What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-08 · 145 added, 170 removed, 340 unchanged (48% of the section changed)

33 unchanged sentences

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 and consolidated financial statements for the year ended December 31, 2023 included in our most recent Annual Report

on Form 10-K.

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 and consolidated financial statements for the year ended December 31, 2023 included in our most recent Annual

Report on Form 10-K.

All information in the following discussion and analysis present the results of continuing operations and exclude

amounts related to discontinued operations for all periods presented unless otherwise stated.

Neonode Inc., collectively

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

As of June 30, 2024, we had

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

As of September 30, 2024,

we had 37 valid technology license agreements with global OEMs, Original Design Manufacturers (“ODMs”) and automotive Tier

Our licensing customer base

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ship products using our technology, but in the future, we may use other business models as well.

Product Sales

In addition to our licensing

business, we design and manufacture Touch Sensor Modules (“TSMs”) that incorporate our patented technology.

We sell our TSMs

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

We utilize a robotic manufacturing

process designed specifically for our TSMs.

The 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.

We began selling our TSMs

to customers in the industrial and consumer electronics segments in 2017.

We commenced the phase out of our TSM product business during

the first quarter of 2024 through licensing of the TSM technology to strategic partners or outsourcing.

we stopped producing TSMs and started to shut down the factory.

Non-recurring Engineering Services

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Three months ended

Percentage of revenue

September 30,

Percentage of revenue

3 unchanged sentences

Cost of revenues:

Percentage of revenue

Non-recurring engineering

17 unchanged sentences

Percentage of revenue

Net loss per share

Six months ended

Net loss from continuing operations

Percentage of revenue

Net loss per share from continuing operations

Nine months ended

September 30,

Percentage of revenue

3 unchanged sentences

Cost of revenues:

Percentage of revenue

Non-recurring engineering

17 unchanged sentences

Percentage of revenue

Net loss from continuing operations

Percentage of revenue

Net loss per share

All of our sales for the three

and six months ended June 30, 2024 were to customers located in the United States, Europe, Asia and Oceania.

Net loss per share from continuing operations

All of our sales for the

three and six months ended June 30, 2023 were to customers located in the United States, Europe, Asia and Oceania.

Total revenues were $1.4 million

and $2.4 million for the three and six months ended June 30 2024, respectively, compared to $1.2 million and $2.5 million for the same

periods in 2023, respectively.

The increase in total revenues by 18.7% and decrease by 0.6% for the three and six months ended June 30,

2024, respectively, as compared to the same periods in 2023 are explained by higher products revenues and non-recurring revenues offset

by lower license fees.

Revenues from license fees

were $0.6 million and $1.4 million for the three and six months ended June 30, 2024, respectively, compared to $1.1 million and $2.2 million

for the three and six months ended June 30, 2023, respectively.

The decrease of 43.9% and 38.1% for the three and six months ended June

30, 2024, respectively, as compared to the same periods in 2023, are mainly due to lower demand for our legacy customers’ products,

resulting lower revenues for us.

Revenues from products were

$0.6 million and $0.8 million for the three and six months ended June 30, 2024, respectively, compared to $0.1 million and $0.2 million

for the three and six months ended June 30, 2023, respectively.

The increase of 641.7% and 342.5% for the three and six months ended June

30, 2024, respectively, as compared to the same periods in 2023 was primarily due to customers securing TSM inventory after receiving

news about our company phasing out TSM manufacturing.

three and nine months ended September 30, 2024 and 2023 were to customers located in the United States, Europe and Asia.

Total revenues were $0.8 million and $2.5 million for the three and

nine months ended September 30 2024, respectively, compared to $0.8 million and $3.1 million for the same periods in 2023, respectively.

The decrease in total revenues of 0.2% and 21.0% for the three and nine months ended September 30, 2024, respectively, as compared to

the same periods in 2023, are explained by lower license fees offset by higher non-recurring revenues.

Revenues from license fees were $0.7 million and $2.1 million for the

three and nine months ended September 30, 2024, respectively, compared to $0.8 million and $3.1 million for the three and nine months

ended September 30, 2023, respectively.

The decrease of 12.6% and 31.2% for the three and nine months ended September 30, 2024, respectively,

as compared to the same periods in 2023, were mainly due to lower demand for our legacy customers products within printer and passenger

car touch applications offset by revenues from new licensing customers.

Non-recurring Engineering

Revenues from non-recurring

engineering were $187,000 and $228,000 for the three and six months ended June 30, 2024, respectively, compared to $22,000 and $25,000

for the three and six months ended June 30, 2023, respectively.

engineering were $107,000 and $335,000 for the three and nine months ended September 30, 2024, respectively, compared to $4,000 and $29,000

for the three and nine months ended September 30, 2023, respectively.

Most of our non-recurring engineering revenues are related to application

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The increase of

750.0% and 812.0% for the three and six months ended June 30, 2024, respectively, as compared to the same periods in 2023 was the result

of a potential TSM licensing project and the new MultiSensing project with a commercial vehicle OEM.

2,575.0% and 1,055.2% for the three and nine months ended September 30, 2024, respectively, as compared to the same periods in 2023 was

the result of TSM licensing projects and the new MultiSensing project with a commercial vehicle OEM.

The following tables presents

the net revenues by market and revenue stream for the three and six months ended June 30, 2024 and 2023 (dollars in thousands):

the net revenues by market and revenue stream for the three and nine months ended September 30, 2024 and 2023 (dollars in thousands):

Three months ended

June 30, 2024

September 30, 2024

Three months ended

June 30, 2023

September 30, 2023

Non-recurring engineering

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Non-recurring engineering

Six months ended

June 30, 2024

Six months ended

June 30, 2023

Nine months ended

September 30, 2024

Nine months ended

September 30, 2023

Non-recurring engineering

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Non-recurring engineering

Our combined total gross margin

was 65.9% and 63.8% for the three and six months ended June 30, 2024, respectively, compared to 96.9% and 96.6% for the three and six

months ended June 30, 2023, respectively.

For the three and six months ended June 30, 2024, gross margin related to products was 26.0%

and (2.2)%, respectively, compared to 66.7% and 59.7% for the three and six months ended June 30, 2023, respectively.

The decrease in

gross margin for products for the three and six months ended June 30, 2024 as compared to the same periods in 2023 was primarily due to

a cost of $8,000 and $286,000 incurred during the three and six months ended June 30, 2024, respectively, related to a write-down on inventory

due to the phasing out of the TSM manufacturing.

Our total gross margin was

97.1% and 97.3% for the three and nine months ended September 30, 2024, respectively, compared to 100.0% and 99.7% for the three and nine

months ended September 30, 2023, respectively.

Our cost of revenues includes

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engineering design contracts.

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

and component costs of TSMs.

Research and Development

Research and development (“R&D”)

expenses were $1.0 million and $1.9 million for the three and six months ended June 30, 2024, respectively, compared to $1.1 million and

$1.9 million for the three and six months ended June 30, 2023, 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

Research and development (“R&D”) expenses were $0.8

million and $2.7 million for the three and nine months ended September 30, 2024, respectively, compared to $0.8 million and $2.7 million

for the three and nine months ended September 30, 2023, 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 8.3% for the three months ended June 30, 2024 compared to the same period in 2023 was primarily

related to lower payroll and related costs.

The R&D expenses for the three and nine months ended September 30, 2024 were in line with the same periods

Sales and Marketing

Sales and marketing expenses

were $0.5 million and $1.4 million for the three and six months ended June 30, 2024, respectively, compared to $0.7 million and $1.3 million

for the three and six months ended June 30, 2023, respectively.

The decrease of 21.0% for the three months ended June 30, 2024 compared

to the same period in 2023 was primarily related to lower payroll and related costs.

The increase of 6.2% for the six months ended June

30, 2024 compared to the same period in 2023 was primarily related to higher costs for participation in technology events offset by lower

payroll and related costs.

Sales and marketing expenses were $0.5 million and $1.8 million for

the three and nine months ended September 30, 2024, respectively, compared to $0.5 million and $1.8 million for the three and nine months

ended September 30, 2023, respectively.

The decrease of 6.2% for the three months ended September 30, 2024 compared to the same period

in 2023 was primarily related to lower payroll and related costs offset by higher professional fees.

The decrease of 2.6% for the nine

months ended September 30, 2024 compared to the same period in 2023 was primarily related to lower payroll and related costs offset by

higher professional fees and advertising costs.

Our sales and marketing activities

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General and Administrative

General and administrative

expenses were $1.2 million and $2.4 million for the three and six months ended June 30, 2024, respectively, compared to $1.0 million and

$2.4 million for the three and six months ended June 30, 2023, respectively.

The increase of 18.2% for the three months ended June 30,

2024 compared to the same period in 2023 was primarily due to higher cost for professional fees.

The decrease of 1.4% for the six months

ended June 30, 2024 compared to the same period in 2023 was primarily due to moving overhead costs to finished goods.

Other income were $0.1 million

and $0.3 million for the three and six months ended June 30, 2024, respectively compared to $0.2 million and $0.3 million for the three

and six months ended June 30, 2023, respectively.

General and administrative expenses were $0.7 million and $2.7 million

for the three and nine months ended September 30, 2024, respectively, compared to $0.8 million and $2.5 million for the three and nine

months ended September 30, 2023, respectively.

The decrease of 2.7% for the three months ended September 30, 2024 compared to the same

period in 2023 was primarily related to lower professional fees.

The increase of 6.1% for the nine months ended September 30, 2024 compared

to the same period in 2023 was primarily related to payroll and related expense.

Other income was $0.2 million

and $0.5 million for the three and nine months ended September 30, 2024, respectively compared to $0.2 million and $0.6 million for the

three and nine months ended September 30, 2023, respectively.

The other income for the periods was mainly related to interest income earned.

Our effective tax rate was

(0.7)% and (0.6)% for the three and six months ended June 30, 2024, respectively, compared to (3.4)% and (2.1)% and for the three and

six months ended June 30, 2023, respectively.

The negative tax rate is due to withholding taxes from sales and the decrease is due to

lower license revenue during 2024.

As a result of the factors

discussed above, we recorded a net loss of $1.7 million and $3.8 million for the three and six months ended June 30, 2024, respectively,

and $1.5 million and $2.9 million for the same periods in 2023.

Our effective tax rate was 1.0% and (0.2)% for the three and nine months

ended September 30, 2024, respectively, compared to (3.4)% and (2.8)% and for the three and nine months ended September 30, 2023, respectively.

The negative tax rate is due to withholding taxes from sales and the decrease is due to lower license revenue during 2024.

As a result of the factors discussed above, we recorded a net loss

from continuing operations of $1.1 million and $4.4 million for the three and nine months ended September 30, 2024, respectively, and

$1.1 million and $3.5 million for the same periods in 2023.

Liquidity and Capital Resources

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licensing of our technology;

purchases of our TSMs;

operating expenses;

3 unchanged sentences

ability to raise additional capital, if necessary.

As of June 30, 2024, we had

cash and cash equivalents of $13.1 million, as compared to $16.2 million as of December 31, 2023.

As of September 30, 2024,

we had cash and cash equivalents of $17.6 million, as compared to $16.2 million as of December 31, 2023.

Based on our current cash position,

1 unchanged sentence

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

Working capital (current assets

less current liabilities) was $13.2 million as of June 30, 2024, compared to $16.8 million as of December 31, 2023.

Net cash used in operating

activities for the six months ended June 30, 2024, was $3.1 million and was primarily the result of a net loss of $3.8 million and approximately

$0.4 million in non-cash operating expenses, comprised of stock-based compensation expense, depreciation and amortization, amortization

of operating lease right-of-use assets and inventory impairment loss and changes in operating assets and liabilities of $0.2 million.

Net cash used in financing activities for the six months ended June 30, 2024, was approximately $13,000 and was primarily the result of

principal payments on finance lease.

Accounts receivable and unbilled

revenues increased by approximately $0.3 million as of June 30, 2024, compared to December 31, 2023.

This was mainly due to the timing

of receipts of customer payments.

Inventory decreased by approximately

$89,000 during the six months ended June 30, 2024, compared to December 31, 2023, mainly as a result of increased sales of TSMs to customers

and decreased purchases after the factory closure.

Working capital (current assets less current liabilities) was $17.7

million as of September 30, 2024, compared to $16.1 million as of December 31, 2023.

Net cash used in operating activities for combined continuing and discontinued

operations for the nine months ended September 30, 2024, was $4.4 million and was primarily the result of a net loss of $4.9 million and

approximately $0.4 million in non-cash operating expenses, comprised of stock-based compensation expense, depreciation and amortization,

amortization of operating lease right-of-use assets and inventory impairment loss and changes in operating assets and liabilities of $28,000.

Net cash provided by financing activities for the nine months ended September 30, 2024, was approximately 5.8 million and was primarily

the result of proceeds from issuance of common stock, net of offering costs.

Accounts receivable and unbilled revenues for combined continuing and

discontinued operations decreased by approximately $105,000 as of September 30, 2024, compared to December 31, 2023.

This was mainly due

to the timing of receipts of customer payments.

Inventory for discontinued

operations decreased by approximately $132,000 during the nine months ended September 30, 2024, compared to December 31, 2023, mainly

as a result of increased sales of TSMs to customers and decreased purchases after the factory closure.

Accounts payable, accrued payroll and employee benefits, and accrued

expenses increased approximately $149,000 during the six months ended June 30, 2024 compared to December 31, 2023, due to various payroll

related expenses.

expenses for combined continuing and discontinued operations decreased approximately $115,000 during the nine months ended September 30,

2024 compared to December 31, 2023, due to various payroll related expenses.

Net cash provided by financing

activities of $7.8 million during the six months ended June 30, 2023 was the result of issuance of common stock under the B.

Facility (as defined below).

We have incurred significant

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

The Company incurred net losses of approximately $1.7 million

and $3.8 million for the three and six months ended June 30, 2024, respectively, compared to $1.5 million and $2.9 million for the three

and six months ended June 30, 2023, respectively, and had an accumulated deficit of approximately $221.4 million and $217.6 million as

of June 30, 2024 and December 31, 2023, respectively.

In addition, operating activities used cash of approximately $3.1 million and $2.3

million for the six months ended June 30, 2024 and 2023, respectively.

activities of $7.8 million during the nine months ended September 30, 2023 was the result of issuance of common stock under the B.

ATM Facility (as defined below).

We have incurred significant operating losses and negative cash flows

from operations since our inception.

The Company incurred net losses for combined continuing and discontinued operations of approximately

$1.1 million and $4.9 million for the three and nine months ended September 30, 2024, respectively, compared to $1.3 million and $4.2

million for the three and nine months ended September 30, 2023, respectively, and had an accumulated deficit of approximately $222.5 million

and $217.6 million as of September 30, 2024 and December 31, 2023, respectively.

In addition, operating activities used cash of approximately

$4.4 million and $4.1 million for the nine months ended September 30, 2024 and 2023, respectively.

The condensed consolidated

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the date the financial statements were issued.

During July 2024, we sold an aggregate of 107,087 of our common stock under the ATM Facility

with aggregate net proceeds to us of $341,000, after payment of commissions to Ladenburg and other expenses of $11,000.

During the three months ended September 30, 2024, we sold an aggregate of 1,423,441 of

our common stock under the ATM Facility with aggregate net proceeds to us of $5.8 million, after payment of commissions to Ladenburg and

other expenses of $0.2 million.

In the future, we may require

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

Technologies AB has informed the landlord of its intention to not renew its lease upon expiration in September 2024.

For total rent expense, we

recorded $123,000 and $249,000 for the three and six months ended June 30, 2024, respectively, compared to $123,000 and $245,000, respectively,

for the three and six months ended June 30, 2023.

facility lease terminated on September 30, 2024 and was not renewed.

For total rent expense for

combined continuing and discontinued operations, we recorded $127,000 and $376,000 for the three and nine months ended September 30, 2024,

respectively, compared to $120,000 and $365,000, respectively, for the three and nine months ended September 30, 2023.

Non-Recurring Engineering Development Costs

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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 June 30, 2024, we had made no payments to TI under the NN1002

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, 2024, we had made no payments to TI under the NN1002 Agreement.

At-the-Market Offering Program

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for sale of up to $10,366,156 of our common stock through the Ladenburg ATM Facility.

the six months ended June 30, 2024, we did not sell shares of our common stock under the B.

Riley ATM Facility or the Ladenburg ATM Facility.

During the three and six months ended June 30, 2023, we sold an aggregate of zero and 903,716 shares of our common stock, respectively,

Riley 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.

the three and nine months ended September 30, 2024, we sold an aggregate of 1,423,441 shares of our common stock, respectively, under

the Ladenburg ATM Facility with aggregate net proceeds to us of $5.8 million, after payment of commissions to Ladenburg and other expenses

of $0.2 million.

During the three and nine months ended September 30, 2023, we sold an aggregate of zero and 903,716 shares of our common

stock, respectively, under the B.

Riley ATM Facility with aggregate net proceeds to us of $7,9 million, after payment of commissions to

Riley Securities and other expenses of $0.2 million.

Critical Accounting Policies

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in connection with the original assignment to Aequitas.

As reflected in publicly available

court filings, on June 8, 2020, Neonode Smartphone LLC, an unrelated third party that is a subsidiary of Aequitas (“Aequitas Sub”),

filed complaints against Apple Inc.

(“Apple”) (assigned docket number 6:20-cv-00507-ADA, current docket number 6:23-cv-00204-ADA),

and Samsung Electronics Co., Ltd., and Samsung Electronics America, Inc.

(collectively, “Samsung”) (assigned docket number

6:20-cv-00505-ADA), in the Western District of Texas alleging infringement of two patents, U.S.

As reflected in publicly available court filings, on June 8, 2020,

Neonode Smartphone LLC, an unrelated third party that is a subsidiary of Aequitas (“Aequitas Sub”), filed complaints against

(“Apple”) (assigned docket number 6:20-cv-00505-ADA), and Samsung Electronics Co., Ltd., and Samsung Electronics

America, Inc.

(collectively, “Samsung”) (assigned docket number 6:20-cv -00507-ADA;

see also 6:23-cv-00204-ADA), in the Western

District of Texas alleging infringement of two patents, U.S.

8,095,879 and 8,812,993.

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8,095,879 are unpatentable.

As reflected in publicly available

court records, on July 14, 2023, the United States District Court for the Western District of Texas entered its final claim constructions

in the Samsung case, and based on those claim constructions, entered judgment in favor of Samsung and against Aequitas Sub.

filed an appeal with the Federal Circuit in August 2023 (assigned docket number 23-2304)[, and oral argument was held on June 6, 2024].

No decision from the Federal Circuit has yet been issued.

The case against Apple remains pending in the United States District Court for

the Northern District of California, and the PTAB stay has not yet been lifted.

Based on information in public records, in November 2020, Samsung and Apple collectively sought inter partes

review of certain claims in U.S.

8,812,993 (assigned proceeding number IPR2021-00145).

As reflected in publicly

available court records, on July 14, 2023, the United States District Court for the Western District of Texas entered its final claim

constructions in the Samsung case, and based on those claim constructions, entered judgment in favor of Samsung and against Aequitas

Aequitas Sub filed an appeal with the Federal Circuit in August 2023 (assigned docket number 23-2304), and oral argument was held

on June 6, 2024 As reflected on the public court docket, on August 20, 2024, the Federal Circuit issued its written opinion, reversing

and remanding the case to the Western District of Texas for further proceedings.

Specifically, the Federal Circuit held that claim 1

of the ‘879 patent was not indefinite.

Mandate issued returning the case to the Western District of Texas on September 26, 2024.

The case against Apple remains

pending in the United States District Court for the Northern District of California.

The stay has not yet been lifted, and on October

17, 2024, the parties indicated that they will soon jointly request that the California case continue to be stayed until resolution of

the Samsung case pending in the Western District of Texas (case number 20-cv-00507-ADA).

Based on information in public records, in November

2020, Samsung and Apple collectively sought inter partes review of certain claims in U.S.

8,812,993 (assigned proceeding number

IPR2021-00145).

In June 2022, the PTAB invalidated U.S.

8,812,993, which Aequitas Sub appealed to the Federal Circuit in August 2022 (assigned docket number 22-2134).

Circuit affirmed the PTAB’s decision on June 11, 2024.

8,812,993, which Aequitas Sub appealed to the Federal Circuit in August

2022 (assigned docket number 22-2134).

The Federal Circuit affirmed the PTAB’s decision on June 11, 2024.

Quantitative and Qualitative Disclosures

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis