Neonode Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to the Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 170 ) F-2 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 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Neonode Inc. 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, 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. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Accounting for Licensing Revenues Critical Audit Matter Description As described further in Note 2 to the consolidated financial statements, the Company earns revenue from licensing its internally developed intellectual property (“IP”) by entering into IP licensing agreements that generally provide licensees the right to incorporate IP components in their products, with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to the Company’s IP, and royalties payable to the Company following the distribution by the licensees of products incorporating the licensed technology. At the end of each reporting period, the Company records unbilled license revenues, using prior royalty revenue data by customer to make estimates of those royalties. Auditing management’s evaluation of unbilled license revenues was challenging due to the lack of objectively verifiable evidence used in the estimation process. As a result, there is a high degree of auditor judgment involved in performing procedures on the Company’s estimates. How the Critical Audit Matter Was Addressed in the Audit The primary procedures we performed to address this critical audit matter included assessing the accuracy of royalty estimates made in prior reporting periods as compared to the actual royalties subsequently determined for all significant licensing customers and inquiring of management as to the reasons for any significant differences between actual and estimated royalties, determining that the Company has had no significant revenue reversals as a result of these past differences, and inquiring as to the basis of the current period estimates of royalties, including the Company’s considerations of the overall economic environment, past royalty experience and the specific circumstances and trends of the license customers’ royalty-based business based on the Company’s knowledge of and discussions with customers’ representatives. /s/ KMJ Corbin & Company LLP We have served as the Company’s auditor since 2009. Irvine, California March 10, 2022 F- 2 NEONODE INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) As of December 31, 2021 As of December 31, 2020 ASSETS Current assets: Cash $ 17,383 $ 10,473 Accounts receivable and unbilled revenues, net 1,293 1,743 Projects in process - - Inventory 2,520 1,273 Prepaid expenses and other current assets 836 1,161 Total current assets 22,032 14,650 Property and equipment, net 376 1,003 Operating lease right-of-use assets 584 919 Total assets $ 22,992 $ 16,572 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 776 $ 1,084 Accrued payroll and employee benefits 1,037 1,170 Accrued expenses 371 545 Deferred revenues 106 138 Current portion of finance lease obligations 258 769 Current portion of operating lease obligations 425 504 Total current liabilities 2,973 4,210 Finance lease obligations, net of current portion 65 95 Operating lease obligations, net of current portion 117 377 Total liabilities 3,155 4,682 Commitments and contingencies Stockholders’ equity: Common stock, 25,000,000 shares authorized, with par value of $ 0.001 ; 13,575,952 and 11,504,665 shares issued and outstanding at December 31, 2021 and 2020, respectively 14 12 Additional paid-in capital 226,880 211,663 Accumulated other comprehensive loss ( 408 ) ( 404 ) Accumulated deficit ( 202,608 ) ( 196,158 ) Total Neonode Inc. stockholders’ equity 23,878 15,113 Noncontrolling interests ( 4,041 ) ( 3,223 ) Total stockholders’ equity 19,837 11,890 Total liabilities and stockholders’ equity $ 22,992 $ 16,572 The accompanying notes are an integral part of these consolidated financial statements. F- 3 NEONODE INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Years Ended December 31, 2021 December 31, 2020 Revenues: License $ 4,787 $ 4,618 Products 955 950 Non-Recurring Revenue 94 416 Total revenues 5,836 5,984 Cost of revenues: Products 922 802 Non-Recurring Revenue 33 276 Total cost of revenues 955 1,078 Total gross margin 4,881 4,906 Operating expenses: Research and development 3,546 4,139 Sales and marketing 2,839 2,534 General and administrative 5,603 4,424 Total operating expenses 11,988 11,097 Operating loss ( 7,107 ) ( 6,191 ) Other expense: Interest expense ( 15 ) ( 27 ) Other expense - ( 5 ) Total other expense ( 15 ) ( 32 ) Loss before provision for income taxes ( 7,122 ) ( 6,223 ) Provision for income taxes 146 59 Net loss including noncontrolling interests ( 7,268 ) ( 6,282 ) Less: net loss attributable to noncontrolling interests 818 677 Net loss attributable to Neonode Inc. ( 6,450 ) ( 5,605 ) Preferred dividends - ( 33 ) Net loss attributable to common shareholders of Neonode Inc. $ ( 6,450 ) $ ( 5,638 ) Loss per common share: Basic and diluted loss per share $ ( 0.54 ) $ ( 0.56 ) Basic and diluted – weighted average number of common shares outstanding 11,907 9,989 The accompanying notes are an integral part of these consolidated financial statements. F- 4 NEONODE INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) Years Ended December 31, 2021 December 31, 2020 Net loss including noncontrolling interests $ ( 7,268 ) $ ( 6,282 ) Other comprehensive income (loss): Foreign currency translation adjustments ( 4 ) 235 Comprehensive loss ( 7,272 ) ( 6,047 ) Less: Comprehensive loss attributable to noncontrolling interests 818 677 Comprehensive loss attributable to Neonode Inc. $ ( 6,454 ) $ ( 5,370 ) The accompanying notes are an integral part of these consolidated financial statements. F- 5 NEONODE INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except for Preferred Stock Shares Issued 1 ) Preferred Stock Shares Issued Preferred Stock Amount Common Stock Shares Issued Common Stock Amount Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Neonode Inc. Stockholders’ Equity Noncontrolling Interests Total Stockholders’ Equity Balances, January 1, 2020 - $ - 9,171 $ 9 $ 197,543 $ ( 639 ) $ ( 190,520 ) $ 6,393 $ ( 2,546 ) $ 3,847 Issuance of shares for cash, net of offering costs 3,932 3,932 1,612 1 9,597 - - 13,530 - 13,530 Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest 517 517 - - ( 1 ) - - 516 - 516 Conversion of Series C-1 and C-2. Preferred Stock to common stock ( 4,449 ) ( 4,449 ) 684 1 4,448 - - - - - Preferred dividends - - - - - - ( 33 ) ( 33 ) - ( 33 ) Stock-based compensation - - 37 1 76 - - 77 - 77 Foreign currency translation adjustment - - - - - 235 - 235 - 235 Net loss - - - - - - ( 5,605 ) ( 5,605 ) ( 677 ) ( 6,282 ) Balances, December 31, 2020 - - 11,504 12 211,663 ( 404 ) ( 196,158 ) 15,113 ( 3,223 ) 11,890 Issuance of shares for cash, net of offering costs - - 2,044 2 15,060 - - 15,062 - 15,062 Stock-based compensation - - 28 - 157 - - 157 - 157 Foreign currency translation adjustment - - - - - ( 4 ) - ( 4 ) - ( 4 ) Net loss - - - - - - ( 6,450 ) ( 6,450 ) ( 818 ) ( 7,268 ) Balances, December 31, 2021 - $ - 13,576 $ 14 $ 226,880 $ ( 408 ) $ ( 202,608 ) $ 23,878 $ ( 4,041 ) $ 19,837 The 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). F- 6 NEONODE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended December 31, 2021 December 31, 2020 Cash flows from operating activities: Net loss (including noncontrolling interests) $ ( 7,268 ) $ ( 6,282 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 157 77 Depreciation and amortization 632 767 Amortization of operating lease right-of-use assets 505 405 Loss on disposal of property and equipment - 5 Changes in operating assets and liabilities: Accounts receivable and unbilled revenue, net 434 ( 394 ) Projects in process - 8 Inventory ( 1,440 ) ( 91 ) Prepaid expenses and other current assets 247 ( 375 ) Accounts payable and accrued expenses ( 406 ) 444 Deferred revenues ( 28 ) 64 Operating lease obligations ( 511 ) ( 380 ) Net cash used in operating activities ( 7,678 ) ( 5,752 ) Cash flows from investing activities: Purchase of property and equipment ( 67 ) ( 60 ) Sale of investment in joint venture - 2 Net cash used in investing activities ( 67 ) ( 58 ) Cash flow from financing activities: Proceeds from issuance of preferred and common stock, net of offering costs 15,062 13,530 Preferred dividends - ( 33 ) Proceeds from short-term borrowings - 966 Proceeds from short-term tax credits - 542 Payments on short-term borrowings - ( 516 ) Payments on short-term tax credits - ( 557 ) Principal payments on finance lease obligations ( 487 ) ( 321 ) Net cash provided by financing activities 14,575 13,611 Effect of exchange rate changes on cash 80 315 Net change in cash 6,910 8,116 Cash at beginning of year 10,473 2,357 Cash at end of year $ 17,383 $ 10,473 Supplemental disclosure of cash flow information: Cash paid for interest $ 15 $ 27 Cash paid for income taxes $ 146 $ 59 Supplemental disclosure of non-cash investing and financing activities: Short-term borrowings and accrued interest settled for Series C-2 Preferred Stock $ - $ 516 Right-of-use asset obtained in exchange for lease obligations $ 239 $ 864 The accompanying notes are an integral part of these consolidated financial statements. F- 7 NEONODE INC. Notes to the Consolidated Financial Statements 1. Nature of the Business and Operations Background and Organization Neonode Inc. (“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. We have the following wholly owned subsidiaries: Neonode Technologies AB (Sweden) (established in 2008 to develop and license touchscreen technology); Neonode Japan Inc. (Japan) (established in 2013); Neonode Korea Ltd. (South Korea) (established in 2014). In 2015, we established Pronode Technologies AB, a majority-owned subsidiary of Neonode Technologies AB. Operations 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 platform. 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. Liquidity 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 31, 2021. 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. 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. (“B. 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. B. 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 . F- 8 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. 2. 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. 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. Pronode Technologies AB was organized to sell engineering services within the automotive markets. All inter-company accounts and transactions have been eliminated in consolidation. Neonode consolidates entities in which it has a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50 % of the voting rights. The consolidated balance sheets at December 31, 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. Estimates 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 to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived assets; for leases, determining whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets; and the fair value of 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. Concentration of Cash Balance Risks Cash balances are maintained at various banks in the U.S., Japan, Korea, Taiwan and Sweden. For deposits held with financial institutions in the U.S., the U.S. Federal Deposit Insurance Corporation, provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 100,000 Euro per customer and covers deposits in all types of accounts. The Japanese government provides insurance coverage up to 10,000,000 Yen per customer. The Korea Deposit Insurance Corporation provides insurance coverage up to 50,000,000 Won per customer. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount of insurance provided. F- 9 Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable is stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. 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, 2021 and 2020. Inventory The Company’s inventory consists primarily of components that will be used in the manufacturing of our touch sensor modules (“TSMs”). We classify inventory for reporting purposes as raw materials, work-in-process, and finished goods. Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period. Due to the low sell-through of our AirBar products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials. Management has further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location it is stored. The AirBar inventory reserve was $ 0.8 million and $ 0.9 million as of December 31, 2021 and 2020, respectively . Management decided to reserve for TSM inventory related to a quality issue in production. The TSM inventory reserve was $ 0.2 million as of December 31, 2021. Raw materials, work-in-process, and finished goods are as follows (in thousands): December 31, December 31, 2021 2020 Raw materials $ 1,446 $ 550 Work-in-process 10 21 Finished goods 1,064 702 Ending inventory $ 2,520 $ 1,273 F- 10 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 Computer equipment 3 years Furniture and fixtures 5 years Equipment 7 years 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. 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, 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 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. F- 11 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 % ● LG – 13 % 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 (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. License Fees We earn revenue from licensing our internally developed intellectual property (“IP”). We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products, with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support. For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when the license is made available to the customer and the customer has a right to use that license. 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. 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. F- 12 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. Under U.S. GAAP, companies may make reasonable aggregations and approximations of returns data to accurately estimate returns. 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 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 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): 2021 2020 Amount Percentage Amount Percentage AMER Net revenues from consumer electronics $ 2,097 93.4 % $ 1,828 72.6 % Net revenues from distributors and other 149 6.6 % 690 27.4 % $ 2,246 100.0 % $ 2,518 100.0 % APAC Net revenues from automotive $ 1,330 42.9 % $ 1,221 43.2 % Net revenues from consumer electronics 1,088 35.0 % 1,160 41.1 % Net revenues from distributors and other 685 22.1 % 442 15.7 % $ 3,103 100.0 % $ 2,823 100.0 % EMEA Net revenues from automotive $ 313 64.3 % $ 412 64.0 % Net revenues from medical 73 15.0 % 215 33.4 % Net revenues from distributors and other 101 20.7 % 16 2.6 % $ 487 100.0 % $ 643 100.0 % F- 13 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. We currently have no outstanding contracts with multiple performance obligations; however, we recently negotiated a contract that may include multiple performance obligations in the future. 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. The following table presents accounts receivable, unbilled revenues and deferred revenues as of December 31, 2021 and 2020 (in thousands): December 31, 2021 December 31, 2020 Accounts receivable and unbilled revenues $ 1,293 $ 1,743 Deferred revenues 106 138 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. F- 14 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. 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. 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): Years ended December 31, 2020 December 31, 2019 Balance at beginning of period $ 25 $ 24 Provisions for warranty issued 11 1 Balance at end of period $ 36 $ 25 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. F- 15 Deferred Revenues Deferred revenues consist primarily of prepayments 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 license. 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): As of December 31, 2021 2020 Deferred license revenues $ 28 $ 28 Deferred NRE revenues 8 22 Deferred AirBar revenues - 10 Deferred sensor modules revenues 70 78 $ 106 $ 138 Contracted revenue not yet recognized was $ 106,000 as of December 31, 2021. We expect to recognize 100 % of that revenue over the next twelve months. 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 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 $ 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. 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. F- 16 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. 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: (1) Net income or loss; (2) Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and (3) Each component of other comprehensive income or loss. Income Taxes We recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in the consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. 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 was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes payable for the current period. 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, 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, 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. F- 17 Cash Flow Information Cash flows in foreign currencies have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average exchange rates for the consolidated statements of operations were as follows: Years ended December 31, 2021 2020 Swedish Krona 8.58 9.21 Japanese Yen 109.82 106.73 South Korean Won 1,144.95 1,179.20 Taiwan Dollar 27.93 29.45 Exchange rates for the consolidated balance sheets were as follows: As of December 31, 2021 2020 Swedish Krona 9.03 8.22 Japanese Yen 115.12 103.23 South Korean Won 1,190.75 1,088.59 Taiwan Dollar 27.71 28.09 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. New Accounting Pronouncements In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments , (“ASU 2016-13”), supplemented by subsequent accounting standards updates. The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13, as amended, is scheduled to become effective for fiscal years beginning after December 15, 2023, with early adoption permitted. In the future, we will evaluate the impact that ASU 2016-13, as amended, will have on our consolidated financial statements, specifically regarding our trade receivables; however, we do not expect any significant impact from implementation of the new standard. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Tax , which simplifies the accounting for income taxes. ASU 2019-12 will become effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We 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”). We 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. F- 18 3. Prepaid Expenses and Other Current Assets Prepaid expense and other current assets consist of the following (in thousands): As of December 31, 2021 2020 Prepaid insurance $ 189 $ 255 Prepaid rent 6 11 VAT receivable 345 433 Advances 3 216 Advances to suppliers 38 43 Other 255 203 Total prepaid expenses and other current assets $ 836 $ 1,161 4. Property and Equipment Property and equipment, net consist of the following (in thousands): As of December 31, 2021 2020 Computers, software, furniture and fixtures $ 1,484 $ 1,591 Equipment under finance leases 3,463 3,806 Less accumulated depreciation and amortization ( 4,571 ) ( 4,394 ) Property and equipment, net $ 376 $ 1,003 Depreciation and amortization expense was $ 0.6 million and $ 0.8 million for the years ended December 31, 2021 and 2020, respectively. 5. Accrued Expenses Accrued expenses consist of the following (in thousands): As of December 31, 2021 2020 Accrued returns and warranty $ 36 $ 24 Accrued consulting fees and other 335 521 Total accrued expenses $ 371 $ 545 F- 19 6. Short-Term Borrowings During the year ended December 31, 2020, the Company was granted a credit from the Swedish Tax Authority covering social charges and staff withholding taxes relating to January through March 2020 payroll, as part of Swedish governmental COVID-19 support. The total amount was $ 563,000 and the credit was for 12 months but could be repaid earlier if desired. There was a 1.25% annual non-deductible interest and a credit fee of 0.2% from the seventh month of the granted credit. The tax credit was repaid in August 2020 along with interest of $ 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. 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, 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 AB. As a result of the repayments to each of UMR Invest AB and Cidro Holding AB, the Loan Agreements terminated in accordance with their terms. 7. 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: Level 1: Applies to assets or liabilities for which there are observable quoted prices in active markets for identical assets and liabilities. Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1. Level 3: 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. F- 20 8. Stockholders’ Equity Common Stock 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. Accordingly, on November 5, 2020, we filed an amendment to the Neonode Inc. Restated Certificate of Incorporation, as amended (our “Certificate of Incorporation”), with the Secretary of State of the State of Delaware to increase the number of authorized shares of our common stock to 25,000,000 shares. On December 29, 2020, we issued 37,288 shares of our common stock to key employees pursuant to our 2020 long-term incentive program (“2020 LTIP”) (see Note 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, 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 below: Outstanding and exercisable Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life January 1, 2020 756,368 $ 14.98 1.47 Expired/forfeited ( 325,000 ) 20.00 - December 31, 2020 431,368 $ 11.20 1.13 Issued - - - Expired/forfeited - - - Exercised - - - December 31, 2021 431,368 $ 11.20 0.13 Outstanding Warrants to Purchase Common Stock as of December 31, 2021: Description Issue Date Exercise Price Shares Expiration Date August 2016 Purchase Warrants 08/17/16 $ 11.20 431,368 02/17/22 F- 21 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: Series B Preferred Stock Shares Issued Series B Preferred Stock Amount Series C-1 Preferred Stock Shares Issued Series C-1 Preferred Stock Amount Series C-2 Preferred Stock Shares Issued Series C-2 Preferred Stock Amount Balances, January 1, 2020 - $ - - $ - - $ - Issuance of Preferred Shares for cash - - 365 365 3,567 3,567 Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest - - - - 517 517 Conversion of Preferred Shares to common stock - - ( 365 ) ( 365 ) ( 4,084 ) ( 4,084 ) Balances, December 31, 2020 - $ - - $ - - $ - F- 22 9. 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 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 discretion. 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 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. 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. The 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. 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. 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. F- 23 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, 2021: Options Outstanding Range of Exercise Price Number Outstanding and exercisable at 12/31/21 Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price $ 0 - $ 15.00 2,500 1.60 $ 14.40 $ 15.01 - $ 30.40 7,000 0.17 $ 30.40 9,500 0.54 $ 26.19 A summary of the combined activity under all of the stock option plans is set forth below: Options Outstanding Weighted- Average Weighted- Remaining Average Contractual Aggregate Number of Exercise Life Intrinsic Shares Price (in years) Value Options outstanding – January 1, 2020 52,500 $ 27.51 1.37 $ - Options granted - - - Options exercised - - - Options cancelled or expired ( 42,000 ) 26.99 - Options outstanding – December 31, 2020 10,500 $ 29.61 1.40 - Options granted - - - Options exercised - - - Options cancelled or expired ( 1,000 ) 62.10 - Options outstanding and vested – December 31, 2021 9,500 $ 26.19 0.54 $ - 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. F- 24 Stock-Based Compensation 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): Years ended December 31, 2021 2020 (In thousands) Sales and marketing $ 50 $ 32 General and administrative 107 45 Stock-based compensation expense $ 157 $ 77 There is no remaining unrecognized compensation expense related to stock options as of December 31, 2021. Unrecognized compensation expense related to the 2020 LTIP as of December 31, 2021 was $ 218,000 , which will be recognized over two years. 10. Commitments and Contingencies Litigation On August 26, 2020, a putative stockholder of Neonode filed a purported class action lawsuit (C.A. No. 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 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 lawsuit. 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. On 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. On November 3, 2021, the Company entered into a settlement agreement with plaintiff’s counsel, which was accrued for as of September 30, 2021. 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. F- 25 Indemnities and Guarantees Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising because of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of any 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, 2021 and December 31, 2020. We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us regarding intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of December 31, 2021 and December 31, 2020. One of our manufacturing partners has previously purchased material for the final assembly of AirBars. To protect the manufacturer from losses in relation to AirBar production, we agreed to secure the value of the inventory in a bank guarantee. In December, 2021 the bank guarantee was cancelled. Patent Assignment On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC. The assignment provides the Company the right to share potential proceeds generated from a licensing and monetization program. On June 8, 2020, Neonode Smartphone LLC, a subsidiary of Aequitas Technologies LLC filed complaints against Apple and Samsung in the Western District of Texas for infringing two patents. These litigation matters are still ongoing. Non-Recurring Engineering Development Costs On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC. Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first 2,000,000 ASICs sold. As of December 31, 2021, we had made no payments to TI under the NN1002 Agreement. F- 26 11. Leases We have operating leases for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms of six months to two years. One of our primary operating leases includes options to extend the lease for one to three years and the other primary lease includes an option to annually 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 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, as well as current and noncurrent operating lease obligations on our consolidated balance sheets for the right to use those buildings in our business. Our finance leases represent manufacturing equipment; we report the manufacturing equipment, as well as current and noncurrent finance lease obligations on our consolidated balance sheets for our manufacturing equipment. Generally, interest rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate. The components of lease expense were as follows (in thousands): Years ended December 31, 2021 2020 Operating lease cost (1) $ 662 $ 572 Finance lease cost: Amortization of leased assets $ 585 $ 636 Interest on lease liabilities 14 11 Total finance lease cost $ 599 $ 647 (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): Years ended December 31, 2021 2020 Cash paid for amounts included in leases: Operating cash flows from operating leases $ ( 505 ) $ ( 405 ) Operating cash flows from finance leases ( 14 ) ( 11 ) Financing cash flows from finance leases ( 487 ) ( 321 ) Right-of-use assets obtained in exchange for lease obligations: Operating leases 239 864 Finance leases - - F- 27 Supplemental balance sheet information related to leases was as follows (in thousands): As of December 31, 2021 2020 Operating leases Operating lease right-of-use assets $ 584 $ 919 Current portion of operating lease obligations $ 425 $ 504 Operating lease liabilities, net of current portion 117 377 Total operating lease liabilities $ 542 $ 881 Finance leases Property and equipment, at cost $ 3,463 $ 3,806 Accumulated depreciation ( 3,199 ) ( 2,941 ) Property and equipment, net $ 264 $ 865 Current portion of finance lease obligations $ 258 $ 769 Finance lease liabilities, net of current portion 65 95 Total finance lease liabilities $ 323 $ 864 Year ended December 31, 2021 Weighted-Average Remaining Lease Term Operating leases 1.6 years Finance leases 1.0 years Weighted-Average Discount Rate Operating leases (2) 5 % Finance leases 2 % (2) Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019. A summary of future minimum payments under non-cancellable operating lease commitments as of December 31, 2021 is as follows (in thousands): Years ending December 31, Total 2022 $ 423 2023 82 2024 61 566 Less imputed interest ( 24 ) Total lease liabilities 542 Less current portion ( 425 ) $ 117 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 2022 $ 261 2023 65 Total minimum payments required: 326 Less amount representing interest: ( 3 ) Present value of net minimum lease payments: 323 Less current portion ( 258 ) $ 65 F- 28 12. 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, 2021 and 2020 (dollars in thousands): 2021 Amount Percentage United States $ 2,241 39 % Japan 1,894 33 % South Korea 894 15 % China 311 5 % Germany 303 5 % Switzerland 73 1 % Other 120 2 % Total $ 5,836 100 % 2020 Amount Percentage United States $ 2,511 42 % Japan 1,864 31 % South Korea 499 8 % China 400 7 % Germany 398 7 % Switzerland 221 4 % Other 91 1 % Total $ 5,984 100 % 13. Income Taxes Loss before provision for income taxes was distributed geographically for the years ended December 31, as follows (in thousands): 2021 2020 Domestic $ ( 5,570 ) $ ( 4,885 ) Foreign ( 1,552 ) ( 1,338 ) Total $ ( 7,122 ) $ ( 6,223 ) The provision (benefit) for income taxes is as follows for the years ended December 31 (in thousands): 2021 2020 Current Federal $ - $ - State - 2 Foreign 146 57 Change in deferred Federal ( 1,177 ) ( 948 ) Federal valuation allowance 1,177 948 State - ( 1 ) State valuation allowance - 1 Foreign ( 1,842 ) ( 1,425 ) Foreign valuation allowance 1,842 1,425 Total current $ 146 $ 59 F- 29 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: 2021 2020 Amounts at statutory tax rates 21 % 21 % Foreign losses taxed at different rates ( 1 )% - % Stock-based compensation ( 1 )% ( 2 )% Other ( 1 )% - % Total 18 % 19 % Valuation allowance ( 20 )% ( 20 )% Effective tax rate ( 2 )% ( 1 )% Significant components of the deferred tax asset balances at December 31 are as follows (in thousands): 2021 2020 Deferred tax assets: Accruals $ ( 87 ) $ 48 Stock compensation 38 38 Net operating losses 21,943 18,788 Total deferred tax assets 21,894 18,874 Valuation allowance ( 21,894 ) ( 18,874 ) 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, 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 740): Simplifying the Accounting for Income Tax, which simplifies the accounting for income taxes. ASU 2019-12 will become effective for fiscal years beginning after December 15, 2020, with early adoption permitted. ASU 2019-12 has an immaterial impact on our consolidated financial statements. F- 30 We file income tax returns in the U.S. federal jurisdiction, California, Sweden, Japan, South Korea, and Taiwan. 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. 14. 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, 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, 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. 15. Net Loss Per Share 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 0 and 0 outstanding stock warrants, 0 and 0 shares issuable upon conversion of preferred stock and 0 and 0 stock options are excluded from the diluted earnings per share calculation for the years ended December 31, 2021 and 2020, respectively, due to their anti-dilutive effect. Years ended December 31, (In thousands, except per share amounts) 2021 2020 BASIC AND DILUTED Weighted average number of common shares outstanding 11,907 9,989 Net loss attributable to common shareholders of Neonode Inc. $ ( 6,450 ) $ ( 5,638 ) Net loss per share basic and diluted $ ( 0.54 ) $ ( 0.56 ) F- 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.