What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-10 · 308 added, 437 removed, 91 unchanged (89% of the section changed)

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report

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

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

that are not purely historical may be forward-looking.

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 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.

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, 2021 included in our most recent

Annual Report on Form 10-K.

Neonode Inc., collectively

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

“registrant”, or “Company”.

Our company provides advanced

optical sensing solutions for contactless touch, touch, 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.

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

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

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.

Product Sales

In 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.

We 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.

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.

Sales of 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.

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 to our standard products or support during the development and initial manufacturing

phases of their products using our technology.

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

Looking Statements

This Quarterly Report on

Form 10-Q (this “Quarterly Report”) 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.

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.

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

reliance on our customers’ ability to design, manufacture 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, our ability to obtain adequate capital to fund future operations, and general economic conditions, including inflation,

or other effects related to the COVID-19 pandemic or future pandemics or epidemics, or geopolitical conflicts such as the ongoing war

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, 2022 and in our publicly available filings with the Securities and Exchange

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

Because actual

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

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

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

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

following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto

included in Item 1 of this Quarterly Report on Form 10-Q and consolidated financial statements for the year ended December 31, 2022 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”.

company provides advanced optical sensing solutions for contactless touch, touch, and gesture sensing.

We also provide software solutions

for machine perception 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 using our zForce

technology platform and our machine perception 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.

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

Since 2010, our licensing customers have sold approximately 90 million devices that use our patented technology.

of March 31, 2023, we had 35 valid technology license agreements with global OEMs, ODMs and Tier 1 suppliers.

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

Eleven of our licensing customers are currently shipping

products that embed our technology.

We anticipate current customers will continue to ship products with our technology in 2023 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 we may use other business models as

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.

of Non-recurring Engineering Services

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.

Impact of COVID-19

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

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.

of War in Ukraine

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.

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

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 commodities;

significant disruptions in logistics infrastructure and telecommunications services;

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.

Results of Operations

A summary of our financial

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

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

Variance in Percent

Percentage of revenue

3 unchanged sentences

Total Revenue

Cost of Sales:

Cost of revenues:

Percentage of revenue

1 unchanged sentence

Percentage of revenue

Total Cost of Sales

Total cost of revenues

Total gross margin

10 unchanged sentences

Percentage of revenue

Interest expense

Other income (expense)

Percentage of revenue

6 unchanged sentences

Net loss per share attributable to Neonode Inc.

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 Expenses:

Research and development

Percentage of revenue

Sales and marketing

Percentage of revenue

General and administrative

Percentage of revenue

Total Operating Expenses

Percentage of revenue

Operating Loss

Percentage of revenue

Interest expense

Percentage of revenue

Provision (benefit) for income taxes

Percentage of revenue

net loss attributable to noncontrolling interests

Percentage of revenue

Net loss attributable to Neonode Inc.

Percentage of revenue

Net loss per share attributable to Neonode Inc.

All of our sales for the three

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

of our sales for the three months ended March 31, 2023 and 2022 were to customers located in the United States, Europe and Asia.

For the three months ended March

31, 2023, total net revenues decreased 4.9% compared to the same period in 2022.

For the three months ended

March 31, 2023, license fee revenues increased 4.0% compared to the same period in

The increase was primarily the result of an increase in volume as the global supply chain challenges related to semiconductor supply

shortages that hampered our printer and automotive customers’ production and sales for the last two years are beginning to improve.

Revenues from product sales

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

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 nine months ended September 30, 2022 and 2021 (dollars in thousands):

were $0.1 million for the three month ended March 31, 2023 compared to $0.1 million for the same period in 2022.

The first quarter is typically slow due to the high number of holidays, but the decrease is also due to high inventory levels at some

key customers after purchases during the fourth quarter 2022.

Non-recurring

Engineering Revenues

of our non-recurring 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 decreased for the three months ended March 31, 2023 compared

to the same period in 2022.

following tables presents the net revenues by geographical area and revenue stream for the three months ended March 31, 2023 and 2022

(dollars in thousands):

Three months ended

September 30, 2022

March 31, 2023

Three months ended

September 30, 2021

Non-recurring engineering

Nine months ended

September 30, 2022

Nine months ended

September 30, 2021

March 31, 2022

Non-recurring engineering

1 unchanged sentence

Non-recurring engineering

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

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

combined total gross margin was 96% for the three months ended March 31, 2023 and 95% for the three months ended March 31, 2022.

the three months ended March 31, 2023, gross margin related to products was 54% compared to 65% for the same period in 2022.

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

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 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

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, 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.

expenses for the three months ended March 31, 2023 were $0.8 million.

For the same period in 2022, the R&D expenses were $1.0 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.

The decrease was primarily related to lower

personnel and related costs.

and Marketing

and marketing expenses for the three months ended March 31, 2023 were $0.6 million, the same as for the same period in 2022.

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, 2023 were $1.4 million.

The G&A expenses

for the three months ended March 31, 2022 were $1.0 million.

The increase was primarily related to higher professional fees and higher

personnel and related costs.

Our effective tax rate was

(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 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.

(1)% for the three months ended March 31, 2023 and (3)% for the three months ended March 31, 2022.

The negative tax rate is due to withholding

taxes from sales.

We recorded valuation allowances for the three-month period ended March 31, 2023 and March 31, 2022 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 $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

Sheet Arrangements

We 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.

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, 2022, we had made no payments to TI under the NN1002 Agreement.

Operating Leases

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 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

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.

attributable to Neonode of $1.4 million for the three months ended March 31, 2023 and $1.4 million for the same period in 2022.

Obligations and Off-Balance Sheet Arrangements

do not have any 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, 2023, we had made no payments

to TI under the NN1002 Agreement.

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

now operates solely through a virtual office in California.

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 has been extended and is valid through November 2023.

It is extended on a yearly basis unless

written notice is provided 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 agreement has been extended and is valid through September 2024.

It is extended on a three-year basis

unless written notice is given nine months prior to the expiration date.

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

Tokyo, Japan.

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

We now operate through a virtual office in Japan.

For the three and nine months

ended September 30, 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

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

Equipment Subject to Finance Lease

the three months ended March 31, 2023, we recorded approximately $122,000 for total rent expense.

For the three months ended March 31,

2022, we recorded approximately $161,000 for total rent expense.

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

Subject to Finance Lease

In April 2014, we entered

10 unchanged sentences

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

Between 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.

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.

The lease 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.

The lease payments and depreciation period began on July

1, 2016 when the equipment went into service.

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

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.

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.

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

The implicit interest rate of the lease

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.

In 2017, we entered into a

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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

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 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 nine months ended

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

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 three-year lease term.

one year of the original four-year lease term.

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

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

The implicit interest rate

of the lease is currently approximately 1.5% per annum.

In 2021, we terminated one

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

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

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

of the original three-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 2022 when the equipment went into service.

The implicit interest rate of the

lease is currently approximately 3.0% 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 TSMs and AirBars;

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, 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.

lease payments and depreciation periods began in May 2022 when the equipment went into service.

The implicit interest rate of the lease

is currently approximately 3.0% per annum.

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

and Capital Resources

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

liquidity will be affected by, among other things:

of our technology;

of our TSMs and AirBars;

of our OEM customer product shipments;

of payment for our technology licensing agreements;

profit margin;

to raise additional capital, if necessary.

As of March 31, 2023, we had cash of $21.0 million compared to $14.8

million as of December 31, 2022.

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.

Working capital (current assets

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

expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets and recoveries of bad debt,

and changes in operating assets and liabilities of $(2.0) million.

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.

less current liabilities) was $25.6 million as of March 31, 2023, compared to $19.1 million as of December 31, 2022.

Net cash used in

operating activities for the three months ended March 31, 2023 was $1.7 million and was primarily the result of a net loss of $1.4

million and approximately $0.1 million in non-cash operating expenses, comprised of stock-based compensation expense, depreciation

and amortization and amortization of operating lease right-of-use assets, partly offset by changes in operating assets and

liabilities of $(0.3) million.

Net cash used in

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

and amortization and amortization of operating lease right-of-use assets, partly offset by changes in operating assets and

liabilities of $(1.0) 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

$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

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.

In the future, we may require

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,

however, 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, 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.

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.

revenues increased by approximately $0.5 million as of March 31, 2023 compared to December 31, 2022.

This was mainly due to the timing of receipts of customer payments.

increased by approximately $11,000 during the three months ended March 31, 2023 compared to December 31, 2022.

Net cash provided by financing

activities of $7.8 million during the three months ended March 31, 2023 was the result of issuance of common stock under the ATM facility.

Net cash used in financing activities of $61,000 during the three months ended March 31, 2022, was the result of principal payments on

the finance lease obligation.

We have incurred significant operating losses and negative cash flows

from operations since our inception.

The Company incurred net losses of approximately $1.4 million and $1.4 million for the three months

ended March 31, 2023 and 2022, respectively, and had an accumulated deficit of approximately $208.9 million and $207.5 million as of March

31, 2023 and December 31, 2022, respectively.

In addition, operating activities used cash of approximately $1.7 million and $2.3 million

for the three months ended March 31, 2023 and 2022, 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 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.

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.

At-the-Market

Offering Program

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

2 unchanged sentences

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 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.

the year ended December 31, 2022, we sold an aggregate of 886,065 shares of common stock under the ATM Facility, resulting in

net proceeds of approximately $4,686,000 after payment of commissions to B.

Riley Securities and other expenses of $167,000.

During the nine

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

Critical Accounting Policies

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.

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.

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 three month ended March 31, 2023, we sold an aggregate of 903,716 shares of our common stock under the ATM Facility with aggregate

net proceeds to us of $7,866,000, after payment of commissions to B.

Riley Securities and other expenses of $244,000.

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, 2022.

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