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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-03-09 · 280 added, 296 removed, 305 unchanged (65% 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

The following discussion and analysis should be

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Our company provides advanced optical sensing solutions

for contactless touch, touch, and gesture sensing.

for touch, contactless touch, and gesture sensing.

We also provide software solutions for machine perception that feature advanced machine

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but not limited to, office equipment, automotive, industrial automation, medical, military and avionics.

In 2010, we began licensing to Original Equipment Manufacturers (“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 technology.

In October 2017, we augmented our licensing business and began manufacturing

and shipping touch sensor modules (“TSMs”) that incorporate our patented technology.

We sell these TSMs to OEMs, Original

Design Manufacturers (“ODMs”), and systems integrators for use in their products.

As of December 31, 2022 we had 35 valid technology license agreements

with global OEMs, ODMs and Tier 1 suppliers.

In 2010, we began licensing to Original Equipment

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

2010, our licensing customers have sold approximately 95 million devices that use our technology.

In 2017, we augmented our licensing

business and began manufacturing and shipping touch sensor modules (“TSMs”) that incorporate our patented technology.

these TSMs to OEMs, Original Design Manufacturers (“ODMs”), and systems integrators for use in their products.

As of December 31, 2023, we had 34 valid technology

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

As of December 31, 2022, that number was 35.

During the year ended December 31, 2022, we

had 11 customers using our touch technology in products that were being shipped to their customers.

The majority of our license fees earned

in 2022 and 2021 were from customer shipments of printers.

As of December 31, 2022, we had 10 agreements with value added resellers

During the year ended December

31, 2023, we had 10 customers using our touch technology in products that were being shipped to their customers.

The majority of our license

fees earned in 2023 and 2022 were from customer shipments of printers.

As of December 31, 2023, we had nine agreements with value added resellers

(“VARs”) for integration of our TSMs in the products they offer to global OEMs, ODMs and systems integrators.

to this, we distribute our TSMs through Digi-Key Corporation, Serial Microelectronics HK Ltd, and Nexty Electronics Corporation.

2022, our three distributors sold and shipped 4,834 TSMs and related development kits.

During 2022 and 2021, we continued to focus our efforts on maintaining

our current licensing customers and achieving design wins for new products both with current and future customers.

We made investments

enhancing the design and improving the production yield of our TSMs and improving the related firmware and configuration tools software

We also made investments to expand our partner networks for sales and distribution of TSMs.

We intend to continue expanding

our TSM product offerings in 2023 and beyond, including new TSM variants and new sensor products for delivery to our key markets.

that over time the sales of HMI products and Remote Sensing Solutions may constitute the majority of our revenue.

2023, our three distributors sold and shipped approximately 7,400 TSMs and related development kits.

During 2023 and 2022, we continued to focus our

efforts on maintaining our current licensing customers and achieving design wins for new products both with current and future customers.

In parallel we continued to market and sell TSMs directly and indirectly via partners.

We made investments enhancing the design and improving

the production yield of our TSMs and improving the related firmware and configuration tools software platforms.

We also made investments

to expand our partner networks for sales and distribution of TSMs.

On December 12, 2023, the Company announced a new,

sharpened strategy with full focus on the licensing business.

Consequently, we will phase out the TSM product business during 2024 through

licensing of the TSM technology to strategic partners or outsourcing.

Critical Accounting Policies and Estimates

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Neonode Technologies AB, one of our wholly owned subsidiaries.

The non-controlling interests are reported below net loss including non-controlling

interests under the heading “Net loss attributable to non-controlling interests” in the consolidated statements of operations,

below comprehensive loss under the heading “Comprehensive loss attributable to non-controlling interests” in the consolidated

The noncontrolling interests are reported below net loss including noncontrolling

interests under the heading “Net loss attributable to noncontrolling interests” in the consolidated statements of operations,

below comprehensive loss under the heading “Comprehensive loss attributable to noncontrolling interests” in the consolidated

statements of comprehensive loss and shown as a separate component of stockholders’ equity in the consolidated balance sheets.

See “Non-controlling Interests” below for further discussion.

“Noncontrolling Interests” below for further discussion.

All inter-company accounts and transactions have been eliminated

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

License fees and sales of our AirBars and TSMs

are on a per-unit basis.

License fees and sales of our TSMs are on a per-unit

Therefore, we generally satisfy performance obligations as units are shipped to our customers.

Non-recurring

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

Non-recurring engineering service

performance obligations are satisfied as work is performed and accepted by our customers.

We recognize revenue net of allowances for returns

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

The timing of revenue recognition related to AirBar

modules depends upon how each sale is transacted - either point-of-sale or through distributors.

We recognize revenue for AirBar modules

sold point-of-sale (online sales and other direct sales to customers) when we provide the promised product to the customer.

Because we use distributors to provide AirBar TSMs

to our customers, we must analyze the terms of our distributor agreements to determine when control passes from us to our distributors.

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

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

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

of products purchased.

Because we use distributors to provide TSMs to

our customers, we must analyze the terms of our distributor agreements to determine when control passes from us to our distributors.

sales of TSMs sold through distributors, we recognize revenues when our distributors obtain control over our products.

Control passes

to our distributors when we have a present right to payment for products sold to the distributors, the distributors have legal title to

and physical possession of products purchased from us, and the distributors have significant risks and rewards of ownership of products

Distributors participate in various cooperative

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aggregations and approximations of returns data to accurately estimate returns.

Our AirBar and TSM returns and warranty experience to

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

The reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was $9,000 and $69,000 as of

Our TSM returns and warranty experience to date has enabled

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

for future sales returns is recorded as a reduction of our accounts receivable and revenue and was $8,000 and $9,000 as of December 31,

2023 and 2022, respectively.

The warranty reserve is recorded as an accrued expense and cost of sales and was $30,000 and $49,000 as of

December 31, 2023 and 2022, respectively.

The warranty reserve is recorded as an accrued expense and cost of sales and was $49,000 and

$36,000 as of December 31, 2022 and 2021, respectively.

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

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

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

been established, our revenue could be adversely affected.

Non-Recurring Engineering

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in full as soon as they become evident.

During the years ended December 31, 2022 and December 31, 2021, we recorded no losses.

Accounts Receivable and Allowance for Doubtful

Our accounts receivable is stated at net realizable

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

Our inventory

consists primarily of components that will be used in the manufacturing of our TSMs.

We classify inventory for reporting purposes as raw

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

During the years ended December 31, 2023 and 2022, we recorded no losses.

Accounts Receivable and Credit Losses

Accounts receivable is stated

at net realizable value.

We estimate and record a provision for expected credit losses related to our financial instruments, including

our trade receivables.

We consider historical collection rates, the current financial status of our customers, macroeconomic factors,

and other industry-specific factors when evaluating for current expected credit losses.

Forward-looking information is also considered

in the evaluation of current expected credit losses.

However, because of the short time to the expected receipt of accounts receivable,

we believe that the carrying value, net of expected losses, approximates fair value and therefore, we rely more on historical and current

analysis of such financial instruments, including our trade receivables.

Further, we consider macroeconomic

factors and the status of the technology industry to estimate if there are current expected credit losses within our trade receivables

based on the trends and our expectation of the future status of such economic and industry-specific factors.

Also, specific allowance

amounts are established based on review of outstanding invoices to record the appropriate provision for customers that have a higher probability

The accounts receivable balance

on our consolidated balance sheet as of December 31, 2023 was $0.9 million, net of approximately $30,000 of allowances.

The following

table provides a roll-forward of the allowance for credit losses that is deducted from the amortized cost basis of accounts receivable

to present the net amount expected to be collected at December 31, 2023:

Balance at January 1, 2023

Change in expected credit losses

Write-offs, net of recoveries

Balance at December 31, 2023

The Company’s

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

We classify inventory for reporting purposes

as raw materials, work-in-process, and finished goods.

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

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

low sell-through of our AirBar products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar

related raw materials and finished goods.

The AirBar inventory reserve was $0.3 million

and $0.8 million as of December 31, 2022 and 2021, respectively.

Management decided to reserve for

TSM inventory related to a quality issue in production.

With the new, sharpened strategy, announced in December 2023, the Company

focuses solely on the licensing business.

Consequently, we will phase out the TSM product business through licensing of the TSM technology

to strategic partners or outsourcing.

Management has decided to reserve TSM related raw materials which are expected to remain after production

ends in 2024.

The TSM inventory reserve was $3.6 million as of December 31, 2023.

2022 the affected inventory was scrapped and as of December 31, 2022 the inventory reserve was zero.

Due to the low sell-through of

our AirBar products, management has decided to fully reserve work-in-process for AirBar components, as well as AirBar related raw materials

and finished goods.

The AirBar inventory reserve was $0.3 million as of December 31,

In 2023, management decided to scrap the fully reserved AirBar inventory.

Research and Development

Research and development (“R&D”)

costs are expensed as incurred.

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

such as testing, certifying and measurements.

Research and development (“R&D”) costs are expensed

R&D costs consist mainly of personnel-related costs in addition to some external consultancy costs such as testing, certifying

and measurements.

Stock-Based Compensation Expense

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

usually the vesting period, net of estimated forfeitures.

usually the vesting period.

We account for equity instruments issued to non-employees

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

Non-controlling Interests

We recognize any non-controlling interest, also

known as a minority interest, as a separate line item in equity in the consolidated financial statements.

A non-controlling interest represents

the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us.

Generally, any interest that represents

less than 50% of the outstanding voting shares is deemed to be a non-controlling interest;

however, there are other factors, such as decision-making

rights, that are considered as well.

We include the amount of net income (loss) attributable to non-controlling interests in consolidated

net income (loss) on the face of the consolidated statements of operations.

We provide either in the consolidated statement

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

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

(net assets) attributable to the non-controlling interest that separately discloses:

Noncontrolling Interests

We recognize any noncontrolling interest, also

known as a minority interest, as a separate line item in stockholders’ equity in the consolidated financial statements.

A noncontrolling

interest represents the portion of equity ownership in a less-than-wholly owned subsidiary not attributable to us.

Generally, any interest

that holds less than 50% of the outstanding voting shares is deemed to be a noncontrolling interest;

however, there are other factors,

such as decision-making rights, that are considered as well.

We include the amount of net income (loss) attributable to noncontrolling

interests in consolidated net income (loss) on the face of the consolidated statements of operations.

The Company provides either in the consolidated

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

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

(net assets) attributable to the noncontrolling interest that separately discloses:

Net income or loss;

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on the weighted-average number of shares of common stock outstanding during the years ended December 31, 2023 and 2022.

Net loss per share, assuming dilution amounts from

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

outstanding during the period.

The weighted-average number of shares of common stock and potential common stock equivalents used in computing

the net loss per share for years ended December 31, 2022 and 2021 exclude the potential common stock equivalents, as the effect would

be anti-dilutive.

Deferred Revenues

Deferred revenues consist primarily of prepayments

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

We earn this revenue when we transfer control of the

product or service.

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

non-recurring engineering services.

Net loss per share,

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

potential common stock equivalents outstanding during the period.

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

common stock equivalents used in computing the net loss per share for years ended December 31, 2023 and 2022 exclude the potential common

stock equivalents, as the effect would be anti-dilutive.

Contract Liabilities

Contract liabilities (deferred revenues) consist

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

We earn the revenue when

we transfer control of the product or service.

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

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

We defer license fees until we have met all accounting

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

Engineering development fee revenues are deferred until engineering services have been completed and accepted by our customers.

We defer sensor modules revenues until distributors sell the products to their end customers.

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

The following table presents our deferred revenues

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Deferred revenues products

Deferred non-recurring engineering

Deferred revenues non-recurring engineering

Results of Operations

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Percentage of revenue

Total Revenue

Cost of Sales:

Total revenues

Cost of revenues:

Percentage of revenue

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Percentage of revenue

Total Cost of Sales

Total Gross Margin

Operating Expense:

Loss on purchase commitment

Percentage of revenue

Total cost of revenues

Total gross (loss) margin

Operating expenses:

Research and development

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Percentage of revenue

Interest income (expense)

Percentage of revenue

Provision for income taxes

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All of our sales for the years ended December 31,

2022 and 2021 were to customers located in the United States, Europe and Asia.

The decrease in total gross revenues by 2.8% for

the year ended December 31, 2022 as compared to 2021 was primarily caused by lower license fees, offset by higher product sales and NRE.

2023 were to customers located in the United States, Europe, Asia and Oceania.

All of our sales for the years ended December 31, 2022

were to customers located in the United States, Europe and Asia.

Total net revenues were $4.4 million and $5.7 million for the

years ended December 31, 2023 and 2022, respectively.

The decrease in total net revenues by 21.5% for the year ended December 31, 2023

as compared to 2022 was caused by lower revenues from all three revenue streams.

The following tables present the net revenues distribution

by geographical area and revenue stream for the years ended December 31, 2023 and 2022 (dollars in thousands):

North America

Non-recurring engineering

Europe, Middle East and Africa

Non-recurring engineering

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December 31, 2022

Net license revenues from automotive (license fees)

Net license revenues from consumer electronics (license fees)

Net revenues from TSMs (products)

Net revenues from non-recurring engineering services

License fees decreased by 6.6% in 2022 as compared

The decrease is primarily the result of component shortages within the printer and automotive markets related to the COVID-19

pandemic, which in turn impacted our license revenues for 2022.

However, we saw a recovery of license revenues for the second half of

2022 compared to the same period in 2021.

Revenues from product sales were $1.0 million,

the same as for 2021.

We saw a recovery for the second half of 2022 compared to same period in 2021, but our product sales continue to

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

We are also affected by the comparatively long development and launch periods,

often 12 to 18 months, or longer, for our customers’ new equipment solutions, which slows our sales growth.

Revenues from NRE services increased 118.1% in

2022 as compared to 2021.

Revenues from NRE is associated with customer application development projects and typically fluctuates from

quarter to quarter and year to year and is entirely dependent on specific customer driven development activities.

We expect to continue

to earn NRE fees in 2023 and future years.

Our total gross margin was 85.8% in 2022 compared

Net license revenues from automotive

Net license revenues from consumer electronics

Net product revenues from TSMs

Net non-recurring engineering services revenues

Revenues from license fees were $3.8 million and

$4.5 million for the years ended December 31, 2023 and 2022, respectively.

The decreased of 14.9% in 2023 as compared to 2022 is primarily

the result of the macro economic downturn.

Revenues from product sales were $0.6 million and

$1.0 for the years ended December 31, 2023 and 2022, respectively.

The decrease of 37.7% in 2023 compared to 2022 was mainly due to low

customer demand.

Revenues from non-recurring engineering revenues

were $26,000 and $0.2 million for the years ended December 31, 2023 and 2022.

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.

decrease of 87.3% in 2023 compared to 2022 was mainly due to fewer projects.

Gross (Loss) Margin

Our combined total gross (loss) margin was (2.1)% in 2023 compared

to 85.8% in 2022.

Gross margin related to product sales was 22.0% in 2022 compared to 3.5% in 2021.

In 2022 and 2021 product sales gross

margin was impacted by one-time adjustments related to TSMs stock write-downs.

Gross (loss) margin related to product sales was (630.6)% in 2023 compared to 22.0% in 2022.

The gross loss for products

for the year ended December 31, 2023 was impacted by one-time costs of $362,000 related to a loss on purchase commitment, $143,000 related

to a customer claim and $3.6 million related to inventory write-down.

The gross margin for products for the year ended December 31, 2022

was impacted by a one-time cost of $262,000 related to inventory write-down.

Our cost of revenues includes the direct cost of

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

contracts and cost of goods sold for sensor modules includes fully burdened manufacturing costs, outsourced final assembly costs, and

component costs of sensor modules.

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

Cost of sales also includes loss on purchase commitment after cancelling an order of components related to the TSMs.

Research and Development

Product R&D expenses for 2022 were 69.9% of

total revenue compared to 60.8% in 2021.

R&D in 2022 increased 11.8% compared to 2021 primarily due to higher cost for personnel and

related costs.

The cost was also affected by favorable exchange rate from Swedish Krona to US Dollar.

There were 26 employees and zero

consultants in our R&D department as of December 31, 2022 compared to 25 employees and 2 consultants as of December 31, 2021.

Our R&D groups are primarily tasked with developing

technology and software platforms to support our TSMs and our customer integration activities for both our sensor hardware and license

R&D expenses for 2023 and 2022 were $3.8 million

and $4.0 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 decrease of 3.3% in 2023

compared to 2022 was primarily related to lower product development costs.

Sales and Marketing

Sales and marketing expenses for 2022 were 35.9%

of total revenue compared to 48.6% in 2021.

Sales and marketing expenses in 2022 decreased 28.4% compared to 2021 primarily due to lower

cost for personnel and related costs in 2022.

The decrease was also result of favorable exchange rate from Swedish Krona to US Dollar.

We had eight employees and five consultants in our sales and marketing department as of December 31, 2022 compared to eight employees

and six consultants as of December 31, 2021.

There is approximately $8,000 of stock-based compensation expense included in sales and marketing

expenses for the year ended December 31, 2022 compared to $50,000 for the year ended December 31, 2021.

Our sales activities focus on OEM, ODM and Tier

1 customers, directly or through VARs, who license our technology or purchase and embed our touch sensor modules into their products.

Sales and marketing expenses for were $2.5 million

and $2.0 million, respectively.

Sales and marketing expenses in 2023 increased 20.7% compared to 2022 primarily due to higher cost for personnel and

related costs and higher cost for marketing.

There is approximately $8,000 of stock-based compensation expense included in sales and

marketing expenses for each of the years ended December 31, 2023 and 2022.

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 were 73.3% of revenue in 2022 compared to 96.0% in 2021.

Total G&A expenses in 2022 decreased 25.8% from 2021 and was primarily

due to lower cost for personnel and related, depreciation and amortization, and professional fees.

The decrease was also result of favorable

exchange rate from Swedish Krona to US Dollar.

As of December 31, 2022, we had 13 full-time employees and zero consultants in our G&A

department fulfilling management, IT, HR and accounting responsibilities compared to seven full-time employees and three consultants as

of December 31, 2021.

There is approximately $114,000 of non-cash stock-based compensation included in G&A expenses for the year ended

December 31, 2022 compared to $107,000 for the year ended December 31, 2021.

Other Income (Expense)

Other income (expense) for the year ended December

31, 2022 was $121,000 compared to $(15,000) for the year ended December 31, 2021.

The other income for 2022 was related to interest income

earned and gain from recovery of bad debt offset by primarily finance leases.

The other expense for 2021 was primarily related to finance

Foreign Currency Translation and Transaction

Gains and Losses

The functional currency of our foreign subsidiaries

is the applicable local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar.

The translation from

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

Dollars is performed for balance sheet accounts using current

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

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

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

consolidated statements of operations were $35,000 and $(66,000) during the years ended December 31, 2022 and 2021, respectively.

currency translation gains (losses) were $68,000 and $(4,000) during the years ended December 31, 2022 and 2021, respectively

Our effective tax rate was (2)% for the year ended

December 31, 2022 and (2)% for the year ended December 31, 2021.

We recorded valuation allowances in 2022 and 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 of $4.9 million for the year ended December 31, 2022, compared to a net loss of $6.5 million for the year ended December

Contractual Obligation

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.

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

2023 and 2022 were $4.4 million and $4.2 million, respectively.

The increase of 5.0% from 2022 was primarily due to higher cost for professional

There is approximately $50,000 of non-cash stock-based compensation included in G&A expenses for the year ended December 31,

2023 compared to $114,000 for the year ended December 31, 2022.

Other income for the year ended December 31, 2023 was $736,000 compared

to $121,000 for the year ended December 31, 2022.

The other income for 2023 was mainly related to interest income earned.

The other income

for 2022 was related to interest income earned and gain from recovery of bad debt offset by primarily finance leases.

Foreign Currency Translation and Transaction Gains and Losses

The functional currency of our foreign subsidiaries is the applicable

local currency, the Swedish Krona, the Japanese Yen, the South Korean Won and the Taiwan Dollar.

The translation from Swedish Krona, Japanese

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

Dollars is performed for balance sheet accounts using current exchange rates in effect

at the balance sheet date and for income statement accounts using a weighted average exchange rate during the period.

Gains or (losses)

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

Foreign currency translation

gains (losses) were $(56,000) and $68,000 during the years ended December 31, 2023 and 2022, respectively.

Gains (losses) resulting from

foreign currency transactions are included in general and administrative expenses in the accompanying consolidated statements of operations

were $(5,000) and $35,000 during the years ended December 31, 2023 and 2022.

Our effective tax rate was (1.1)% for the year ended December 31, 2023

and (2.3)% for the year ended December 31, 2022.

We recorded valuation allowances in 2023 and 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

of $10.1 million for the year ended December 31, 2023, compared to a net loss of $4.9 million for the year ended December 31, 2022.

Contractual Obligation and Off-Balance Sheet

We 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.

We have no special purpose or limited purpose entities

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Operating Leases

We 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

operates solely through a virtual

office in California.

On December 1, 2020, Neonode Technologies AB entered

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It is extended on a yearly basis unless written notice is provided nine months prior to the expiration

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.

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.

On 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.

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.

Pronode Technologies AB has informed the landlord

of its intention to not renew its lease upon expiration in September 2024.

For the years ended December 31, 2023 and 2022,

we recorded approximately $485,000 and $577,000, respectively, for rent expense.

Equipment Subject to

Finance Leases

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.

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.

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

Equipment Subject to Finance Leases

Between the second and fourth quarters of 2016,

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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.

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periods began in May 2017 when the equipment went into service.

The implicit interest rate of the lease is currently approximately 1.5%

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.

The implicit interest rate of the lease was approximately 1.5% per annum.

In November, 2021, the lease contract was extended for two years.

The implicit interest rate of the extended lease period was 1.5% per

In November, 2023, the equipment was purchased.

In 2018, we entered into a lease for component

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The implicit interest rate of the lease is currently approximately 1.5% per

In 2021 we terminated one finance lease by purchasing

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

During 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

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%

Non-Recurring Engineering

Development Costs

In 2022, we entered into a lease for soundproof

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.

Non-Recurring Engineering Development Costs

On April 25, 2013, we entered into an Analog Device

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

6, 2012, pursuant to which TI agreed to integrate our intellectual property into an ASIC.

Under the terms of the NN1002 Agreement, we

agreed to pay TI $500,000 of non-recurring engineering costs at the rate of $0.25 per ASIC for each of the first two million ASICs sold.

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 Application Specific Integrated Circuit (“ASIC”).

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

for each of the first 2,000,000 ASICs sold.

As of December 31, 2023, we had made no payments to TI under the NN1002 Agreement.

Liquidity and Capital

Liquidity and Capital Resources

Our liquidity is dependent on many factors, including

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licensing of our technology;

purchases of our TSMs and AirBars;

purchases of our TSMs;

operating expenses;

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ability to raise additional capital, if necessary.

As of December 31, 2022, we had cash of $14.8 million,

as compared to $17.4 million as of December 31, 2021.

Working capital (current assets less current liabilities)

was $19.1 million as of December 31, 2022, compared to working capital of $19.1 million as of December 31, 2021.

Net cash used in operating activities for the year

ended December 31, 2022 was $6.8 million and was primarily the result of a net loss including noncontrolling interests of approximately

$5.3 million.

Cash used to fund net losses is offset by approximately $0.6 million in non-cash operating expenses, mainly comprised

of depreciation, amortization and stock-based compensation.

Accounts receivable and unbilled revenues increased

by approximately $136,000 as of December 31, 2022 compared to December 31, 2021.

Inventory increased by approximately $1,133,000

As of December 31, 2023, we had cash and cash equivalents

of $16.2 million, as 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 Annual Report.

Working capital (current assets less current liabilities) was $16.8

million as of December 31, 2023, compared to working capital of $19.1 million as of December 31, 2022.

Net cash used in operating activities for the year ended December 31,

2023 was $6.3 million and was primarily the result of a net loss of $10.1 million and approximately $3.8 million in non-cash operating

expenses, comprised of stock-based compensation expense, inventory impairment loss, depreciation and amortization and amortization of

operating lease right-of-use assets, and changes in operating assets and liabilities of $25,000.

Net cash used in operating activities

for the year ended December 31, 2022 was $6.8 million and was primarily the result of a net loss including noncontrolling interests of

$5.3 million and approximately $0.6 million in non-cash operating expenses, comprised of stock-based compensation expense, 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 $(2.1) million.

Accounts receivable and unbilled revenues decreased

by approximately $539,000 as of December 31, 2023 compared to December 31, 2022, due to lower revenues.

Inventory increased by approximately $395,000 as

of December 31, 2023, not considering the $3.6 million non-cash impairment charge recorded during 2023, compared to December 31, 2022.

Accounts payable and accrued expenses increased approximately $173,000

as of December 31, 2023 compared to December 31, 2022.

Accounts payable and accrued expenses decreased

approximately $460,000 as of December 31, 2022 compared to December 31, 2021.

Net cash used in operating activities for the year

ended December 31, 2021 was $7.7 million and was primarily the result of a net loss including noncontrolling interests of approximately

$7.3 million.

Cash used to fund net losses is offset by approximately $1.3 million in non-cash operating expenses, mainly comprised of

depreciation, amortization and stock-based compensation.

Net cash provided by financing activities for the

year ended December 31, 2022 was $4.5 million and was mainly the result of the issuance of common stock, partly offset by principal payments

on finance leases.

Net cash provided by financing activities for the

year ended December 31, 2021 was $14.6 million and was mainly the result of the issuance of common stock, partly offset by principal payments

on finance leases.

For the year ended December 31, 2023, we purchased

$123,000 of fixed assets, consisting primarily of manufacturing equipment.

For the year ended December 31, 2022, we purchased $52,000

of fixed assets, consisting primarily of office equipment.

For the year ended December 31, 2021, we purchased $67,000 of fixed

assets, consisting primarily of engineering equipment.

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

Net cash provided by financing activities for the

year ended December 31, 2023 was $7.8 million and was primarily the result of issuance of common stock under the ATM Facility (as defined

and described below).

Net cash provided by financing activities for the year ended December 31, 2022 was $4.5 million and was mainly the

result of the issuance of common stock, partly offset by principal payments on finance leases.

At-the-Market Offering Program

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

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

Pursuant to the Sale Agreement, we may sell the

Pursuant to the Sales Agreement, we may sell the

shares through B.

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We are not obligated to sell any shares under the

Sale Agreement.

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

Sales Agreement.

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

sale, through B.

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

with its terms.

During the twelve months ended December 31, 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

Riley Securities and other expenses of $167,000.

During the twelve months ended December 31, 2021,

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

payment of commissions to B.

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

accordance with its terms.

During the year ended December 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.

During January 2023, we sold an aggregate of 903,716

shares of our common stock under the ATM Facility with aggregate net proceeds to us of $7,868,000, after payment of commissions to B.

During 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.

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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-K

Item 7. Management’s Discussion and Analysis