What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-11 · 169 added, 167 removed, 359 unchanged (48% of the section changed)

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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

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.

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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

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

the 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

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

Because actual events or results may differ materially

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

forward-looking statement.

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

to forward-looking statements, whether as a result of new information, future events or otherwise.

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

Because actual events or results may differ

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

on any forward-looking statement.

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

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

The following discussion and

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License Sales

We license our zForce technology

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 87 million devices that use our patented technology.

As of June 30, 2022, we had

34 valid technology license agreements with global OEMs, ODMs and Tier 1 suppliers.

We license our zForce technology 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

88 million devices that use our patented technology.

As of September 30, 2022,

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

Our licensing customer base

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will be derived from TSM sales.

Non-recurring engineering services

Sales of Non-recurring Engineering Services

We also offer non-recurring

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Impact of COVID-19

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 as also been impacted

by lockdowns and travel restrictions, which forced us to pause business-related travel and caused a majority of our employees to begin

working remotely.

In the second quarter of 2022, however, as lockdowns and travel restrictions continued to be lifted, we began to resume

business-related travel and more and more of our employees are now returning to the office..

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, 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 further actions in response.

There is a risk that we will not be successful in mitigating the COVID-19

pandemic’s impact on our business, and our sales may not increase in line with our expectations and our operating margins could

fluctuate or decline.

Our near-term growth and overall business have been and are continuing

to be adversely impacted by the ongoing COVID-19 pandemic 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 as also been impacted by lockdowns and travel

restrictions, which forced us to pause business-related travel and caused a majority of our employees to begin working remotely.

second quarter of 2022, however, as lockdowns and travel restrictions continued to be lifted, we began to resume business-related travel

and more and more of our employees are now returning to the office.

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

and financial performance going forward will depend on 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 further actions

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

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

Impact of War in Ukraine

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Three months ended

Variance in Dollars

Variance in Percent

September 30,

Percentage of revenue

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Total Gross Margin

Operating Expense:

Operating Expenses:

Research and development

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Percentage of revenue

Provision (benefit) for income taxes

Provision for income taxes

Percentage of revenue

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Net loss per share attributable to Neonode Inc.

Six months ended

Variance in Dollars

Variance in Percent

Nine months ended

September 30,

Percentage of revenue

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Total Gross Margin

Operating Expense:

Operating Expenses:

Research and development

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All of our sales for the three

and six months ended June 30, 2022 and 2021 were to customers located in the United States, Europe and Asia.

The decrease of 26.3% and

23.6% in total net revenues for the three and six months ended June 30, 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.

The decrease in license fee

revenues for the three and six months ended June 30, 2022 compared to the same period in 2021 is mainly pandemic-related.

The component

shortage within the printer and automotive industries, as a result of the pandemic, has continued as well as reduced production volumes

of printers and cars equipped with our new technology.

and nine months ended September 30, 2022 and 2021 were to customers located in the United States, Europe and Asia.

For the three months ended September 30, 2022, total net revenues increased

26.4% compared to the same period in 2021.

We saw a recovery of license revenues from legacy customers in the printer and automotive markets

in the current period compared to the same period in 2021, primarily due to increased sales volumes from these customers.

of 12.6% in total net revenues for the nine months ended September 30, 2022 as compared to the same period in 2021 was primarily due to

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

For the three months ended September 30, 2022 we saw a slight recovery

in volume and our license fee revenues increased with 27.3% compared to the same period in 2021.

The decrease in license fee revenues

for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily pandemic-related.

The component shortage

within the printer and automotive industries, resulting from the pandemic, has continued to have an impact on our operations.

Product Sales

Revenues from product sales

were $0.2 million and $0.4 million for the three and six month ended June 30, 2022 compared to $0.3 million and $0.7 million for the same

periods in 2021.

In the first half of 2021 several early adopters of our technology developed and launched retrofit solutions, which affected our TSM sales

positively during this period.

However, our product sales for the second quarter of 2022 continue to be negatively impacted by COVID-19

driven lock-downs in Asia and we are also affected by the comparatively long development and launch periods, often 12 to 18 months, or

longer, for customer new equipment solutions, which slow down our sales growth.

were $0.2 million and $0.5 million for the three and nine month ended September 30, 2022 compared to $0.1 million and $0.8 million for

the same periods in 2021.

We saw a slight recovery for the third quarter compared to the third quarter of 2021, but our product sales

continue to be negatively impacted by COVID-19 driven lock-downs in Asia.

Our product revenues are also affected by the comparatively

long development and launch periods, often 12 to 18 months, or longer, for customer new equipment solutions, which slows our sales growth.

Non-recurring Engineering

Most of our non-recurring

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

Non-recurring revenues increased for the three and

six months ended June 30, 2022 compared to the same periods in 2021.

Revenues related to Remote Sensing Solutions were recognized for the

first time for the three months ended June 30, 2022 and were $0.1 million.

engineering revenues are related to application development and proof-of-concept projects related to our TSMs or to our zForce and MultiSensing

technology platforms.

Non-recurring revenues increased for the three and nine months ended September 30, 2022 compared to the same periods

Revenues related to Remote

Sensing Solutions were $0.1 million for the nine months ended September 30, 2022.

The following tables presents

the net revenues by geographical area and revenue stream for the three and six months ended June 30, 2022 and 2021 (dollars in thousands):

the net revenues by geographical area and revenue stream for the three and nine months ended September 30, 2022 and 2021 (dollars in thousands):

Three months ended

June 30, 2022

September 30, 2022

Three months ended

June 30, 2021

September 30, 2021

Non-recurring engineering

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Non-recurring engineering

Six months ended

June 30, 2022

Six months ended

June 30, 2021

Nine months ended

September 30, 2022

Nine months ended

September 30, 2021

Non-recurring engineering

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Non-recurring engineering

Our combined total gross margin

was 93% and 94% for the three and six months ended June 30, 2022, respectively, and 87% and 85% for the three and six months ended June

30, 2021, respectively.

For the three and six months ended June 30, 2022, gross margin related to products was 63% and 64%, respectively,

compared to 39% and 31% for the same periods in 2021, respectively.

Our combined total gross margin was 94% and 93% for the three and nine

months ended September 30, 2022, respectively, and 90% and 86% for the three and nine months ended September 30, 2021, respectively.

the three and nine months ended September 30, 2022, gross margin related to products was 48% and 56%, respectively, compared to 28% and

31% for the same periods in 2021, respectively.

Our cost of sales includes

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Research and Development

Research and development (“R&D”) expenses for the three

and six months ended June 30, 2022 were $1.1 million and $2.2 million, respectively.

For the same periods in 2021, the R&D expenses

were $1.4 million and $2.5 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 decreases were 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.

Research and development (“R&D”)

expenses for the three and nine months ended September 30, 2022 were $0.8 million and $3.0 million, respectively.

For the same periods

in 2021, the R&D expenses were $1.0 million and $3.5 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 decreases were 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.

Sales and Marketing

Sales and marketing expenses

for the three and six months ended June 30, 2022 were $0.6 million and $1.3 million, respectively.

The sales and marketing costs for the

same periods in 2021 were $0.8 million and $1.6 million, respectively.

The decrease for the three and six months ended June 30, 2022 were

primarily due to lower staff expenses.

Sales and marketing expenses for the three and nine months ended September

30, 2022 were $0.3 million and $1.6 million, respectively.

The sales and marketing costs for the same periods in 2021 were $0.6 million

and $2.2 million, respectively.

The decrease for the three and nine months ended September 30, 2022 were primarily due to lower staff

Our sales and marketing activities

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General and Administrative

General and administrative

(“G&A”) expenses for the three and six months ended June 30, 2022 were $1.1 million and $2.1 million, respectively.

G&A expenses for the three and six months ended June 30, 2021 were $1.1 million and $2.2 million, respectively.

The decrease was primarily

related to decrease in depreciation.

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

three and nine months ended September 30, 2022 were $1.0 million and $3.0 million, respectively.

The G&A expenses for the three and

nine months ended September 30, 2021 were $1.0 million and $3.3 million, respectively.

The decrease was primarily related to lower staff

expenses and lower depreciations.

Our effective tax rate was

(2)% and (2)% for the three and six months ended June 30, 2022, respectively, and (2)% and (2)% for the three and six months ended June

30, 2021, respectively.

(3)% and (3)% for the three and nine months ended September 30, 2022, respectively, and (2)% and (2)% for the three and nine months ended

September 30, 2021, respectively.

The negative tax rate is due to withholding taxes from sales.

We recorded valuation allowances for the three and

six-month periods ended June 30, 2022 and June 30, 2021 for deferred tax assets related to net operating losses due to the uncertainty

of realization.

We recorded valuation allowances for the

three and nine-month periods ended September 30, 2022 and September 30, 2021 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 $1.5 million and $2.9 million for the three and six months ended June 30, 2022, respectively, compared to $1.7

million and $3.2 million for the same periods in 2021, respectively.

attributable to Neonode of $0.8 million and $3.7 million for the three and nine months ended September 30, 2022, respectively, compared

to $1.7 million and $4.9 million for the same periods in 2021, respectively.

Contractual Obligations and Off-Balance

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

As of June 30, 2022, we had made no payments to TI under the NN1002 Agreement.

As of September 30, 2022, we had made no payments to TI under the NN1002 Agreement.

Operating Leases

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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.

lease agreement has been extended and is valid through September 2024.

The lease is extended on a three-year basis unless written notice

is given nine months prior to the expiration date.

On December 1, 2015, Neonode

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We now operate through a virtual office in Japan.

For the three and six months

ended June 30, 2022, we recorded approximately $146,000 and $307,000 for total rent expense.

For the three and six months ended June 30,

2021, we recorded approximately $171,000 and $344,000 for total rent expense, respectively.

For the three and nine months

ended September 30, 2022, we recorded approximately $134,000 and $441,000 for total rent expense, respectively.

For the three and nine

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

See Note 7 – Leases

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

In 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.

1, 2021 the lease contract was extended for two years.

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

In 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.

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 years.

The implicit interest rate

of the extended lease period is 1.5% per annum.

In 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

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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 currently approximately

1.5% per annum.

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.

During 2021, we terminated

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

During the three month ended

June 30, 2022, we entered into a lease for soundproof office pods.

During the nine months ended

September 30, 2022, we entered into a lease for soundproof office pods.

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

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ability to raise additional capital, if necessary.

As of June 30, 2022, we had

cash of $12.4 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.

As of September 30, 2022,

we had cash of $11.3 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 Quarterly Report on Form 10-Q.

Working capital (current assets

less current liabilities) was $16.4 million as of June 30, 2022, compared to $19.1 million as of December 31, 2021.

Net cash used in operating activities for the six months ended June

less current liabilities) was $15.5 million as of September 30, 2022, compared to $19.1 million as of December 31, 2021.

Net cash used in operating activities for the nine months ended September

30, 2022 was $5.7 million and was primarily the result of a net loss of $4.1 million and approximately $0.5 million in non-cash operating

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Net cash used in operating

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

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

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

Accounts receivable and unbilled revenues decreased by approximately

$0.3 million as of June 30, 2022 compared to December 31, 2021.

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.

Accounts receivable and unbilled

revenues decreased by approximately $0.3 million as of September 30, 2022 compared to December 31, 2021.

This was due to lower revenues.

Inventory increased by approximately $2.3 million during the six months

ended June 30, 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 $0.1 million and $0.3 million

during the six months ended June 31, 2022 and 2021, respectively, was the result of principal payments on finance lease obligations.

We have incurred significant operating losses and negative cash flows

from operations since our inception.

The Company incurred net losses of approximately $1.5 million and $2.9 million and $1.7 million and

$3.2 million for the three and six months ended June 30, 2022 and 2021, respectively, and had an accumulated deficit of approximately

$205.5 million and $202.6 million as of June 30, 2022 and December 31, 2021, respectively.

In addition, operating activities used cash

of approximately $5.2 million and $3.4 million for the six months ended June 31, 2022 and 2021, respectively.

Inventory increased by approximately

$1.7 million during the nine months ended September 30, 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) provided

by financing activities of $(0.1) million and $0.2 million during the nine months ended September 30, 2022 and 2021, respectively, was

the result of principal payments on finance lease obligations and the repurchase of common stock.

We have incurred significant

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

The Company incurred net losses of approximately $0.8 million

and $3.7 million and $1.7 million and $4.9 million for the three and nine months ended September 30, 2022 and 2021, respectively, and

had an accumulated deficit of approximately $206.3 million and $202.6 million as of September 30, 2022 and December 31, 2021, respectively.

In addition, operating activities used cash of approximately $5.7 million and $5.0 million for the nine months ended September 30, 2022

and 2021, respectively.

The condensed consolidated

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In the future, we may require

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

If our operations do not become cash

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

Historically, we have been able to access the capital

markets through sales of common stock and warrants to generate liquidity.

Our management believes it could raise capital through public

or private offerings if needed to provide us with sufficient liquidity.

sources of capital in addition to cash on hand and our ATM Facility (described below) to continue operations and to implement our strategy.

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

Historically, we

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

Our management believes

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

No assurances can be given,

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

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.

the 12 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.

six month ended June 30, 2022, no shares were sold under the ATM Facility.

During the nine

months ended September 30, 2022, no shares were sold under the ATM Facility.

Critical Accounting Policies

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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