of revenue we recognize

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

Our contracts with customers may include combinations

of products and services, 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 on a per-unit basis;

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

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

We recognize revenue net of allowances for

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

We treat all product

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

we treat all shipping and handling charges as expenses.

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

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

We recognize revenue when control of products is

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

the amount of revenue we recognize reflects

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

Our contracts with customers may include combinations of products

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

We structure our contracts such that distinct

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

License fees and sales of our AirBar and TSMs 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 fulfill the promise to transfer goods, therefore we treat all shipping

and handling charges as expenses.

We earn revenue from licensing our internally developed

intellectual property (“IP”).

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

our IP components 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

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

For technology license arrangements that do not

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

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

At the end of each reporting period, we record unbilled

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

Explicit return rights are not offered to customers.

There have been no returns through December 31, 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 is earned.

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.

Revenues from engineering services contracts

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

Revenues from engineering services contracts

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

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

Estimated losses on all SOW projects are

recognized in full as soon as they become evident.

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

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

Optical Sensor Modules Revenues:

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 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

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.

Because we generally use distributors to

provide AirBar and sensor modules to our customers, however, 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.

Product Sales

We earn revenue from sales of TSM hardware products

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

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

These distributors are generally given business

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

marketing programs.

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

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 (online sales and other direct sales to customers) when we provide the promised product to the customer.

Because we generally use distributors to provide

AirBar and TSMs to our customers, we must analyze the terms of our distributor agreements to determine when control passes from us to

our distributors.

For sales of AirBar and TSMs sold through distributors, we recognize revenues when our distributors obtain control over

our products.

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

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

ownership of products 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.

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 $78,000

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

If the actual future returns were to deviate from the historical

data on which the reserve had been established, our revenue could be adversely affected.

The following table presents disaggregated

revenues by market for the years ended December 31, 2020 and 2019 (dollars in thousands):

December 31, 2020

December 31, 2019

Net license revenues from automotive

Net license revenues from consumer electronics

Net revenues from sensor modules

Net revenues from non-recurring engineering

Other revenue

Our AirBar and TSM returns and warranty experience to

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

The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was $ 69,000 and $ 78,000 as

of December 31, 2021 and 2020, respectively.

The warranty reserve is recorded as an accrued expense and cost of sales and was $ 36,000

and $ 25,000 as of December 31, 2021 and 2020, respectively.

If the actual future returns were to deviate from the historical data on which

the reserve had been established, our revenue could be adversely affected.

Non-Recurring Engineering

For technology license or TSM contracts that require

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

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

We perform our analysis on a

contract-by-contract basis.

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

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

We provide engineering

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

Deliverables and payment terms are specified

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

contracts are completed and accepted by our customers.

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

recorded as unearned revenue until that revenue is earned.

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.

Revenues from non-recurring engineering contracts

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

Revenues from non-recurring engineering contracts

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

are recognized as they are completed and accepted by customers.

Estimated losses on all SOW projects are recognized

in full as soon as they become evident.

During the year ended December 31, 2021, we recorded no losses and during the year ended December

31, 2020, we recorded $ 47,000 of losses.

The following tables present the net revenues distribution

by geographical area and market for the years ended December 31, 2021 and 2020 (dollars in thousands):

Net revenues from consumer electronics

Net revenues from distributors and other

Net revenues from automotive

Net revenues from consumer electronics

Net revenues from distributors and other

Net revenues from automotive

Net revenues from medical

Net revenues from distributors and other

Significant Judgments

Our contracts with customers may include

promises to transfer multiple products and services to a customer, particularly when one of our customers contracts with us 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;

however, we recently negotiated a contract that may include

multiple performance obligations in the future.

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 to us.

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.

Our contracts with customers may include promises

to transfer multiple products and services to a customer, particularly when one of our customers contracts with us 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

however, we recently negotiated a contract that may include multiple performance obligations in the future.

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 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

Timing of revenue recognition 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.

Timing of revenue recognition 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.

The following table presents accounts receivable,

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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;

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.

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

at the end of each reporting period.

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.

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.

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.

Payment terms and conditions vary by the type of

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

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 one year.

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 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 one year.

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.

Product Warranty

The following table summarizes the activity

related to the product warranty liability (in thousands):

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 to 36 months from the customer receipt of the product.

Deferred Revenues

Deferred revenues consist primarily of prepayments

for license fees, and other products or services for which we have been paid in advance, and earn the revenue when we transfer

control of the product or service.

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

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

We defer license fees until we have met

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

has a right to use the 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 by source (in thousands):

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

We earn the revenue when we transfer control of the

product or service.

Deferred revenues may also include upfront payments for consulting services to be performed in the future, such as

non-recurring engineering services.

We defer license fees until we have met all accounting

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

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

The following table presents our deferred revenues

by source (in thousands):

Deferred license revenues

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

The Company recognized

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

the beginning of the year.

The Company recognized revenues of approximately

$ 41,000 and $ 39,000 , for 2021 and 2020, respectively, related to contract liabilities outstanding at the beginning of the year.

Advertising costs are expensed as incurred.

We will classify any reseller marketing allowances related to AirBar in general as sales expense unless we can define an identifiable

benefit to us from the reseller marketing allowance.

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

years ended December 31, 2020 and 2019, respectively.

will classify any reseller marketing allowances related to AirBar in general as sales expense unless we can define an identifiable benefit

to us from the reseller marketing allowance.

Advertising costs amounted to approximately $ 208,000 and $ 70,000 for the years ended

December 31, 2021 and 2020, respectively.

Research and Development

Research and development (“R&D”)

costs are expensed as incurred.

R&D costs consist mainly of personnel-related costs in addition to some external consultancy

costs such as testing, certifying and measurements.

R&D costs consist mainly of personnel-related costs in addition to some external consultancy costs

such as testing, certifying and measurements.

Stock-Based Compensation Expense

We measure the cost of employee services

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

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

in exchange for the award, usually the vesting period.

We account for equity instruments issued

to non-employees at their estimated fair value.

When determining stock-based compensation

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

pricing model.

We measure the cost of employee services received

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

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

usually the vesting period.

We account for equity instruments issued to non-employees

at their estimated fair value.

When determining stock-based compensation expense

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

Noncontrolling Interests

We recognize any noncontrolling interest,

also known as a minority interest, as a separate line item in 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.

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 consolidated

statements of stockholders’

equity, if presented, or in the notes to consolidated financial statements, a reconciliation

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

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

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

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

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.

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 December 31, 2020 and 2019.

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 payable for the current period.

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.

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.

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 December 31, 2021 and 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

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

We follow U.S.

GAAP related to uncertain

tax positions, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions.

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

As of December 31, 2020 and 2019, we had no unrecognized

tax benefits.

GAAP related to uncertain tax positions,

which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions.

As a result, we did

not recognize a liability for unrecognized tax benefits.

As of December 31, 2021 and 2020, we had no unrecognized tax benefits.

Net Loss per Share

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

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

Net loss per share, assuming dilution

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

common stock equivalents outstanding during the period.

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

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

Net loss per share amounts have been computed based

on the weighted-average number of shares of common stock outstanding during the years ended December 31, 2021 and 2020.

Net loss per share,

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

potential common stock equivalents outstanding during the period.

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

common stock equivalents used in computing the net loss per share for years ended December 31, 2021 and 2020 exclude the potential common

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

Other Comprehensive Income (Loss)

Our 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 consolidated balance sheets, as accumulated other comprehensive loss.

Our 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 consolidated balance sheets, as accumulated other comprehensive loss.

Cash Flow Information

Cash flows in foreign currencies have been

converted to U.S.

Cash flows in foreign currencies have been converted

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

The weighted-average

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

Years ended December 31,

The weighted-average exchange rates

for the consolidated statements of operations were as follows:

Swedish Krona

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Taiwan Dollar

Exchange rate for the consolidated balance

sheets was as follows:

Exchange rates for the consolidated balance sheets

were as follows:

Swedish Krona

2 unchanged sentences

Fair Value of Financial Instruments

We disclose the estimated fair values for

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

Financial instruments including cash, accounts receivable,

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

We disclose the estimated fair values for all financial

instruments for which it is practicable to estimate fair value.

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 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,

2 unchanged sentences

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

We are currently

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

Reclass of Presentation in our Condensed Consolidated

Statements of Operations

Since January 1, 2020, we have allocated

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

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

The presentation in our consolidated statements of operations

has therefore been changed accordingly.

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

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

We believe that future revenues from Remote Sensing

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

We adopted this standard as of

January 1, 2021 and concluded that there was no impact to our consolidated financial statements.

Reclass of Presentation in our Consolidated Statements

of Operations

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 (“AMER”), Asia-Pacific (“APAC”), and Europe, Middle East and Africa (“EMEA”).

thereby changed from a business area organization to a regional sales organization going forward.

Revenues are however primarily monitored

for each of our revenue streams consisting of license fees, product sales and non-recurring engineering fees.

The presentation in our

consolidated financial statements has therefore been changed accordingly for the year ended December 31, 2020 with no net impact on our

previously reported consolidated statement of operations.

Prepaid Expenses and Other Current Assets

Prepaid expense and other current assets

consist of the following (in thousands):

Prepaid expense and other current assets consist

of the following (in thousands):

As of December 31,

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Property and Equipment

Property and equipment, net consist of the

following (in thousands):

Property and equipment, net consist of the following

(in thousands):

As of December 31,

3 unchanged sentences

Property and equipment, net

Depreciation and amortization expense was

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

Depreciation and amortization expense was $ 0.6 million and $ 0.8 million

for the years ended December 31, 2021 and 2020, respectively.

Accrued Expenses

Accrued expenses consist of the following

(in thousands):

Accrued expenses consist of the following (in thousands):

As of December 31,

3 unchanged sentences

Short-Term Borrowings

During the year ended

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

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

The total amount was $563,000

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

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

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

During the year ended December

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

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

The total amount was $ 563,000 and the credit

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

There was a 1.25% annual non-deductible interest and a credit fee of 0.2% from

the seventh month of the granted credit.

The tax credit was repaid in August 2020 along with interest of $ 2,000 .

On June 17, 2020, the Company entered into

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

(each, a “Director”).

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

$1.7 million in U.S.

On June 17, 2020, the Company entered into the

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

a “Director”).

Pursuant to the Loan Agreements, each entity beneficially owned by the Director made approximately $1.7 million

dollars principal amount available to the Company.

The Company made an initial drawdown of an aggregate of

approximately $1.0 million under the Loan Agreements.

Each of the Loan Agreements

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

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

Drawdowns under

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

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

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

If a capital raise was not

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

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

due and payable on February 28, 2021.

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

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

interest under the Loan Agreement with UMR Invest AB.

Cidro Förvaltning AB, an entity associated with Mr.

The Company made an initial drawdown of an aggregate of approximately $1.0

million under the Loan Agreements.

Each of the Loan Agreements provided for a credit

fee of 0.75% per annum, calculated on a daily basis from the date of the Loan Agreement, and any outstanding amount incurred interest

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

Drawdowns under the Loan Agreements became unavailable

upon the earlier to occur of the execution of a capital raise by Neonode or December 31, 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, we issued 517 shares of Series

C-2 Preferred Stock to UMR Invest AB, an entity beneficially owned by Ulf Rosberg, in satisfaction of the outstanding indebtedness and

accrued interest under the Loan Agreement with UMR Invest AB.

Cidro Förvaltning AB, an entity associated with Mr.

Lindell purchased

517 shares of Series C-2 Preferred Stock.

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

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

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

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

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

result of the repayments to each of UMR Invest AB and Cidro Holding AB, the Loan Agreements terminated in accordance with their terms.

Fair Value Measurements

Accounting guidance defines fair value,

establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements.

The accounting

guidance does not mandate any new fair value measurements and is applicable to assets and liabilities that are required to be recorded

at fair value under other accounting pronouncements.

The three levels of

the fair value hierarchy are described as follows:

Applies to assets or liabilities

for which there are observable quoted prices in active markets for identical assets and liabilities.

We had no Level 1 assets or

Applies to assets or liabilities

for which there are inputs other than quoted prices included in Level 1.

We had no Level 2 assets or liabilities.

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

of the fair value of the assets or liabilities.

We had no Level 3 assets or liabilities.

There were no assets

or liabilities recorded at fair value on a recurring basis in 2020 and 2019.

Stockholders’

At the Annual Meeting of our Company held

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

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

Restated Certificate of Incorporation, as amended

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

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

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

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

Accounting guidance defines fair value, establishes

a framework for measuring fair value, and expands disclosure requirements about fair value measurements.

The accounting guidance does

not mandate any new fair value measurements and is applicable to assets and liabilities that are required to be recorded at fair value

under other accounting pronouncements.

The three levels of the fair value hierarchy are

described as follows:

Applies to assets or liabilities for

which there are observable quoted prices in active markets for identical assets and liabilities.

Applies to assets or liabilities for

which there are inputs other than quoted prices included in Level 1.

Applies to assets or liabilities for

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

There were no assets or liabilities recorded at

fair value on a recurring basis in 2021 and 2020.

Stockholders’ Equity

At the Annual Meeting of our Company held on September

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

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 9).

On August 12, 2021, we issued 12,830 shares of our

common stock to key employees pursuant to our 2020 LTIP (see Note 9).

On December 29, 2021, we issued 14,735 shares of

our common stock to key employees pursuant to our 2020 long-term incentive program (“2020 LTIP”) (see Note 9).

During the twelve months ended December 31, 2021,

we sold an aggregate of 235,722 shares of common stock under the ATM Facility, resulting in net proceeds to us of approximately $ 1,984,000

after payment of commissions to B.

Riley and other expenses of $ 66,000 .

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.

Warrants and Other Common Stock Activity

During the year ended December 31, 2020,

325,000 warrants expired and no warrants were exercised.

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

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

summary of all warrant activity is set forth below:

and exercisable

During the year ended December 31, 2021, no warrants

expired and no warrants were exercised.

During the year ended December 31, 2020, 325,000 warrants expired and no warrants were exercised.

A summary of all warrant activity is set forth

Outstanding and exercisable

January 1, 2020

Expired/forfeited

December 31, 2020

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

2016 Purchase Warrants

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

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

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

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

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

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

the Secretary of State of the State of Delaware.

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

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

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

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

On December 7, 2020,

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

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

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

Details of the preferred stock activities

are set forth below:

Balances, December 31, 2018

Conversion of Series B Preferred Stock to common stock

Balances, December 31, 2019

Expired/forfeited

December 31, 2021

Outstanding Warrants to Purchase Common Stock as

of December 31, 2021:

August 2016 Purchase Warrants

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.

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 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.

No shares of preferred stock were issued and outstanding

as of and during the year ended December 31, 2021.

Details of the preferred stock activities for the

year ended December 31, 2020 are set forth below:

Balances, January 1, 2020

Issuance of Preferred Shares for cash

3 unchanged sentences

Stock-Based Compensation

We have adopted equity incentive plans for

which stock options and restricted stock awards are available to grant 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

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, they are still operative for previously granted awards.

Under the 2020 Plan, 750,000

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

officers, employees, non-employee directors and consultants.

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

compensation committee at its discretion.

Accordingly, as of December 31, 2020, we

had three equity incentive plans:

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

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

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

We have adopted equity incentive plans for which

stock options and restricted stock awards are available to grant 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

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, they are still operative for previously granted awards.

Under the 2020 Plan, 750,000 shares

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

non-employee directors and consultants.

The terms of the awards granted under the 2020 Plan are set by our compensation committee at its

Accordingly, as of December 31, 2021, we had three

equity incentive plans:

the 2006 Plan;

the 2015 Plan;

the 2020 Plan.

In 2020 we established the Neonode Inc.

2020 Long Term Incentive

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

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

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

Through the 2020

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

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

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

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

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

period after issuance.

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

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

and termination date.

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

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

Neonode has reported and paid Swedish

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

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

the two-year lock-up period.

The following table summarizes information

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

at December 31, 2020:

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 termination date.

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 recognized

immediately 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.

On August 12, 2021, we issued 12,830 shares of common

stock to a key employee pursuant to the 2020 LTIP.

The shares were immediately vested but subject to a two-year lock-up period after issuance.

In the event the participant’s employment with the Company 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.

Company has reported and paid Swedish social charges of $ 21,000 for the issued shares but only 30 % of the stock-based compensation (totaling

$ 25,000 ) was recognized immediately in the consolidated statements of operations for the year ended December 31, 2021, with the remainder

to be recognized ratably over the two-year lock-up period.

On December 29, 2021, we issued 14,735 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 termination date.

Neonode has reported

and paid Swedish social charges of $ 46,000 for the issued shares but only 30 % of the stock-based compensation (totaling $ 38,000 ) was recognized

immediately in the consolidated statements of operations for the year ended December 31, 2021, with the remainder to be recognized ratably

over the two-year lock-up period.

During the year ended December 31, 2021, we recognized

$ 94,000 of stock-based compensation for the amortization of the LTIP over the respective lock-up periods.

The following table summarizes information with

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

Options Outstanding

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$ 15.01 - $ 30.40

$ 30.40 - $ 62.10

A summary of the combined activity under

all of the stock option plans is set forth below:

A summary of the combined activity under all of

the stock option plans is set forth below:

Options Outstanding

Options outstanding –

January 1, 2019

Options outstanding – January 1, 2020

Options granted

1 unchanged sentence

Options cancelled or expired

Options outstanding –

December 31, 2019

Options outstanding – December 31, 2020

Options granted

1 unchanged sentence

Options cancelled or expired

Options outstanding and vested –

December 31, 2020

No stock options were granted during the

years ended December 31, 2020 and 2019, respectively.

During the years ended December 31, 2020

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

The estimated fair value of

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

Stock options granted under the 2006 and

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.

Options outstanding and vested – December 31, 2021

No stock options were granted during the years

ended December 31, 2021 and 2020, respectively.

During the years ended December 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

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

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.

Stock-Based Compensation

The stock-based compensation expense for

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

directors and employees (in thousands):

Years ended December 31,

The stock-based compensation expense for the years

ended December 31, 2021 and 2020 reflects the estimated fair value of the vested portion of common stock granted to directors and employees

(in thousands):

(In thousands)

Sales and marketing

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Commitments and Contingencies

On August 26, 2020,

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

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

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

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

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

These proposals for shareholder

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

Neonode participated.

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

5 and Proposal 6.

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

in the Proxy Statement concerning election of directors.

N eonode and the other named defendants

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

was required, and that the plaintiffs’

allegations are without merit.

However, in an effort to avoid the nuisance and ongoing

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

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

definitive additional materials to the Proxy Statement.

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

On September 2, 2020,

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

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

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

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

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

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

On October 20, 2020, the plaintiff claimed to voluntarily

dismiss the lawsuit in the United States District Court.

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

mootness discussions, which are still ongoing.

Operating expenses

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

and Guarantees

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

of the officer or director serving in such capacity.

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

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

is unlimited.

However, we have a directors’

and officers’

liability insurance policy that should enable us to recover

a portion of future amounts paid.

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

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

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

with business partners, contractors, customers and landlords.

Under these provisions we generally indemnify and hold harmless

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

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

These indemnification provisions often include indemnifications

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

These indemnification provisions generally

survive termination of the underlying agreement.

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

under these indemnification provisions is unlimited.

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

to these indemnification agreements.

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

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

One of our manufacturing partners has previously

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

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

Management’s judgment

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

purchase the inventory.

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

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

has therefore been recorded as of December 31, 2020.

On August 26, 2020, a putative stockholder of Neonode

filed a purported class action lawsuit (C.A.

2020-0701-AGB) in the Delaware Court of Chancery (the “Court”) against Neonode

and the Board of Directors of Neonode for alleged breach of fiduciary duty in connection with disclosure of information concerning Proposal

5 and Proposal 6 in the proxy statement filed with the SEC by Neonode on August 20, 2020 for the 2020 Annual Meeting of Stockholders of

Neonode (the “Proxy Statement”).

These proposals for shareholder approval related to the Private Placement by Neonode

on August 5, 2020 in which two directors and the chief executive officer of Neonode participated.

The relief sought by the plaintiff included

a preliminary injunction to enjoin the stockholder votes on Proposal 5 and Proposal 6.

On September 13, 2020, the plaintiff amended his

complaint to also enjoin the stockholder vote on Proposal 1 in the Proxy Statement concerning election of directors.

and the other named defendants believe that the disclosures set forth in the Proxy Statement complied fully with all applicable law, that

no supplemental disclosure was required, and that the plaintiffs’ allegations are without merit.

However, in an effort to avoid

the nuisance and ongoing expense relating to the claims in the lawsuit, Neonode filed definitive additional materials to the Proxy

Statement on September 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.

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

On September 2, 2020, a 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 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 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.

September 9, 2021, the plaintiff’s counsel filed a complaint in the Supreme Court of the State of New York, County of Nassau, to

recover plaintiff’s attorneys’ fees and expenses in the amount of $ 400,000 incurred in connection with the Proceeding.

November 3, 2021, the Company entered into a settlement agreement with plaintiff’s counsel, which was accrued for as of September

On November 4, 2021, the case was dismissed with prejudice.

Operating expenses for the year ended December

31, 2021 include costs in relation to the above-referenced lawsuits.

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 lifetime.

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

we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of any future amounts

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

and we have no liabilities recorded for these agreements as of December 31, 2021 and December 31, 2020.

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.

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 December 31, 2021 and December 31, 2020.

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.

In December, 2021 the bank guarantee

was cancelled.

Patent Assignment

1 unchanged sentence

of patents to Aequitas Technologies LLC.

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

a licensing and monetization program.

On June 8, 2020, Neonode Smartphone LLC,

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

These litigation matters are still ongoing.

Non-Recurring Engineering Development

On April 25, 2013, we entered into an Analog

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

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

Under the terms of the NN1002

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

2 million ASICs sold.

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

We have operating leases for our corporate

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

Our leases have remaining lease terms of six months to

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

lease includes an option to annually prolong;

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 two patents.

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 2,000,000 ASICs sold.

As of December

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

We have operating leases for our corporate offices

and our manufacturing facility, and finance leases for equipment.

Our leases have remaining lease terms of six months to two years.

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

to annually prolong;

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

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

related lease liabilities.

Our operating leases represent building

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

Our Stockholm corporate office lease has

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

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

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 one year 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,

2 unchanged sentences

Our finance leases represent manufacturing equipment;

we report the manufacturing equipment, as well as current

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

Generally, interest rates are stated in

our leases for equipment.

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

finance leases to estimate our incremental borrowing rate.

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

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

The components of

lease expense were as follows (in thousands):

Years ended December 31,

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

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

Generally, interest rates are stated in our leases

for equipment.

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

to estimate our incremental borrowing rate.

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

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

The components of lease expense

were as follows (in thousands):

Operating lease cost (1)

3 unchanged sentences

Total finance lease cost

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

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

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

ended December 31,

paid for amounts included in leases:

cash flows from operating leases

cash flows from finance leases

assets obtained in exchange for lease obligations:

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

of December 31,

lease right-of-use assets

portion of operating lease obligations

lease liabilities, net of current portion

operating lease liabilities

and equipment, at cost

and equipment, net

portion of finance lease obligations

lease liabilities, net of current portion

finance lease liabilities

(1) Includes short term lease costs of $ 127,000 and $ 145,000 for the years ended December 31, 2021 and 2020.

Supplemental cash flow information

related to leases was as follows (in thousands):

Cash paid for amounts included in leases:

Operating cash flows from operating leases

Operating cash flows from finance leases

Financing cash flows from finance leases

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

Operating leases

Finance leases

Supplemental balance sheet

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

As of December 31,

Operating leases

Operating lease right-of-use assets

Current portion of operating lease obligations

Operating lease liabilities, net of current portion

Total operating lease liabilities

Finance leases

Property and equipment, at cost

Accumulated depreciation

Property and equipment, net

Current portion of finance lease obligations

Finance lease liabilities, net of current portion

Total finance lease liabilities

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.

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

ending December 31,

imputed interest

lease liabilities

current portion

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

ending December 31,

minimum payments required:

amount representing interest:

value of net minimum lease payments:

current portion

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

A summary of future minimum payments under non-cancellable

operating lease commitments as of December 31, 2021 is as follows (in thousands):

Years ending December 31,

Less imputed interest

Total lease liabilities

Less current portion

The following is a schedule of minimum future rentals

on the non-cancelable finance leases as of December 31, 2021 (in thousands):

Year ending December 31,

Total minimum payments required:

Less amount representing interest:

Present value of net minimum lease payments:

Less current portion

Segment Information

Our Company has one reportable segment,

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

We report revenues from external customers

based on the country where the customer is located.

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

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

Our Company has one reportable segment, which is

comprised of the touch technology licensing and sensor module business.

We report revenues from external customers based

on the country where the customer is located.

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

31, 2021 and 2020 (dollars in thousands):

United States

Loss before provision for income taxes

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

The provision (benefit)

for income taxes is as follows for the years ended December 31 (in thousands):

Loss before provision for income taxes was distributed

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

The provision (benefit) for income taxes is as

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

Change in deferred

3 unchanged sentences

Total current

The differences between our effective income

tax rate and the U.S.

The differences between our effective income tax

rate and the U.S.

federal statutory federal income tax rate for the years ended December 31, are as follows:

4 unchanged sentences

Effective tax rate

Significant components of the deferred

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

Significant components of the deferred tax asset

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

Deferred tax assets:

4 unchanged sentences

Total net deferred tax assets

Valuation allowances are recorded to offset

certain deferred tax assets due to management’s uncertainty of realizing the benefits of these items.

Management applies

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

and its subsidiaries, since it is not determinable using

the “more likely than not”

criteria that there will be any future benefit of our deferred tax assets.

This is mainly

due to our history of operating losses.

As of December 31, 2020, we had federal, state and foreign net operating losses of $68.9

million, $20.0 million and $14.2 million, respectively.

The federal loss carryforward begins to expire in 2028, and the California

loss carryforward begins to expire in 2030.

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

do not expire.

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

Utilization of the net operating loss and

tax credit carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382

of the Internal Revenue Code and similar state provisions.

The annual limitation may result in the expiration of the net operating

losses and tax credit carryforwards before utilization.

As of December 31, 2020, we had not completed the determination of

the amount to be limited under the provision.

We follow the provisions of accounting

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

There were no

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

We follow the policy to classify accrued

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

For the years ended December 31,

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

As of December 31, 2020, we had no uncertain

tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.

Valuation allowances are recorded to offset certain

deferred tax assets due to management’s uncertainty of realizing the benefits of these items.

Management applies a full valuation

allowance for the accumulated losses of Neonode Inc.

and its subsidiaries, since it is not determinable using the “more likely than

not” criteria that there will be any future benefit of our deferred tax assets.

This is mainly due to our history of operating losses.

As of December 31, 2021, we had federal, state and foreign net operating losses of $ 74.5 million, $ 20.0 million and $ 23.6 million, respectively.

The federal loss carryforward begins to expire in 2028, and the California loss carryforward begins to expire in 2030 The foreign loss

carryforward, which is generated in Sweden, does not expire.

Utilization of the net operating loss and tax credit

carryforwards is subject to an annual limitation due to the ownership percentage change limitations provided by Section 382 of the

Internal Revenue Code and similar state provisions.

The annual limitation may result in the expiration of the net operating losses and

tax credit carryforwards before utilization.

As of December 31, 2021, we had not completed the determination of the amount to be

limited under the provision.

We follow the provisions of accounting guidance

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

There were no unrecognized tax

benefits for the years ended December 31, 2021 and 2020.

We follow the policy to classify accrued interest

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

For the years ended December 31, 2021 and 2020 we

did not recognize any interest or penalties related to unrecognized tax benefits.

As of December 31, 2021, we had no uncertain tax

positions that would be reduced as a result of a lapse of the applicable statute of limitations.

New Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic

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.

ASU 2019-12 has an immaterial impact on our consolidated

financial statements.

We file income tax returns in the U.S.

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

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

potential examination in one or more jurisdictions.

The 2009 through 2020 tax years are open and may be subject to potential

examination in one or more jurisdictions.

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

Employee Benefit Plans

We participate in a number of individual

defined contribution pension plans for our employees in Sweden.

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

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

Contributions relating to these defined contribution plans for

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

We participate in a number of individual defined

contribution pension plans for our employees in Sweden.

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

pension plans depending on age and salary level.

Contributions relating to these defined contribution plans for the years ended December

31, 2021 and 2020 were $ 587,000 and $ 459,000 , respectively.

We match U.S.

employee contributions to a

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

Contributions relating to the

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

In Taiwan, we

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

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

respectively.

employee contributions to a 401(K) retirement plan up to a maximum

of six percent ( 6 %) of an employee’s annual salary.

Contributions relating to the matching 401(K) contributions for the years ended

December 31, 2021 and 2020 were $ 10,000 and $ 6,000 , respectively.

In Taiwan, we contribute six percent ( 6 %) of the employee’s annual

salary to a pension fund which agrees with Taiwan’s Labor Pension Act.

Contributions relating to the Taiwanese pension fund for

the years ended December 31, 2021 and 2020 were $ 2,000 and $ 4,000 , respectively.

Net Loss Per Share

Basic net loss per common share for the

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

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

Diluted loss per

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

for the relevant period by the

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

Basic net loss per common share for the years ended

December 31, 2021 and 2020 was computed by dividing the net loss attributable to common shareholders of Neonode Inc.

for the relevant

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

Diluted loss per common share is computed

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

for the relevant period by the weighted average number of shares

of common stock and common stock equivalents outstanding during the year.

Potential common stock equivalents of approximately

8 unchanged sentences

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data