What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-11 compared with 2021-11-10 · 344 added, 444 removed, 77 unchanged (91% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

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

Looking Statements

This Quarterly Report

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

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

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

For example, statements in this Quarterly Report regarding

our plans, strategy and focus areas are forward-looking statements.

You can identify some forward-looking statements by the use of

words such as “believe,” “anticipate,” “expect,” “intend,” “goal,”

“plan,” and similar expressions.

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

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

financial position.

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

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

(including the emergence of vaccine resistant COVID-19 variants), the ongoing war in Ukraine and its impact on the global economy,

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

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

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

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

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

our ability to obtain adequate capital to fund future operations.

For a discussion of these and other factors that could cause

actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk

Factors” and elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended

December 31, 2021 and in our publicly available filings with the Securities and Exchange Commission.

Forward-looking statements

This Quarterly Report on

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

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

that are not purely historical may be forward-looking.

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

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

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

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

A number of important factors could cause

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

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

since inception, our dependence on a limited number of customers, our reliance on our customers’ ability to develop and sell products

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

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

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

costs to defend, as well as risks of losing, patents and intellectual property rights and our ability to obtain adequate capital to fund

future operations.

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

forward-looking statements, please see the discussion under “Risk Factors” and elsewhere in this Quarterly Report on Form

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

and Exchange Commission.

Forward-looking statements reflect our analysis only as of the date of this Quarterly Report on Form 10-Q.

actual events or results may differ materially from those discussed in or implied by forward-looking statements made by us or on our behalf,

you should not place undue reliance on any forward-looking statement.

We do not undertake responsibility to update or revise any of these

factors or to announce publicly any revision to forward-looking statements, whether as a result of new information, future events or otherwise.

reflect our analysis only as of the date of this Quarterly Report on Form 10-Q.

Because actual events or results may differ

materially from those discussed in or implied by forward-looking statements made by us or on our behalf, you should not place undue

reliance on any forward-looking statement.

We do not undertake responsibility to update or revise any of these factors or to

announce publicly any revision to forward-looking statements, whether as a result of new information, future events or

The following discussion and

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

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

on Form 10-K.

Neonode Inc., collectively

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

“registrant”, or “Company”.

this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2021 included in our most recent

Annual Report on Form 10-K.

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

“our”, “registrant”, or “Company”.

Our company provides 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 using our zForce technology platform, and our scene analysis solutions using

our MultiSensing technology platform.

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

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

License Sales

optical sensing solutions for contactless touch, touch, and gesture sensing.

We also provide software solutions for scene analysis that

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

We base our contactless touch, touch, and gesture sensing products and solutions on our zForce technology platform and our scene analysis

solutions on our MultiSensing technology platform.

We market and sell 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 license our zForce technology

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

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

As of September 30, 2021,

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

Our licensing customer base is primarily in the automotive and printer

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

We anticipate current customers

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

We also anticipate new customers will initiate product

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

cycles, which typically take between 6 months to 36 months.

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

using our technology.

Product Sales

In addition to our technical

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

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

We utilize a robotic manufacturing process designed specifically for

our components.

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

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

In October 2017, we began

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

Over time, we expect a significant portion of our revenues

will be derived from TSM sales.

Our product offerings also

include a consumer product, AirBar.

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

and other devices.

AirBar is powered by our TSM technology.

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

Non-recurring Engineering Services Sales

We also offer engineering

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

Typically, our licensing customers

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

TSM customers require hardware or software modifications of our standard products or support during the development and initial manufacturing

phase for their products using our technology.

Impact of COVID-19

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

a global pandemic.

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

it will continue to be impacted by COVID-19 and the emergence of new COVID-19 variants and their impact on the global economy.

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

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

are experiencing challenges in obtaining deliveries of components needed to manufacture our TSMs and we may have difficulties delivering

our products to our customers in time and at a reasonable cost.

Our operations were impacted as we paused business-related travel and

our employees to a large extent still work remotely.

to OEMs, ODMs and Tier 1 suppliers who embed our technology into products they develop, manufacture and sell.

Since 2010, our licensing

customers have sold approximately 86 million devices that use our patented technology.

of March 31, 2022, we had 34 valid technology license agreements with global OEMs, ODMs and Tier 1 suppliers.

Our licensing customer base

is primarily in the automotive and printer segments.

Eleven of our licensing customers are currently shipping products that embed our

We anticipate current customers will continue to ship products with our technology in 2022 and in future years.

We also expect

to expand our customer base with a number of new customers who will be looking to ship new products incorporating our zForce and MultiSensing

technologies as they complete final product development and release cycles.

We typically earn our license fees on a per unit basis when

our customers ship products using our technology, but in the future other business models may also be used.

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

We sell our TSMs

to OEMs, ODMs and systems integrators for use in their products.

We also sell our Neonode branded AirBar product that incorporates one

of our TSMs through distributors.

utilize a robotic manufacturing process designed specifically for our components.

Our TSMs are commercial-off-the-shelf products based

on our patent-protected zForce technology platform and can support the development of contactless touch, touch, gesture and object sensing

solutions that, paired with our technology licensing offering, give us a full range of options to enter and compete in key markets.

October 2017, we began selling our TSMs to customers in the industrial and consumer electronics segments.

Over time, we expect a significant

portion of our revenues will be derived from TSM sales.

Non-recurring

engineering services

We also offer non-recurring

engineering (“NRE”) services related to application development linked to our TSMs and our zForce and MultiSensing technology

platforms on a flat rate or hourly rate basis.

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

technology, while our TSM customers require hardware or software modifications to our standard products or support during the development

and initial manufacturing phases of their products using our technology.

In both cases we can offer NRE services and earn NRE revenues.

Our near-term growth and overall

business have been and are continuing to be adversely impacted by COVID-19 and we expect they will continue to be impacted by the pandemic

and its impact on the global economy.

Although we have noted additional demand for our TSMs for use in contactless touch products and

some increases in sales of licenses, COVID-19 has negatively impacted some of our customers’ businesses and their sales volumes

and new development projects and product launches, which, in turn, has impacted our business.

Our operations have been and are continuing

to be impacted by the pandemic as lockdowns and travel restrictions have forced us to pause business-related travel and our employees

to a large extent have and still are working remotely.

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

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

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

and difficult to predict at this time.

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

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

hours by 20% between mid-April to mid-August last year.

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

are uncertain and difficult to predict at this time.

We are continuing to monitor the impact of the COVID-19 pandemic and we may take

2 unchanged sentences

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

Results of Operations

A summary of our financial

results is as follows (in thousands, except percentages):

Impact of War in Ukraine

The ongoing war in Ukraine has impacted the global economy as the United

States, the UK, the EU, and other countries have imposed broad export controls and financial and economic sanctions against Russia (a

large exporter of commodities), Belarus, and specific areas of Ukraine, and may continue to impose additional sanctions or other measures.

Russia may impose its own counteractive measures.

We do not procure materials directly from Ukraine or Russia, but the war in Ukraine

may further exacerbate ongoing supply chain disruptions that are occurring across the globe.

While the precise effects on global economies

from the war and related sanctions remain uncertain, there has been significant volatility in the financial markets, fluctuations in currency

exchange rates, and an increase in energy and commodity prices globally.

Should the war continue or escalate, there may be various economic

and security consequences including, but not limited to, additional supply shortages of different kinds;

further increases in prices of

significant disruptions in logistics infrastructure and telecommunications services;

and risks relating to the unavailability

of information technology systems and infrastructure.

The resulting impacts on the global economy, financial markets, inflation, interest

rates, and unemployment, among others, could adversely impact economic and financial conditions, and may disrupt the global economy’s

ongoing recovery from the COVID-19 pandemic.

of Operations

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

Three months ended

September 30,

Variance in Dollars

28 unchanged sentences

Percentage of revenue

Preferred dividends

Percentage of revenue

Net loss attributable to common shareholders Neonode Inc.

Percentage of revenue

Net loss per share attributable to common shareholders Neonode Inc.

Percentage of revenue

Nine months ended

September 30,

Percentage of revenue

Non-recurring engineering

Percentage of revenue

Total Revenue

Cost of Sales:

Percentage of revenue

Non-recurring engineering

Percentage of revenue

Total Cost of Sales

Total Gross Margin

Operating Expense:

Research and development

Percentage of revenue

Sales and marketing

Percentage of revenue

General and administrative

Percentage of revenue

Total Operating Expenses

Percentage of revenue

Operating Loss

Percentage of revenue

Interest expense

Percentage of revenue

Provision for income taxes

Percentage of revenue

net loss attributable to noncontrolling interests

Percentage of revenue

Preferred dividends

Percentage of revenue

Net loss attributable to Neonode Inc.

1 unchanged sentence

Net loss per share attributable to Neonode Inc.

Percentage of revenue

All of our sales for the three

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

of our sales for the three months ended March 31, 2022 and 2021 were to customers located in the United States, Europe and Asia.

The decrease of (20.8)% in

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

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

For the nine months

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

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

License Fees Revenues

The decrease in license fees

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

The component shortage

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

with our technology.

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

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

in the first and second quarters of 2020.

The interest for contactless

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

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

For the three months ended September 30, 2021

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

result of the pandemic.

Non-recurring Engineering

Most of our non-recurring

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

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

There were no revenues related

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

The following tables presents

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

Three months ended

September 30, 2021

Three months ended

September 30, 2020

Non-recurring engineering

Nine months ended

September 30, 2021

Nine months ended

September 30, 2020

Non-recurring engineering

Our combined total gross margin

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

September 30, 2020, respectively.

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

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

Our cost of sales includes

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

engineering design contracts.

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

and component costs of TSMs.

Research and Development

Research and development (“R&D”)

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

For the same periods

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

R&D expenses primarily consist of personnel-related

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

and building new product prototypes.

The increases were primarily

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

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

Sales and Marketing

Sales and marketing expenses

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

The sales and marketing costs

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

The increases for the three and nine months ended September

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

Our sales and marketing activities

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

General and Administrative

General and administrative

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

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

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

The increase for the nine months ended September

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

Our effective tax rate was

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

September 30, 2020, respectively.

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

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

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

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

We recorded valuation allowances for the three

and nine-month periods ended September 30, 2021 and September 30, 2020 for deferred tax assets related to net operating losses due to

the uncertainty of realization.

As a result of the factors

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

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

Contractual Obligations and Off-Balance

Sheet Arrangements

We previously agreed to secure

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

At December 31, 2020, the guaranteed amount was decreased

from $210,000 to $100,000.

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

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

We have no special purpose

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

We do not engage in

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

of the consolidated financial statements.

Contractual Obligations and Commercial Commitments

Non-Recurring Engineering Development Costs

On April 25, 2013, we entered

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

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

Under the terms of the NN1002 Agreement, we agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25

per ASIC for each of the first 2 million ASICs sold.

As of September 30, 2021, we had made no payments to TI under the NN1002 Agreement.

Operating Leases

We did not renew our lease

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

On December 1, 2020, Neonode

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

agreement is valid through November 2022.

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

the expiration date.

On December 1, 2015, Pronode

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

lease can be terminated with nine months’ written notice prior to the termination date.

In January 2015, our subsidiary

Neonode Korea Ltd.

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

543-1, Seoul, South Korea.

The lease was terminated

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

On December 1, 2015, Neonode

total net revenues for the three months ended March 31, 2022 as compared to the same period in 2021 is mainly explained by component shortage

within the printer industry and automotive industry and lock-downs in APAC, as a result of the pandemic.

decrease in license fee revenues for the three months ended March 31, 2022 compared to the same period in 2021 is mostly pandemic-related.

The component shortage within the printer and automotive industries experienced during the second and third quarters of 2021 as a result

of the pandemic reduced production volumes of printers and cars equipped with our new technology.

Revenues from product sales

were $0.1 million for the three month ended March 31, 2022 compared to $0.4 million for the same period in 2021.

In the first half of

2021 we saw an increase in product sales.

In the second half of 2021 and continuing in the first quarter of 2022, product sales were negatively

impacted when COVID-19 driven lock-downs were implemented in APAC.

Our elevator and kiosks customers in Asia have been first adopters

for our contactless touch technology and as expected, most of our initial TSM sales are related to retrofit solutions.

New customer equipment

launches have much longer product development and production cycles that can take 4 to 18 months or longer.

Non-recurring

Engineering Revenues

of our non-recurring revenues are related to both hardware and software related customization of our TSMs.

Non-recurring revenues increased

for the three months ended March 31, 2022 compared to the same period in 2021.

were no revenues related to Remote Sensing Solutions for the three months ended March 31, 2022.

following tables presents the net revenues by geographical area and revenue stream for the three months ended March 31, 2022 and 2021

(dollars in thousands):

March 31, 2022

March 31, 2021

Non-recurring

combined total gross margin was 95% for the three months ended March 31, 2022 and 83% for the three months ended March 31, 2021.

the three months ended March 31, 2022, gross margin related to products was 65% compared to 24% for the same period in 2021.

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

to complete the engineering design contracts.

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

assembly costs, and component costs of TSMs.

and Development

and development (“R&D”) expenses for the three months ended March 31, 2022 were $1.0 million For the same period in 2021,

the R&D expenses were $1.1 million.

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

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

decrease was primarily related to the move of administrative costs related to production from R&D to general and administrative partly

offset by reallocation of overhead costs from general and administrative to R&D.

and Marketing

and marketing expenses for the three months ended March 31, 2022 were $0.6 million.

The sales and marketing costs for the same period

in 2021 were $0.8 million.

The decrease for the three months ended March 31, 2022 were primarily due to lower staff expenses.

sales and marketing activities focus on OEM, ODM and Tier 1 customers who will license our technology or purchase and embed our TSMs

into their products.

and Administrative

and administrative (“G&A”) expenses for the three months ended March 31, 2022 were $1.0 million.

The G&A expenses

for the three months ended March 31, 2021 were $1.1 million.

The decrease was primarily related to a reallocation of overhead costs from

G&A to R&D partly offset by the move of administrative costs related to production from R&D to G&A.

effective tax rate was (3)% for the three months ended March 31, 2022 and (2)% for the three months ended March 31, 2021.

tax rate is due to withholding taxes from sales.

We recorded valuation allowances for the three-month period ended March 31, 2022 and

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

a result of the factors discussed above, we recorded a net loss attributable to Neonode of $1.4 million for the three months ended March

31, 2022 and $1.6 million for the same period in 2021.

Obligations and Off-Balance Sheet Arrangements

previously agreed to secure the value of inventory purchased by one of our AirBars manufacturing partners.

At December 31, 2021, the

guaranteed amount was decreased from $100,000 to $0.

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

unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than the operating leases incurred

in the normal course of business.

have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support.

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

reflected on the face of the consolidated financial statements.

Obligations and Commercial Commitments

Non-Recurring

Engineering Development Costs

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

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

ASIC, which is used in our licensed technology.

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

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

As of March 31, 2022, we had made no payments

to TI under the NN1002 Agreement.

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

Stockholm, Sweden.

The lease agreement is valid through November 2022.

The lease is extended on a yearly basis unless written notice

is given nine months prior to the expiration date.

December 1, 2015, Pronode Technologies AB entered into a lease agreement for 9,040 square feet of workshop located at Faktorvägen

17, Kungsbacka, Sweden.

The lease can be terminated with nine months’ written notice prior to the termination date.

December 1, 2015, Neonode Taiwan Ltd.

entered into a lease agreement located at Rm.

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

lease is renewed monthly.

On September 1, 2019 we entered

into a lease of office space located at NishiShinjuku Takagi Building, 1203 NishiShinjuku, Shinjukuku, Tokyo, Japan.

The lease was valid

through August 31, 2021 and was not renewed.

2406, International Trade Building, Keelung Rd.,

Sec.1, Taipei, Taiwan.

The lease is renewed monthly.

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

The lease was valid through August 31, 2021 and was not renewed.

We now operate through a virtual office in Japan.

For the three and nine months

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

For the three and nine months

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

See Note 7 – Leases

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

Equipment Subject to Finance Lease

In April 2014, we entered

into a lease for certain specialized milling equipment.

Under the terms of the lease agreement, we are obligated to purchase the equipment

at the end of the original six-year lease term for 10% of the original purchase price of the equipment.

In accordance with relevant accounting

guidance, the lease is classified as a finance lease.

The lease payments and depreciation period began on July 1, 2014 when the equipment

went into service.

the three months ended March 31, 2022, we recorded approximately $161,000 for total rent expense.

For the three months ended March 31,

2021, we recorded approximately $173,000 for total rent expense, respectively.

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

Subject to Finance Lease

April 2014, we entered into a lease for certain specialized milling equipment.

Under the terms of the lease agreement we are obligated

to purchase the equipment at the end of the original six-year lease term for 10% of the original purchase price of the equipment.

accordance with relevant accounting guidance the lease is classified as a finance lease.

The lease payments and depreciation period began

on July 1, 2014 when the equipment went into service.

On July 1, 2020 the lease contract was extended for one year.

The implicit interest rate of the extended lease period

is 9.85% per annum.

Between the second and the

fourth quarters of 2016, we entered into six leases for component production equipment.

Under the terms of five of the lease agreements

entered into during 2016, we are obligated to purchase the equipment at the end of the original three to five years lease terms for 5-10%

of the original purchase price of the equipment.

In accordance with relevant accounting guidance these five leases are classified as finance

The lease payments and depreciation periods began between June and November 2016 when the equipment went into service.

interest rate of these five leases is currently approximately 3% per annum.

The additional lease entered into during 2016 is a hire-purchase

agreement that requires the equipment to be paid off after five years.

In accordance with relevant accounting guidance the lease is classified

as a finance lease.

The lease payments and depreciation period began on July 1, 2016 when the equipment went into service.

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

In 2017, we entered into one

lease for component production equipment.

Under the terms of the lease agreement the lease will be renewed within one year of the end

of the original four-year lease term.

The implicit interest

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

The lease expired July 1, 2021 and we paid the residual value.

the second and fourth quarters of 2016, we entered into six leases for component production equipment.

Under the terms of five of the

lease agreements we are obligated to purchase the equipment at the end of the original 3-5 year lease terms for 5-10% of the original

purchase price of the equipment.

In accordance with relevant accounting guidance the leases are classified as finance leases.

payments and depreciation periods began between June and November 2016 when the equipment went into service.

The implicit interest rate

of the leases is currently approximately 3% per annum.

One of the leases is a hire-purchase agreement where the equipment is required

to be paid off after five years.

In accordance with relevant accounting guidance the lease is classified as a finance lease.

lease payments and depreciation periods began in May 2017 when the equipment went into service.

payments and depreciation period began on July 1, 2016 when the equipment went into service.

The implicit interest rate of the lease

is approximately 1.5% per annum.

In 2018, we entered into one

lease for component production equipment.

Under the terms of the agreement, the lease will be renewed within one year of the original

four-year lease term.

is currently approximately 3% per annum.

On April 1, 2022, one of lease contracts was extended for three years.

The implicit interest

rate of the extended lease period is 2.7% per annum.

2017, we entered into a lease for component production equipment.

Under the terms of the lease agreement the lease will be renewed within

one year of the end of the original four-year lease term.

In accordance with relevant accounting guidance the lease is classified as

a finance lease.

The lease payments and depreciation periods began in May 2017 when the equipment went into service.

The implicit interest

rate of the lease is currently approximately 1.5% per annum.

On November 1, 2021 the lease contract was extended for two year.

interest rate of the extended lease period is 1.5% per annum.

2018, we entered into a lease for component production equipment.

Under the terms of the agreement, the lease will be renewed within

one year of the original four-year lease term.

In accordance with relevant accounting guidance the lease is classified as a finance lease.

The lease payments

and depreciation periods began in August 2018 when the equipment went into service.

The implicit interest rate of the lease is approximately

1.5% per annum.

See Note 7 – Leases

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

Liquidity and Capital Resources

Our liquidity is dependent

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

Our future liquidity will be affected

by, among other things:

licensing of our technology;

purchases of our sensor

products, including AirBar;

operating expenses;

timing of our OEM customer

product shipments;

timing of payment for our

technology licensing agreements;

gross profit margin;

ability to raise additional

capital, if necessary.

As of September 30, 2021,

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

Working capital (current assets

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

The lease payments and depreciation periods began in August 2018 when the equipment went into service.

The implicit interest rate of

the lease is currently approximately 1.5% per annum.

2021 we terminated one finance lease by purchasing the related equipment and extended one finance lease for an additional two years.

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

and Capital Resources

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

liquidity will be affected by, among other things:

of our technology;

of our TSMs and AirBars;

of our OEM customer product shipments;

of payment for our technology licensing agreements;

profit margin;

to raise additional capital, if necessary.

of March 31, 2022, we had cash of $15.1 million compared to $17.4 million as of December 31, 2021.

Based on our current cash position,

and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the

twelve-month period subsequent to the date of this Report.

capital (current assets less current liabilities) was $17.9 million as of March 31, 2022, compared to $19.1 million as of December 31,

Net cash used in operating

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

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

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

activities for the three months ended March 31, 2022 was $2.3 million and was primarily the result of a net loss of $1.4 million and

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

right-of-use assets, partly offset by changes in operating assets and liabilities of $(0.7) million.

Net cash used in operating

activities for the nine months ended September 30, 2020 was $3.7 million and was primarily the result of a net loss of $4.6 million and

approximately $0.8 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating

lease right-of-use assets.

activities for the three months ended March 31, 2021 was $2.0 million and was primarily the result of a net loss of $1.6 million and approximately

$0.2 million in non-cash operating expenses, comprised of stock based compensation expense, depreciation and amortization and amortization

of operating lease right-of-use assets.

Accounts receivable and unbilled

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

This was due to estimated lower

revenues decreased by approximately $0.1 million as of March 31, 2022 compared to December 31, 2021.

This was due to lower revenues.

Inventory increased by approximately

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

secure production in line with estimated product sales.

Deferred revenues decreased

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

During the nine months ended

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

$1.1 million during the three months ended March 31, 2022 compared to December 31, 2021, primarily due to purchase of components to secure

production in line with estimated product sales.

Net cash used in financing

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

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

Net cash provided by financing

activities of $13.7 million during the nine months ended September 30, 2020 was the result of proceeds from short-term borrowings of $1.0

million and proceeds of issuance of preferred and common stock net of offering costs of $13.5 million, offset by principal payments on

short-term borrowings and finance leases of $742,000.

activities of $61,000 and $148,000 during the three months ended March 31, 2022 and 2021, respectively, was the result of principal payments

We have incurred significant

1 unchanged sentence

The Company incurred net losses of approximately $1.4 million

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

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

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

and 2020, respectively.

The condensed consolidated

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

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

Management evaluated the significance

of the Company’s operating loss and determined that the Company’s current operating plan and sources of potential capital

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

In October 2021, the Company

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

program, as described below.

In the future, we may require

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

If our operations do not become cash

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

No assurances can be given that we will be successful

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

If adequate funds are not available to us on acceptable terms,

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

and financial condition.

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

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

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

We expect revenues will enable

us to reduce our operating losses in coming years.

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

efficiencies.

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

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.

and $1.6 million for the three months ended March 31, 2022 and 2021, respectively, and had an accumulated deficit of approximately $204.0

million and $202.6 million as of March 31, 2022 and December 31, 2021, respectively.

In addition, operating activities used cash of approximately

$2.3 million and $2.0 million for the three months ended March 31, 2022 and 2021, respectively.

condensed consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity

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

Management evaluated

the significance of the Company’s operating loss and determined that the Company’s cash position 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.

the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy.

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

Historically, we have

been able to access the capital markets through sales of common stock and warrants to generate liquidity.

Our management believes it

could raise capital through public or private offerings if needed to provide us with sufficient liquidity.

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

adequate funds are not available on acceptable terms, or at all, we may be unable to adequately fund our business plans and it could

have a negative effect on our business, results of operations and financial condition.

In addition, no assurance can be given that stockholders

will approve an increase in the number of our authorized shares of common stock if needed.

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.

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

Won and the Taiwan Dollar.

They are subject to foreign currency exchange rate risk.

Any increase or decrease in the exchange rate of the U.S.

Dollar compared to

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

Registered Direct Offering

On October 21, 2021, we entered

into a placement agency agreement with Pareto Securities Inc.

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

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

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

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

after deducting placement agent fees and offering expenses.

At-the-Market Offering Program

Any increase or decrease in the exchange rate of

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

Direct Offering

October 21, 2021, we entered into a placement agency agreement with Pareto Securities Inc.

and Pareto Securities AB pursuant to which

we sold to certain Swedish and other European investors an aggregate of 1,808,000 shares of our common stock at a price of $7.75 per

share in a registered direct offering that closed on October 26, 2021 (the “Offering”).

We received net proceeds of approximately

$13.1 million from the Offering after deducting placement agent fees and offering expenses.

At-the-Market

Offering Program

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

Riley Securities,

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.

Riley Securities, acting as sales agent, up

to $25 million of shares of our common stock.

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

12 unchanged sentences

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

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

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

Riley Securities of $18,000.

During October 2021 we sold

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

Riley Securities of $43,000.

Critical Accounting Policies

Our contracts with customers

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

engineering services fees for customizing that product for our customer.

Determining whether products and services are considered distinct

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

Judgment may also be required to determine

the stand-alone selling price for each distinct performance obligation identified, although we generally structure our contracts such

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

We currently have no outstanding

contracts with multiple performance obligations.

Our products are sold with

a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining

the amount of revenue to recognize.

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

becomes available to estimate returns and credits.

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

revenue would occur.

See Note 2 – Summary

of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further

discussion of critical accounting policies and discussion of estimates.

There have been no other changes

from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31,

Quantitative and Qualitative Disclosures

about Market Risk

Not applicable.

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.

three month ended March 31, 2022, no shares were sold under the ATM Facility.

Accounting Policies

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.

whether products and services are considered distinct performance obligations that should be accounted for separately may require significant

Judgment may also be required to determine the 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.

currently have no outstanding contracts with multiple performance obligations;

however, we recently negotiated a contract that may include

multiple performance obligations in the future.

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.

judgment is required to determine the amount of unbilled license fees at the end of each reporting period.

Note 2 – Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements (Part

I, Item 1) for further discussion of critical accounting policies and discussion of estimates.

have been no other changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal

year ended December 31, 2021.

Quantitative and Qualitative Disclosures about Market Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis