Neonode Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021

☐ Transition report pursuant to section 13 or 15(d) of the Securities and Exchange Act of 1934

For the transition period from ________ to ________

Commission file number 1-35526

NEONODE INC.

(Exact name of registrant as specified in its charter)

Delaware		94-1517641
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Karlavägen 100, 115 26 Stockholm, Sweden

(Address of principal executive offices and zip code)

+46 (0) 8 667 17 17

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.001 per share		NEON		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of November 10, 2021 was 13,561,217.

NEONODE INC.

Quarterly Report on Form 10-Q

For the Fiscal Quarter Ended September 30, 2021

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION		1

Item 1	Financial Statements	1

	Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 (Audited)	1

	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020	2

	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2021 and 2020	3

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the quarter to date periods ended September 30, 2020 through September 30, 2021	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4	Controls and Procedures	36

PART II OTHER INFORMATION		37

Item 1	Legal Proceedings	37

Item 1A	Risk Factors	37

Item 5	Other Information	37

Item 6	Exhibits	37

SIGNATURES		38

EXHIBITS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NEONODE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2021			2020
	(Unaudited)			(Audited)
ASSETS
Current assets:
Cash	$	5,496		$	10,473
Accounts receivable and unbilled revenue, net		763			1,743
Inventory		2,402			1,273
Prepaid expenses and other current assets		586			1,161
Total current assets		9,247			14,650

Property and equipment, net		492			1,003
Operating lease right-of-use assets		488			919
Total assets	$	10,227		$	16,572

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	635		$	1,084
Accrued payroll and employee benefits		1,009			1,170
Accrued expenses		637			545
Deferred revenues		134			138
Current portion of finance lease obligations		369			769
Current portion of operating lease obligations		314			504
Total current liabilities		3,098			4,210

Finance lease obligations, net of current portion		28			95
Operating lease obligations, net of current portion		36			377
Total liabilities		3,162			4,682

Commitments and contingencies

Stockholders’ equity:
Common stock, 25,000,000 shares authorized, with par value of $0.001; 11,611,048 and 11,504,665 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively.		12			12
Additional paid-in capital		212,347			211,663
Accumulated other comprehensive loss		(551	)		(404	)
Accumulated deficit		(201,104	)		(196,158	)
Total Neonode Inc. stockholders’ equity		10,704			15,113
Noncontrolling interests		(3,639	)		(3,223	)
Total stockholders’ equity		7,065			11,890
Total liabilities and stockholders’ equity	$	10,227		$	16,572

The accompanying notes are an integral part of these condensed consolidated financial statements.

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
Revenues:
License fees	$	821		$	1,207		$	3,474		$	3,050
Products		136			284			837			450
Non-recurring engineering		5			4			36			47
Total revenues		962			1,495			4,347			3,547

Cost of revenues:
Products		98			198			580			306
Non-recurring engineering		1			3			17			62
Total cost of revenues		99			201			597			368

Total gross margin		863			1,294			3,750			3,179

Operating expenses:
Research and development		1,015			901			3,536			2,939
Sales and marketing		640			604			2,197			1,797
General and administrative		1,030			1,535			3,264			3,034

Total operating expenses		2,685			3,040			8,997			7,770
Operating loss		(1,822	)		(1,746	)		(5,247	)		(4,591	)

Other expense:
Interest expense		3			11			11			25
Total other expense		3			11			11			25

Loss before provision (benefit) for income taxes		(1,825	)		(1,757	)		(5,258	)		(4,616	)

Provision (benefit) for income taxes		31			(9	)		104			10
Net loss including noncontrolling interests		(1,856	)		(1,748	)		(5,362	)		(4,626	)
Less: Net loss attributable to noncontrolling interests		135			110			416			366
Net loss attributable to Neonode Inc.	$	(1,721	)	$	(1,638	)	$	(4,946	)	$	(4,260	)
Preferred dividends		-			(33	)		-			(33	)
Net loss attributable to common shareholders of Neonode Inc.		(1,721	)		(1,671	)		(4,946	)		(4,293	)

Loss per common share:
Basic and diluted loss per share	$	(0.15	)	$	(0.16	)	$	(0.43	)	$	(0.45	)
Basic and diluted – weighted average number of common shares outstanding		11,542			10,128			11,517			9,492

The accompanying notes are an integral part of these condensed consolidated financial statements.

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2021			2020			2021			2020
Net loss	$	(1,856	)	$	(1,748	)	$	(5,362	)	$	(4,626	)

Other comprehensive income (loss):
Foreign currency translation adjustments		(37	)		(228	)		(147	)		(251	)
Comprehensive loss		(1,893	)		(1,976	)		(5,509	)		(4,877	)
Less: Comprehensive loss attributable to noncontrolling interests		135			110			416			366
Comprehensive loss attributable to Neonode Inc.	$	(1,758	)	$	(1,866	)	$	(5,093	)	$	(4,511	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except for Preferred Stock Shares Issued¹)

(Unaudited)

For the Quarter to Date periods ended September 30, 2020 through September 30, 2021

	Preferred Stock Shares Issued			Preferred Stock Amount			Common Stock Shares Issued		Common Stock Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Neonode Inc. Stockholders’ Equity			Noncontrolling Interests			Total Stockholders’ Equity
Balances, December 31, 2019		-		$	-			9,171	$	9	$	197,543		$	(639	)	$	(190,520	)	$	6,393		$	(2,546	)	$	3,847

Foreign currency translation adjustment		-			-			-		-		-			(87	)		-			(87	)		-			(87	)

Net loss		-			-			-		-		-			-			(1,010	)		(1,010	)		(102	)		(1,112	)

Balances, March 31, 2020		-		$	-			9,171	$	9	$	197,543		$	(726	)	$	(191,530	)	$	5,296		$	(2,648	)	$	2,648

Foreign currency translation adjustment		-			-			-		-		-			64			-			64			-			64

Net loss		-			-			-		-		-			-			(1,612	)		(1,612	)		(154	)		(1,766	)

Balances, June 30, 2020		-		$	-			9,171	$	9	$	197,543		$	(662	)	$	(193,142	)	$	3,748		$	(2,802	)	$	946

Issuance of shares for cash, net of offering costs		3,932			3,932			1,612		1		9,597			-			-			13,530			-			13,530

Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest		517			517			-		-		(1	)		-			-			516			-			516

Conversion of Series C-1 and C-2 Preferred Stock to common stock		(4,449	)		(4,449	)		684		1		4,448			-			-			-			-			-

Preferred dividends		-			-			-		-		-			-			(33	)		(33	)		-			(33	)

Foreign currency translation adjustment		-			-			-		-		-			(228	)		-			(228	)		-			(228	)

Net loss		-			-			-		-		-			-			(1,638	)		(1,638	)		(110	)		(1,748	)

Balances, September 30, 2020		-		$	-			11,467	$	11	$	211,587		$	(890	)	$	(194,813	)	$	15,895		$	(2,912	)	$	12,983

Stock-based compensation		-			-			37		1		76			-			-			77			-			77

Foreign currency translation adjustment		-			-			-		-		-			486			-			486			-			486

Net loss		-			-			-		-		-			-			(1,345	)		(1,345	)		(311	)		(1,656	)

Balances, December 31, 2020		-		$	-			11,504	$	12	$	211,663		$	(404	)	$	(196,158	)	$	15,113		$	(3,223	)	$	11,890

Stock-based compensation		-			-			-		-		23			-			-			23			-			23

Foreign currency translation adjustment		-			-			-		-		-			(166	)		-			(166	)		-			(166	)

Net loss		-			-			-		-		-			-			(1,568	)		(1,568	)		(102	)		(1,670	)

Balances, March 31, 2021		-		$	-			11,504	$	12	$	211,686		$	(570	)	$	(197,726	)	$	13,402		$	(3,325	)	$	10,077

Stock-based compensation		-			-			-		-		22			-			-			22			-			22

Foreign currency translation adjustment		-			-			-		-		-			56			-			56			-			56

Net loss		-			-			-		-		-			-			(1,657	)		(1,657	)		(179	)		(1,836	)

Balances, June 30, 2021		-		$	-			11,504	$	12	$	211,708		$	(514	)	$	(199,383	)	$	11,823		$	(3,504	)	$	8,319

Issuance of common stock under the ATM, net		-			-			94		-		593			-			-			593			-			593

Stock-based compensation		-			-			13		-		46			-			-			46			-			46

Foreign currency translation adjustment		-			-			-		-		-			(37	)		-			(37	)		-			(37	)

Net loss		-			-			-		-		-			-			(1,721	)		(1,721	)		(135	)		(1,856	)

Balances, September 30, 2021		-		$	-			11,611	$	12	$	212,347		$	(551	)	$	(201,104	)	$	10,704		$	(3,639	)	$	7,065

The accompanying notes are an integral part of these condensed consolidated financial statements.

Preferred Shares Issued per series can be found under the equity footnote (see Note 3).

NEONODE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine months ended September 30,
	2021			2020
Cash flows from operating activities:
Net loss (including noncontrolling interests)	$	(5,362	)	$	(4,626	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		91			-
Depreciation and amortization		530			567
Amortization of operating lease right-of-use assets		386			289
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue, net		970			284
Projects in process		-			(3	)
Inventory		(1,249	)		(55	)
Prepaid expenses and other current assets		524			(248	)
Accounts payable and accrued expenses		(371	)		310
Deferred revenues		(1	)		73
Operating lease obligations		(492	)		(298	)
Net cash used in operating activities		(4,974	)		(3,707	)

Cash flows from investing activities:
Purchase of property and equipment		(67	)		(17	)
Net cash used in investing activities		(67	)		(17	)

Cash flows from financing activities:
Proceeds from issuance of preferred and common stock, net of offering costs		593			13,530
Proceeds from short term borrowings		-			966
Proceeds from short term tax credits		-			542
Payments on short term borrowings		-			(516	)
Payments on short term tax credits		-			(557	)
Principal payments on finance lease obligations		(426	)		(185	)
Payment of preferred dividend		-			(2	)
Net cash provided by financing activities		167			13,778

Effect of exchange rate changes on cash		(103	)		(199	)

Net increase (decrease) in cash		(4,977	)		9,855
Cash at beginning of period		10,473			2,357
Cash at end of period	$	5,496		$	12,212

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	104		$	10
Cash paid for interest	$	11		$	25
Supplemental disclosure of non-cash investing and financing activities:
Short-term borrowings and accrued interest settled for Series C-2 Preferred Stock	$	-		$	516
Accrual of dividends	$	-		$	31
Right-of-use asset obtained in exchange for lease obligation	$	-		$	25

The accompanying notes are an integral part of these condensed consolidated financial statements.

NEONODE INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Interim Period Reporting

The accompanying unaudited interim condensed consolidated financial statements include all adjustments consisting of normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods presented. The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results for a full fiscal year or any other period.

The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 have been prepared by us, pursuant to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Operations

Neonode Inc., which is collectively with its subsidiaries referred to as “Neonode” or the “Company” in this report, develops advanced optical sensing solutions for contactless touch, touch, gesture sensing, and scene analysis solutions using advanced machine learning algorithms to detect and track persons and objects in video streams for cameras and other types of imagers. We market and sell our contactless touch, touch, and gesture sensing products and solutions using our zForce technology platform, and our scene analysis solutions using our MultiSensing technology platform. We offer our solutions to customers in many different markets and segments including, but not limited to, consumer electronics, office equipment, automotive, industrial automation, medical, military and avionics.

In our operations, we have historically focused on three different business areas, human machine interface (“HMI”) Solutions, HMI Products and Remote Sensing Solutions. On May 4, 2021, we announced a new strategy and organizational update targeting an increased focus on the Company’s contactless touch business and on current market opportunities in North America (“AMER”), Asia-Pacific (“APAC”), and Europe, Middle East and Africa (“EMEA”). We thereby changed from a business area organization to a regional sales organization going forward. Revenues are however primarily monitored for each of our revenue streams consisting of license fees, product sales and non-recurring engineering fees.

Liquidity

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 $4.9 million and $1.6 million and $4.3 million for the three and nine months ended September 30, 2021 and 2020, respectively, and had an accumulated deficit of approximately $201.1 million and $196.2 million as of September 30, 2021 and December 31, 2020, respectively. In addition, operating activities used cash of approximately $5.0 million and $3.7 million for the nine months ended September 30, 2021 and 2020, respectively.

During the three and nine months ended September 30, 2021, we sold an aggregate of 93,553 shares of common stock under our at-the-market (the “ATM Facility”) with B. Riley Securities, Inc. (“B. Riley Securities”), resulting in net proceeds of approximately $593,000 to us after payment of commissions to B. Riley Securities of $18,000.

During October 2021 we sold an aggregate of 142,169 shares under the ATM Facility with aggregate net proceeds to us of $1,396,000 after payment of commissions to B. Riley Securities of $43,000.

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.

Management evaluated the significance of the Company’s operating loss and determined that the Company’s current operating plan and sources of potential capital would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern.

In the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available to us on acceptable terms, or at all, we may be unable to adequately fund our business plans, which could have a negative effect on our business, results of operations and financial condition. If funds are available through the issuance of equity or debt securities, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

We expect revenues will enable us to reduce our operating losses in coming years. In addition, we intend to continue to implement various measures to improve our operational efficiencies. No assurances can be given that management will be successful in meeting its revenue targets and reducing its operating loss.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of Neonode Inc. and its wholly-owned subsidiaries, as well as Pronode Technologies AB, a 51% majority owned subsidiary of Neonode Technologies AB. The remaining 49% of Pronode Technologies AB is owned by 2X Communication AB, located in Gothenburg, Sweden. Pronode Technologies AB was organized to manufacture and sell our touch sensor modules (“TSM”). All inter-company accounts and transactions have been eliminated in consolidation.

Neonode consolidates entities in which it has a controlling financial interest. We consolidate subsidiaries in which we hold, directly or indirectly, more than 50% of the voting rights.

The condensed consolidated balance sheets at September 30, 2021 and December 31, 2020 and the condensed consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the three and nine months ended September 30, 2021 and 2020 include our accounts and those of our wholly-owned subsidiaries as well as Pronode Technologies AB.

Estimates and Judgments

The preparation of financial statements in conformity with U.S. GAAP requires making estimates and judgments that affect, at the date of the financial statements, the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates and judgments.

Significant estimates and judgments include, but are not limited to: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, the standalone selling price of performance obligations, and transaction prices and assessing transfer of control; measuring variable consideration and other obligations such as product returns and refunds, and product warranties; provisions for uncollectible receivables; determining the net realizable value of inventory; recoverability of capitalized project costs and long-lived assets; for leases, determining whether a contract contains a lease, allocating consideration between lease and non-lease components, determining incremental borrowing rates, and identifying reassessment events, such as modifications; the valuation allowance related to our deferred tax assets; and the fair value of options issued as stock-based compensation.

Cash and Cash Equivalents

We have not had any liquid investments other than normal cash deposits with bank institutions to date. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Concentration of Cash Balance Risks

Cash balances are maintained at various banks in the U.S., Japan, Taiwan and Sweden. For deposits held with financial institutions in the U.S., the U.S. Federal Deposit Insurance Corporation provides basic deposit coverage with limits up to $250,000 per owner. The Swedish government provides insurance coverage up to 1,050,000 Krona per customer and covers deposits in all types of accounts. For bank accounts of the category held by Neonode, the Japanese government provides full insurance coverage. The Central Deposit Insurance Corporation in Taiwan provides insurance coverage up to 3,000,000 Taiwan Dollar per customer. At times, deposits held with financial institutions may exceed the amount of insurance provided.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable is stated at net realizable value. Our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments. Credit limits are established through a process of reviewing the financial history and stability of each customer. Should all efforts fail to recover the related receivable, we will write off the account. We also record an allowance for all customers based on certain other factors including the length of time the receivables are past due and historical collection experience with customers. Our allowance for doubtful accounts was approximately $79,000 as of September 30, 2021 and December 31, 2020.

Projects in Process

Projects in process consist of costs incurred toward the completion of various projects for certain customers. These costs are primarily comprised of direct engineering labor costs and project-specific equipment costs. These costs are capitalized on our balance sheet as an asset and deferred until revenue for each project is recognized in accordance with our revenue recognition policy. There were no costs capitalized to projects in process as of September 30, 2021 and December 31, 2020.

Inventory

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.

Inventory is stated at the lower of cost or net realizable value, using the first-in, first-out (“FIFO”) valuation method. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Any adjustments to reduce the cost of inventories to their net realizable value are recognized in earnings in the current period.

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. Management has further decided to reserve for a portion of AirBar finished goods, depending on type of AirBar and in which location it is stored. The AirBar inventory reserve was $0.8 million and $0.9 million as of September 30, 2021 and December 31, 2020, respectively.

To protect our manufacturing partner from losses in relation to AirBar production, we agreed to secure the value of the inventory with a bank guarantee covering the production of 20,000 AirBars. Excess inventory was purchased from our manufacturing partner in 2019 and has been fully reserved.

Raw materials, work-in-process, and finished goods are as follows (in thousands):

	September 30,		December 31,
	2021		2020
Raw materials	$	1,126	$	550
Work-in-process		-		21
Finished goods		1,276		702
Ending inventory	$	2,402	$	1,273

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows:

Estimated useful lives

Computer equipment			3 years
Furniture and fixtures			5 years
Equipment			7 years

Equipment purchased under a finance lease is recognized over the term of the lease if that lease term is shorter than the estimated useful life.

Upon retirement or sale of property and equipment, cost and accumulated depreciation and amortization are removed from the accounts and any gains or losses are reflected in the condensed consolidated statement of operations. Maintenance and repairs are charged to expense as incurred.

Right of Use Assets

A right-of-use asset represents a lessee’s right to use a leased asset for the term of the lease. Our right-of-use assets generally consist of operating leases for buildings and finance leases for manufacturing equipment.

Right-of-use assets are measured initially at the present value of the lease payments, plus any lease payments made before a lease began and any initial direct costs, such as commissions paid to obtain a lease.

Right-of-use assets are subsequently measured at the present value of the remaining lease payments, adjusted for incentives, prepaid or accrued rent, and any initial direct costs not yet expensed.

Long-lived Asset Recoverability

We assess the recoverability of long-lived assets by estimating the future cash flows from the associated assets in accordance with relevant accounting guidance. If the estimated undiscounted future cash flows related to these assets decreases or the useful life is shorter than originally estimated, we may incur charges for impairment of these assets. As of September 30, 2021, we believe there was no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or sufficient demand for our products and services will continue, which could result in impairment of long-lived assets in the future.

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 and 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 $(37,000) and $(147,000) and $(228,000) and $(251,000) during the three and nine months ended September 30, 2021 and 2020, respectively. Gains (losses) resulting from foreign currency transactions are included in general and administrative expenses in the accompanying condensed consolidated statements of operations and were $40,000 and $68,000 during the three and nine months ended September 30, 2021, respectively, compared to $(135,000) and $(149,000) during the same periods in 2020, respectively.

Concentration of Credit and Business Risks

Our customers are located in the U.S., Europe and Asia.

As of September 30, 2021, five customers represented approximately 82% of our consolidated accounts receivable and unbilled revenues.

As of December 31, 2020, three customers represented approximately 62% of our consolidated accounts receivable and unbilled revenues.

Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2021 are as follows:

	●	Hewlett Packard Company: 34%

	●	Seiko Epson Corporation: 25%

●

LG Electronics Inc.: 10%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2021 are as follows:

	●	Hewlett Packard Company: 32%

	●	Seiko Epson Corporation: 17%

	●	LG Electronics Inc.: 13%

Customers who accounted for 10% or more of our net revenues during the three months ended September 30, 2020 are as follows:

	●	Hewlett Packard Company – 31%

	●	LG Electronics – 16%

	●	Seiko Epson Corporation – 13%

	●	Alpine Electronics, Inc – 12%

Customers who accounted for 10% or more of our net revenues during the nine months ended September 30, 2020 are as follows:

	●	Hewlett Packard Company – 32%

	●	Seiko Epson Corporation – 19%

	●	Alpine Electronics, Inc – 15%

Revenue Recognition

We recognize revenue when control of products is transferred to our customers, and when services are completed and accepted by our customers. The amount of revenue we recognize reflects the consideration we expect to receive for those products or services. Our contracts with customers may include combinations of products and services, for example, a contract that includes products and related engineering services. We structure our contracts such that distinct performance obligations, such as product sales or license fees, and related engineering services, are clearly defined in each contract.

License fees for products and sales of AirBar and TSMs are recognized on a per-unit basis; 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.

We recognize revenue net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. We treat all product shipping and handling charges (regardless of when they occur) as activities to fulfill the promise to transfer goods, therefore we treat all shipping and handling charges as expenses.

Revenues from our business areas derive from three different revenue streams: license fees, product sales and non-recurring engineering fees.

Licensing Revenues:

We earn revenue from licensing our internally developed intellectual property (“IP”). Our licensing customer base is primarily in the automotive and printer segments. We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components into their products, with terms and conditions that vary by licensee. Fees under these agreements may include license fees relating to our IP, and royalties payable to us following the distribution by our licensees of products incorporating the licensed technology. The license for our IP has standalone value and can be used by the licensee without maintenance and support.

For technology license arrangements that do not require significant modification or customization of the underlying technology, we recognize technology license revenue when the license is made available to the customer and the customer has a right to use that license. At the end of each reporting period, we record unbilled license fees, using prior royalty revenue data by customer to make estimates of those royalties.

Explicit return rights are not offered to customers. There have been no returns through September 30, 2021.

Product Revenues:

We earn revenue from sales of TSMs to our Original Equipment Manufacturers (“OEMs”) and Tier 1 supplier customers, who embed our hardware into their products and, occasionally, from sales of our AirBar branded consumer products (incorporating our TSM technology) sold through distributors. These distributors are generally given business terms that do not allow them to return unsold inventory. Our sales agreements generally provide customers with limited rights of return and warranty provisions.

The timing of revenue recognition related to sales of TSMs and AirBars depends upon how each sale is transacted - either point-of-sale or through distributors. We recognize revenue for products sold point-of-sale (online sales and other direct sales to customers) when we provide the promised product to the customer.

Because we generally use distributors to provide TSMs and AirBars to our customers, we analyze the terms of distributor agreements to determine when control passes from us to our distributors. For sales of TSMs and AirBars sold through distributors, revenues are recognized 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 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.

Distributors participate in various cooperative marketing and other incentive programs, and we maintain estimated accruals and allowances for these programs. If actual credits received by distributors under these programs were to deviate significantly from our estimates, which are based on historical experience, our revenue could be adversely affected.

Under U.S. GAAP, companies may make reasonable aggregations and approximations of returns data to accurately estimate returns. Our 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 $76,000 as of September 30, 2021 and $78,000 as of December 31, 2020. 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.

Engineering Services Revenues:

For technology license or TSM contracts that require modification or customization of the underlying technology to adapt that technology to the customer’s desired use, we determine whether the technology licensing or TSM sales, and the engineering consulting services represent separate performance obligations. We perform our analysis on a contract-by-contract basis. If there are separate performance obligations, we determine the standalone selling price (“SSP”) of each separate performance obligation to properly recognize revenue as each performance obligation is satisfied. We provide engineering consulting services to our customers under a signed Statement of Work (“SOW”). Deliverables and payment terms are specified in each SOW. We generally charge an hourly rate or a flat rate for engineering services, and we recognize revenue as the engineering services specified in the contracts are completed and accepted by our customers. Any upfront payments we receive for future non-recurring engineering services are recorded as unearned revenue until that revenue is earned.

We believe that recognizing non-recurring engineering service revenues as progress towards completion of engineering services and when customer acceptance of those services occurs best reflects the economics of those transactions, because engineering services as tracked in our systems correspond directly with the value to our customers of our performance completed to date. Hours performed for each engineering project are tracked and reflect progress made on each project and are charged at a consistent hourly rate.

Revenues from engineering services contracts that are short-term in nature are recorded when those services are complete and accepted by customers.

Revenues from engineering services contracts with substantive defined deliverables for which payment terms in the SOW are commensurate with the efforts required to produce such deliverables are recognized as they are completed and accepted by customers.

Estimated losses on all SOW projects are recognized in full as soon as they become evident. During the three and nine months ended September 30, 2021 and 2020, no losses related to SOW projects were recorded.

The following tables present disaggregated revenues by market for the three and nine months ended September 30, 2021 and 2020 (dollars in thousands):

	Three months ended September 30, 2021					Three months ended September 30, 2020
	Amount		Percentage			Amount		Percentage
AMER
Net revenues from consumer electronics	$	376		98	%	$	452		93	%
Net revenues from distributors and other		8		2	%		35		7	%
	$	384		100	%	$	487		100	%

APAC
Net revenues from automotive	$	164		31	%	$	409		50	%
Net revenues from consumer electronics		246		47	%		217		26	%
Net revenues from distributors and other		113		22	%		199		24	%
	$	523		100	%	$	825		100	%

EMEA
Net revenues from automotive	$	34		62	%	$	129		70	%
Net revenues from medical		21		38	%		54		30	%
Net revenues from distributors and other		-		-	%		-		-	%
	$	55		100	%	$	183		100	%

	Nine months ended September 30, 2021					Nine months ended September 30, 2020
	Amount		Percentage			Amount		Percentage
AMER
Net revenues from consumer electronics	$	1,534		92	%	$	1,243		92	%
Net revenues from distributors and other		125		8	%		101		8	%
	$	1,659		100	%	$	1,344		100	%

APAC
Net revenues from automotive	$	987		42	%	$	807		46	%
Net revenues from consumer electronics		738		32	%		712		41	%
Net revenues from distributors and other		615		26	%		224		13	%
	$	2,340		100	%	$	1,743		100	%

EMEA
Net revenues from automotive	$	239		69	%	$	289		63	%
Net revenues from medical		95		27	%		159		34	%
Net revenues from distributors and other		14		4	%		12		3	%
	$	348		100	%	$	460		100	%

Significant Judgments

Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract is 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. 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. We currently have no outstanding contracts with multiple performance obligations.

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.

Contract Balances

Timing of revenue recognition may differ from the timing of invoicing to customers. We record a receivable when we have an unconditional right to receive future payments from customers, and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our customers.

The following table presents accounts receivable and deferred revenues as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
Accounts receivable and unbilled revenue	$	763	$	1,743
Deferred revenues		134		138

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled revenues (contract assets), and customer advances and deposits or deferred revenue (contract liabilities) on the consolidated balance sheets. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets; contract assets are generally classified as current. The Company sometimes receives advances or deposits from its customers before revenue is recognized, which are reported as contract liabilities and are generally classified as current. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.

We do not anticipate impairment of our contract asset related to license fee revenues, given the creditworthiness of our customers whose invoices comprise the balance in that asset account. We will continue to monitor the timeliness of receipts from those customers, however, to assess whether the contract asset has been impaired.

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Our allowance for doubtful accounts was approximately $79,000 as of September 30, 2021 and December 31, 2020.

Payment terms and conditions vary by the type of contract; however, payments generally occur 30-60 days after invoicing for license fees and TSMs to our resellers and distributors. Where revenue recognition timing differs from invoice timing, we have determined that our contracts do not include a significant financing component. Our intent is to provide our customers with consistent invoicing terms for the convenience of our customers, not to receive financing from our customers.

Costs to Obtain Contracts

We record the incremental costs of obtaining a contract with a customer as an asset, if we expect the benefit of those costs to cover a period greater than one year. We currently have no incremental costs that must be capitalized.

We expense as incurred costs of obtaining a contract when the amortization period of those costs would have been less than or equal to one year.

Product Warranty

The following table summarizes the activity related to the product warranty liability (in thousands):

	September 30, 2021		December 31, 2020
Balance at beginning of period	$	25	$	24
Provisions for warranty issued		14		1
Balance at end of period	$	39	$	25

The Company accrues for warranty costs as part of its cost of sales of TSMs based on estimated costs. The Company’s products are generally covered by a warranty for a period of 12 months from the customer receipt of the product.

Deferred Revenues

Deferred revenues consist primarily of prepayments for license fees, and other products or services for which we have been paid in advance and 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 license. Engineering development fee revenues are deferred until engineering services have been completed and accepted by our customers.

The following table presents our deferred revenues (in thousands):

	September 30, 2021		December 31, 2020
Deferred revenues license fees	$	28	$	28
Deferred revenues products		76		88
Deferred revenues non-recurring engineering		30		22
	$	134	$	138

During the three and nine months ended September 30, 2021, the Company recognized revenues of approximately $0 and $26,000, respectively, related to contract liabilities outstanding at the beginning of the year.

Advertising

Advertising costs are expensed as incurred. Advertising costs for the three and nine months ended September 30, 2021 and 2020 amounted to approximately $12,000 and $70,000 and $27,000 and $43,000, respectively.

Research and Development

Research and development (“R&D”) costs are expensed as incurred. R&D costs consist primarily of personnel related costs in addition to external consultancy costs such as testing, certifying and measurements.

Stock-Based Compensation Expense

We measure the cost of employee services received in exchange for an award of equity instruments, including share options, based on the estimated fair value of the award on the grant date, 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.

We account for equity instruments issued to non-employees at their estimated fair value.

When determining stock-based compensation expense involving options and warrants, we determine the estimated fair value of options and warrants using the Black-Scholes option pricing model.

Noncontrolling Interests

We recognize any noncontrolling interest, also known as a minority interest, as a separate line item in 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 represents less than 50% of the outstanding voting shares of an entity 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 condensed consolidated statement of stockholders’ equity, if presented, or in the notes to condensed 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 noncontrolling interest that separately discloses:

	(1)	Net income or loss;

	(2)	Transactions with owners acting in their capacity as owners, showing separately contributions from and distributions to owners; and

	(3)	Each component of other comprehensive income or loss.

Income taxes

We recognize deferred tax liabilities and assets for the expected future tax consequences of items that have been included in our consolidated financial statements or tax returns. We estimate income taxes based on rates in effect in each of the jurisdictions in which we operate. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded against net deferred tax assets when, in our opinion, realization is uncertain based on the “more likely than not” criteria of the accounting guidance.

Based on the uncertainty of future pre-tax income, we fully reserved our net deferred tax assets as of September 30, 2021 and December 31, 2020. In the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made. The provision for income taxes represents the net change in deferred tax amounts, plus income taxes paid or payable for the current period.

We follow U.S. GAAP related accounting for uncertainty in income taxes, which provisions include a two-step approach to recognizing, de-recognizing and measuring uncertainty in income taxes. As a result, we did not recognize a liability for unrecognized tax benefits. As of September 30, 2021 and December 31, 2020, we had no unrecognized tax benefits.

Net Loss per Share

Net loss per share amounts have been computed based on the weighted average number of shares of common stock outstanding during the three and nine months ended September 30, 2021 and 2020, respectively. 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 the three and nine months ended September 30, 2021 and 2020 exclude the potential common stock equivalents, as the effect would be anti-dilutive (see Note 8).

Other Comprehensive Income (Loss)

Our other comprehensive income (loss) includes foreign currency translation gains and losses. The cumulative amount of translation gains and losses are reflected as a separate component of stockholders’ equity in the condensed consolidated balance sheets.

Cash Flow Information

Cash flows in foreign currencies have been converted to U.S. Dollars at an approximate weighted-average exchange rate for the respective reporting periods. The weighted-average exchange rate for the condensed consolidated statements of operations was as follows:

	Nine months ended September 30,
	2021		2020
Swedish Krona		8.49		9.41
Japanese Yen		108.53		107.52
South Korean Won		1,131.90		1,199.94
Taiwan Dollar		28.00		29.78

Exchange rate for the consolidated balance sheets was as follows:

	As of
	September 30,		December 31,
	2021		2020
Swedish Krona		8.77		8.22
Japanese Yen		111.44		103.23
South Korean Won		1,185.22		1,088.29
Taiwan Dollar		27.85		28.09

Fair Value of Financial Instruments

We disclose the estimated fair values for all financial instruments for which it is practicable to estimate fair value. Financial instruments including cash, accounts receivable, accounts payable and accrued expenses are deemed to approximate fair value due to their short maturities.

New Accounting Pronouncements

In September 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”), supplemented by subsequent accounting standards updates. The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13, as amended, is scheduled to become effective for fiscal years beginning after December 15, 2023, with early adoption permitted. In the future, we will evaluate the impact that ASU 2016-13, as amended, will have on our consolidated financial statements, specifically regarding our trade receivables; however, we do not expect any significant impact from implementation of the new standard at this time.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Tax, which simplifies the accounting for income taxes. We adopted ASU 2019-12 on January 1, 2021 and the adoption of this ASU did not have a significant impact on our consolidated financial statements.

3. Stockholders’ Equity

At-the-Market Facility

On May 10, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities with respect to, 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 $25.0 million of shares of our common stock through the ATM Facility.

Pursuant to the Sale Agreement, we may sell the shares through B. Riley Securities by any method permitted that is deemed an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended. B. Riley Securities will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the shares from time to time, based upon instructions from us (including any price or size limits or other customary parameters or conditions we may impose). We will pay B. Riley Securities a commission of 3.0% of the gross sales price per share sold under the Sales Agreement.

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 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.

2020 Private Placement

On August 7, 2020, we closed a private placement (the “Private Placement”) with certain institutional and accredited investors. We issued a total of 1,611,845 shares of common stock at a price of $6.50 per share, and a total of 365 shares of Series C-1 Preferred Stock and 3,050 shares of Series C-2 Preferred Stock, each with a conversion price of $6.50 per share and a stated value of $1,000 per share, for approximately $13.9 million in aggregate gross proceeds.

Common Stock

At our annual meeting of stockholders held on September 29, 2020, stockholders approved a proposal to increase the number of authorized shares of our common stock to 25,000,000 shares. Accordingly, on November 5, 2020, we filed an amendment to the Neonode Inc. Restated Certificate of Incorporation, as amended (our “Certificate of Incorporation”), with the Secretary of State of the State of Delaware to increase the number of authorized shares of our common stock to 25,000,000 shares.

On December 29, 2020, we issued 37,288 shares of our common stock to key employees pursuant to our 2020 long-term incentive program (“2020 LTIP”) (see Note 4).

On August 12, 2021, we issued 12,830 shares of our common stock to key employees pursuant to our 2020 LTIP (see Note 4).

During the three and nine months ended September 30, 2021, we sold an aggregate of 93,553 shares of common stock under the ATM Facility, resulting in net proceeds to us of approximately $593,000 after payment of commissions to B. Riley of $18,000.

Preferred Stock

On August 6, 2020, in connection with the closing of the Private Placement, we designated (i) 365 shares of our authorized and unissued preferred stock as Series C-1 Preferred Stock by filing a Series C-1 Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware and (ii) 4,084 shares of our authorized and unissued preferred stock as Series C-2 Preferred Stock by filing a Series C-2 Certificate of Designation of Preferences, Rights and Limitations with the Secretary of State of the State of Delaware.

On September 24 and 29, 2020, respectively, the Series C-1 Preferred Stock and Series C-2 Preferred Stock (together, the “Series C Preferred Shares”) were converted into an aggregate of 684,378 shares of Neonode common stock.

The holders of the Series C-1 and C-2 Preferred Shares were entitled to receive dividends at the rate per share of 5% per annum, totaling $33,000. As of December 31, 2020, all of the preferred dividends had been paid.

On December 7, 2020, we filed Certificates of Elimination with the Secretary of State of the State of Delaware to eliminate the Series A Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock and Series C-2 Preferred Stock.

There were no transactions in our preferred stock during the three and nine months ended September 30, 2021 and 2020. No shares of preferred stock were issued and outstanding as of September 30, 2021.

Details of the preferred stock activities are set forth below:

	Series C-1 Preferred Stock Shares Issued			Series C-1 Preferred Stock Amount			Series C-2 Preferred Stock Shares Issued			Series C-2 Preferred Stock Amount
Balances, December 31, 2019		-			-			-			-
Issuance of Preferred Shares for cash		365			365			3,567			3,567
Series C-2 Preferred Stock issued for repayment of short-term borrowings and accrued interest		-			-			517			517
Conversion of Preferred Shares to common stock		(365	)		(365	)		(4,084	)		(4,084	)
Balances, December 31, 2020		-		$	-			-		$	-

Warrants

As of September 30, 2021 and December 31, 2020, the Company had outstanding warrants to purchase 431,638 shares of common stock outstanding.

4. Stock-Based Compensation

We have adopted equity incentive plans under which we may grant stock options and restricted stock awards to employees, consultants and directors. Except for certain options granted to certain Swedish employees, all employee, consultant and director stock options granted under our stock option plans have an exercise price equal to the market value of the underlying common stock on the grant date. There are no vesting provisions tied to performance conditions for any options, as vesting for all outstanding option grants was based solely on continued service as an employee, consultant or director. All of our outstanding stock options and restricted stock awards are classified as equity instruments.

Stock Options

During the year ended December 31, 2020, our stockholders approved the Neonode Inc. 2020 Stock Incentive Plan (the “2020 Plan”), which replaced our 2015 Stock Incentive Plan (the “2015 Plan”), which in turn replaced our Neonode Inc. 2006 Equity Incentive Plan (the “2006 Plan”). Although no new awards may be made under the 2015 or 2006 Plans, these plans are still operative for awards previously granted under those plans. Under the 2020 Plan, 750,000 shares of common stock have been reserved for awards, including nonqualified stock option grants and restricted stock grants to officers, employees, non-employee directors and consultants. The terms of the awards granted under the 2020 Plan are set by our compensation committee at its discretion.

In 2020 we established the 2020 LTIP to provide eligible persons with the opportunity to acquire an equity interest, or otherwise increase their equity interest, in the Company as an incentive for them to remain in the service of the Company. Under the 2020 LTIP, eligible employees of Neonode may waive between 50% to 67% of any future unearned bonuses that may be awarded to them under the Company’s annual bonus arrangement in exchange for the grant of shares of the Company’s common stock under the Company’s 2020 Plan.

On December 29, 2020, we issued 37,288 shares of common stock to key employees pursuant to the 2020 LTIP. The shares were immediately vested but subject to a two-year lock-up period after issuance. In the event the participant’s employment with the Company is terminated by the participant during the two-year lock-up period, the Company will repurchase the shares at a price equal to 30% of the lower of market value at issuance and the termination date. The shares issued on December 29, 2020 represent two-thirds of the total shares available for issuance to these employees under the 2020 LTIP and the last one-third is planned to be issued at the end of December 2021.

On August 12, 2021, we issued 12,830 shares of common stock to a key employee pursuant to the 2020 LTIP. The shares were immediately vested but subject to a two-year lock-up period after issuance. In the event the participant’s employment with the Company is terminated by the participant during the two-year lock-up period, the Company will repurchase the shares at a price equal to 30% of the lower of market value at issuance and the termination date. The shares issued on August 12, 2021 represent two-thirds of the total shares available for issuance under the 2020 LTIP to this employee and the last one-third is planned to be issued at the end of December 2021.

The Company has reported and paid Swedish social charges of $75,000 for the issued shares but only 30% of the stock-based compensation (totaling $77,000) was included in the consolidated statements of operations for the year ended December 31, 2020, with the remainder to be recognized ratably over the two-year lock-up period.

The Company has reported and paid Swedish social charges of $21,000 for the issued shares but only 30% and two twenty-fourth of 70% of the stock-based compensation (totaling $25,000) was included in the consolidated statements of operations for the three and nine months ended September 30, 2021, with the remainder to be recognized ratably over the remainder of the two-year lock-up period.

For the three and nine months ended September 30, 2021, $46,000 and $91,000, respectively, of stock-based compensation was included in our condensed consolidated statements of operations. Unrecognized compensation expense related to the 2020 LTIP as of September 30, 2021 was $156,000, which will be recognized over two years from issuance of the shares of common stock.

A summary of the combined activity under all of our stock option plans is set forth below:

	Number of Options Outstanding			Weighted Average Exercise Price
Outstanding at January 1, 2021		10,500		$	29.61
Expired		(1,000	)		61.10
Outstanding at September 30, 2021		9,500		$	26.19

The aggregate intrinsic value of the 9,500 stock options that are outstanding, vested and expected to vest as of September 30, 2021 was $0.

For the three and nine months ended September 30, 2021 and 2020, we recorded no compensation expense related to the vesting of stock options.

During the three and nine months ended September 30, 2021, we did not grant any options to purchase shares of our common stock to employees or members of our board of directors.

Stock options granted under the 2006, 2015 and 2020 Plans are exercisable over a maximum term of ten years from the date of grant, vest in various installments over a one to four-year period and have exercise prices reflecting the market value of the shares of common stock on the date of grant.

5. Commitments and Contingencies

Litigation

On September 2, 2020, a putative stockholder of Neonode filed a purported class action lawsuit (Case No. 1:20-cv-01174-UNA) in the United States District Court for the District of Delaware against Neonode, the Board of Directors of Neonode, and the Chief Executive Officer of Neonode for alleged violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, in connection with disclosure of information concerning Proposal 5 and Proposal 6 in the proxy statement filed with the SEC by Neonode on August 20, 2020 for the 2020 Annual Meeting of Stockholders of Neonode (the “Proxy Statement”). These proposals for shareholder approval related to the Private Placement by Neonode on August 5, 2020 in which two directors and the chief executive officer of Neonode participated. The relief sought by the plaintiff included a preliminary injunction to enjoin the stockholder votes on Proposal 5 and Proposal 6. On October 20, 2020, the plaintiff voluntarily dismissed the lawsuit in the United States District Court. However, on February 11, 2021, the plaintiff’s counsel informed Neonode that they would file a fee petition as a result of Neonode filing the definitive additional materials to the Proxy Statement on September 18, 2020. On September 9, 2021, the plaintiff’s counsel filed a complaint in the Supreme Court of the State of New York, County of Nassau, to recover plaintiff’s attorneys’ fees and expenses in the amount of $400,000 incurred in connection with the Proceeding. On November 3, 2021, the Company entered into a settlement agreement with plaintiff’s counsel, which was accrued for as of September 30, 2021. On November 4, 2021, the case was dismissed with prejudice.

Indemnities and Guarantees

Our bylaws require that we indemnify each of our executive officers and directors for certain events or occurrences arising because of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have a directors’ and officers’ liability insurance policy that should enable us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal and we have no liabilities recorded for these agreements as of September 30, 2021 and December 31, 2020.

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, customers and landlords. Under these provisions we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by us regarding intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these indemnification provisions as of September 30, 2021 and December 31, 2020.

One of our manufacturing partners has previously purchased material for the final assembly of AirBars. To protect the manufacturer from losses in relation to AirBar production, we agreed to secure the value of the inventory in a bank guarantee. At September 30, 2021, the guaranteed amount is $100,000 and represents the value of the remaining material in inventory at September 30, 2021.

Management’s judgment is that the bank guarantee is a contingent guarantee and management will record a liability when it is probable that we will have to purchase the inventory. As of November 10, 2021, management’s judgment is that we will sell the remaining AirBars and purchase the components and the assembly service from the manufacturing partner. No liability has therefore been recorded for the period ended September 30, 2021.

Patent Assignment

On May 6, 2019, the Company assigned a portfolio of patents to Aequitas Technologies LLC. The assignment provides the Company the right to share potential proceeds generated from a licensing and monetization program.

On June 8, 2020, Neonode Smartphone LLC, a subsidiary of Aequitas Technologies LLC, filed complaints against Apple and Samsung in the Western District of Texas for infringing two patents. These litigation matters are still ongoing.

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

6. Segment Information

We have one reportable segment, which is comprised of the touch technology licensing and TSM business. All of our sales for the three and nine months ended September 30, 2021 and 2020, respectively, were to customers located in the U.S., Europe and Asia. The Company reports revenues from external customers based on the country where the customer is located.

The following table presents net revenues by geographic area for the three and nine months ended September 30, 2021 and 2020, respectively, (dollars in thousands):

	Three months ended September 30, 2021					Three months ended September 30, 2020
	Amount		Percentage			Amount		Percentage
United States	$	385		40	%	$	486		33	%
Japan		362		38	%		395		26	%
South Korea		140		15	%		240		16	%
China		16		2	%		154		10	%
Germany		34		3	%		130		9	%
Switzerland		21		2	%		54		4	%
Taiwan		4		0	%		3		0	%
Other		0		0	%		33		2	%
	$	962		100	%	$	1,495		100	%

	Nine months ended September 30, 2021					Nine months ended September 30, 2020
	Amount		Percentage			Amount		Percentage
United States	$	1,661		38	%	$	1,340		38	%
Japan		1,372		32	%		1,229		35	%
South Korea		660		15	%		267		7	%
China		298		7	%		203		6	%
Germany		233		5	%		274		8	%
Switzerland		95		2	%		161		5	%
Sweden		15		1	%		10		0	%
Other		13		0	%		63		2	%
	$	4,347		100	%	$	3,547		100	%

The following table presents our total assets by geographic region as of September 30, 2021 and December 31, 2020 (in thousands):

	September 30, 2021		December 31, 2020
U.S.	$	5,246	$	7,253
Sweden		4,941		9,210
Asia		40		109
Total	$	10,227	$	16,572

7. Leases

We have operating leases for our corporate offices and our manufacturing facility, and finance leases for equipment. Our leases have remaining lease terms of three to eighteen months. One of our primary operating leases includes options to extend the lease for one to three years and the other primary lease includes an option to annually extend; those operating leases also include options to terminate the leases within one year. Future renewal options that are not likely to be executed as of the balance sheet date are excluded from right-of-use assets and related lease liabilities.

Our operating leases represent building leases for our Stockholm corporate offices and our Kungsbacka manufacturing facility. Our Stockholm corporate office lease has a remaining lease term of 17 months and both of our leases are automatically renewed at a cost increase of 2% on an annual basis, unless we provide written notice nine months prior to the respective expiration dates.

We report operating lease right-of-use assets, as well as current and noncurrent operating lease obligations on our consolidated balance sheets for the right to use those buildings in our business. Our finance leases represent manufacturing equipment; we report the manufacturing equipment, as well as current and noncurrent finance lease obligations on our condensed consolidated balance sheets for our manufacturing equipment.

Generally, interest rates are stated in our leases for equipment. When no interest rate is stated in a lease, however, we review the interest rates implicit in our recent finance leases to estimate our incremental borrowing rate. We determine the rate implicit in a lease by using the most recent finance lease rate, or other method we think most closely represents our incremental borrowing rate.

The components of lease expense were as follows (in thousands):

	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
Operating lease cost ⁽¹⁾	$	174	$	529

Finance lease cost:
Amortization of leased assets	$	130	$	446
Interest on lease liabilities		3		11
Total finance lease cost	$	133	$	457

⁽¹⁾	Includes short-term lease costs of $41,000 and $117,000 for the three and nine months ended September 30, 2021, respectively.

	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
Operating lease cost ⁽¹⁾	$	139	$	381

Finance lease cost:
Amortization of leased assets	$	164	$	467
Interest on lease liabilities		3		15
Total finance lease cost	$	167	$	482

⁽¹⁾	Includes short-term lease costs of $30,000 and $81,000 for the three and nine months ended September 30, 2020, respectively.

Supplemental cash flow information related to leases was as follows (in thousands):

	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021
Cash paid for amounts included in leases:
Operating cash flows from operating leases	$	(150	)	$	(492	)
Operating cash flows from finance leases		(3	)		(11	)
Financing cash flows from finance leases		(131	)		(426	)

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		-			-

	Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
Cash paid for amounts included in leases:
Operating cash flows from operating leases	$	(115	)	$	(298	)
Operating cash flows from finance leases		(3	)		(15	)
Financing cash flows from finance leases		(21	)		(185	)

Right-of-use assets obtained in exchange for lease obligations:
Operating leases		-			-

Supplemental balance sheet information related to leases was as follows (in thousands):

	September 30, 2021			December 31, 2020
Operating leases
Operating lease right-of-use assets	$	488		$	919

Current portion of operating lease obligations	$	314		$	504
Operating lease liabilities, net of current portion		36			377
Total operating lease liabilities	$	350		$	881

Finance leases
Property and equipment, at cost	$	3,569		$	3,806
Accumulated depreciation		(3,193	)		(2,941	)
Property and equipment, net	$	376		$	865

Current portion of finance lease obligations	$	369		$	769
Finance lease liabilities, net of current portion		28			95
Total finance lease liabilities	$	397		$	864

	September 30, 2021			December 31, 2020
Weighted Average Remaining Lease Term
Operating leases		1.2 years			1.6 years
Finance leases		0.4 years			0.8 years

Weighted Average Discount Rate:
Operating leases ⁽²⁾		5	%		5	%
Finance leases		2	%		2	%

⁽²⁾	Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019

A summary of future minimum payments under non-cancellable operating lease commitments as of September 30, 2021 is as follows (in thousands):

Years ending December 31,	Total
2021 (remaining months)	$	66
2022		297
		363
Less imputed interest		(13	)
Total lease liabilities	$	350
Less current portion		(314	)
	$	36

The following is a schedule of minimum future rentals on the non-cancellable finance leases as of September 30, 2021 (in thousands):

Year ending December 31,	Total
2021 (remaining months)	$	210
2022		169
2023		22
Total minimum payments required:		401
Less amount representing interest:		(4	)
Present value of net minimum lease payments:		397
Less current portion		(369	)
	$	28

8. Net Loss per Share

Basic net loss per common share for the three and nine months ended September 30, 2021 and 2020 was computed by dividing the net loss attributable to Neonode for the relevant period by the weighted average number of shares of common stock outstanding. Diluted loss per common share is computed by dividing net loss attributable to Neonode by the weighted average number of shares of common stock and common stock equivalents outstanding.

There were no potentially dilutive common stock equivalents for the three and nine months ended September 30, 2021 and 2020, respectively.

(in thousands, except per share amounts)	Three months ended September 30,
	2021			2020
BASIC AND DILUTED
Weighted average number of common shares outstanding		11,542			10,128
Net loss attributable to Neonode Inc.	$	(1,721	)	$	(1,671	)

Net loss per share - basic and diluted	$	(0.15	)	$	(0.16	)

(in thousands, except per share amounts)	Nine months ended September 30,
	2021			2020
BASIC AND DILUTED
Weighted average number of common shares outstanding		11,517			9,492
Net loss attributable to Neonode Inc.	$	(4,946	)	$	(4,293	)

Net loss per share - basic and diluted	$	(0.43	)	$	(0.45	)

9. Subsequent Events

During October 2021, we sold an aggregate of 142,169 shares under the ATM Facility with aggregate net proceeds to us of $1,396,000 after payment of commissions to B. Riley Securities of $43,000.

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. We received net proceeds of approximately $13.1 million from the Offering after deducting placement agent fees and offering expenses.

No other subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes thereto other than as discussed elsewhere in the accompanying notes.

Item 2. 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. Statements that are not purely historical may be forward-looking. You can identify some forward-looking statements by the use of words such as “believe,” “anticipate,” “expect,” “intend,” “goal,” “plan,” and similar expressions. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to risks relating to the impact of the COVID-19 pandemic (including the emergence of COVID-19 variants), our history of losses since inception, our dependence on a limited number of customers, our reliance on our customers’ ability to develop and sell products that incorporate our touch technology, the length of a product development and release cycle, our and our customers’ reliance on component suppliers, the difficulty in verifying royalty amounts owed to us, our limited experience manufacturing hardware devices, our ability to remain competitive in response to new technologies, our dependence on key members of our management and development team, the costs to defend, as well as risks of losing, patents and intellectual property rights and our ability to obtain adequate capital to fund future operations. For a discussion of these and other factors that could cause actual results to differ from those contemplated in the forward-looking statements, please see the discussion under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in our publicly available filings with the Securities and Exchange Commission. Forward-looking statements reflect our analysis only as of the date of this Quarterly Report on Form 10-Q. 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, 2020 included in our Annual Report on Form 10-K.

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

Overview

Our company provides advanced optical sensing solutions for contactless touch, touch, gesture sensing, and scene analysis solutions using advanced machine learning algorithms to detect and track persons and objects in video streams for cameras and other types of imagers. We market and sell our contactless touch, touch, and gesture sensing products and solutions using our zForce technology platform, and our scene analysis solutions using our MultiSensing technology platform. We offer our solutions to customers in many different markets and segments including, but not limited to, consumer electronics, office equipment, automotive, industrial automation, medical, military and avionics..

License Sales

We license our zForce technology 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 83 million devices that use our patented technology.

As of September 30, 2021, we had 35 valid technology license agreements with global OEMs, Original Design Manufacturers (“ODMs”) and Tier 1 suppliers.

Our licensing customer base is primarily in the automotive and printer segments. Thirteen of our licensing customers are currently shipping products that embed our technology. We anticipate current customers will continue product shipments throughout the remainder of 2021 and in future years. We also anticipate new customers will initiate product shipments of new products incorporating our zForce and MultiSensing technologies as they complete final product development and release cycles, which typically take between 6 months to 36 months. We earn our license fees on a per unit basis when our customers ship products using our technology.

Product Sales

In addition to our technical solutions business, we design and manufacture touch sensor modules (“TSMs”) that incorporate our patented technology. We sell our embedded sensors components to OEMs, ODMs and Tier 1 suppliers for use in their products.

We utilize a robotic manufacturing process designed specifically for our components. Our TSMs are commercial-off-the-shelf products based on a technology platform and provide hardware touch, gesture and object sensing solutions that, paired with our technology licensing platform, give us a full range of options to enter and compete in 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.

Our product offerings also include a consumer product, AirBar. As a plug and play accessory, AirBar enables touch and gesture functionality for notebook computers and other devices. AirBar is powered by our TSM technology. We have no current plans to develop new Neonode branded products for the consumer markets.

Non-recurring Engineering Services Sales

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

Typically, our licensing customers require engineering support during the development and initial manufacturing phase for their products using our technology, while our TSM customers require hardware or software modifications of our standard products or support during the development and initial manufacturing phase for their products using our technology.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Our near-term growth and overall business has been and is continuing to be adversely impacted by COVID-19 and we expect it will continue to be impacted by COVID-19 and the emergence of new COVID-19 variants and their impact on the global economy. Although we have noted additional demand for our TSMs for use in contactless touch products and some increases in sales of licensed products, COVID-19 has negatively impacted some of our customers’ businesses and their sales volumes, which, in turn, has impacted our business. We are experiencing challenges in obtaining deliveries of components needed to manufacture our TSMs and we may have difficulties delivering our products to our customers in time and at a reasonable cost. Our operations were impacted as we paused business-related travel and our employees to a large extent still work remotely. The extent of the COVID-19 pandemic’s impact on our operational and financial performance going forward will depend on future developments, including the duration, spread and intensity of the pandemic (including the emergence of new COVID-19 variants), and the effectiveness, distribution and acceptance of COVID-19 vaccines, all of which are uncertain and difficult to predict at this time. To mitigate the financial effects of the COVID-19 pandemic, we have undertaken cost-reduction measures. In particular, we implemented a Swedish government-backed program of short-term layoffs that resulted in the reduction of staff working hours by 20% between mid-April to mid-August last year. We are continuing to monitor the impact of the COVID-19 pandemic and we may take further actions in response. There is a risk that we will not be successful in mitigating the COVID-19 pandemic’s impact on our business, and our sales may not increase in line with our expectations and our operating margins could fluctuate or decline.

Results of Operations

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

	Three months ended September 30,						2021 vs 2020
	2021			2020			Variance in Dollars			Variance in Percent
Revenue:
License fees	$	821		$	1,207		$	(386	)		(32.0	)%
Percentage of revenue		85.3	%		80.7	%
Products		136			284			(148	)		(52.1	)%
Percentage of revenue		14.1	%		19.0	%
Non-recurring engineering	$	5		$	4		$	1			25.0	%
Percentage of revenue		0.5	%		0.3	%
Total Revenue	$	962		$	1,495		$	(533	)		(35.7	)%

Cost of Sales:
Products	$	98		$	198		$	(100	)		(50.5	)%
Percentage of revenue		10.2	%		13.2	%
Non-recurring engineering	$	1		$	3		$	(2	)		(66.7	)%
Percentage of revenue		0.1	%		0.2	%
Total Cost of Sales	$	99		$	201		$	(102	)		(50.7	)%

Total Gross Margin	$	863		$	1,294		$	(431	)		(33.3	)%

Operating Expense:
Research and development	$	1,015		$	901		$	114			12.7	%
Percentage of revenue		105.5	%		60.3	%
Sales and marketing		640			604			36			6.0	%
Percentage of revenue		66.5	%		40.4	%
General and administrative		1,030			1,535			(505	)		(32.9	)%
Percentage of revenue		107.1	%		102.7	%
Total Operating Expenses	$	2,685		$	3,040		$	(355	)		(11.7	)%
Percentage of revenue		279.1	%		203.3	%

Operating Loss	$	(1,822	)	$	(1,746	)	$	(76	)		4.4	%
Percentage of revenue		(189.4	)%		(116.8	)%
Interest expense		3			11			(8	)		(72.7	)%
Percentage of revenue		0.3	%		0.7	%
Provision (benefit) for income taxes		31			(9	)		40			(444.4	)%
Percentage of revenue		3.2	%		0.6	%
Less: net loss attributable to noncontrolling interests	$	(135	)	$	110		$	25			22.7	%
Percentage of revenue		14	%		7.4	%
Preferred dividends	$	-			(33	)	$	33			-	%
Percentage of revenue		-	%		2.2	%
Net loss attributable to common shareholders Neonode Inc.	$	(1,721	)	$	(1,671	)	$	(50	)		(3.0	)%
Percentage of revenue		(178.9	)%		(111.8	)%
Net loss per share attributable to common shareholders Neonode Inc.	$	(0.15	)	$	(0.16	)	$	0.01			(6.3	)%
Percentage of revenue		0.0	%		0.0	%

	Nine months ended September 30,						2021 vs 2020
	2021			2020			Variance in Dollars			Variance in Percent
Revenue:
License fees	$	3,474		$	3,050		$	424			13.9	%
Percentage of revenue		79.9	%		86.0	%
Products		837			450			387			86.0	%
Percentage of revenue		19.3	%		12.7	%
Non-recurring engineering	$	36		$	47		$	(11	)		(23.4	)%
Percentage of revenue		0.8	%		1.3	%
Total Revenue	$	4,347		$	3,547		$	800			22.6	%

Cost of Sales:
Products	$	580		$	306		$	274			89.5	%
Percentage of revenue		13.3	%		8.6	%
Non-recurring engineering	$	17		$	62		$	(45	)		(72.6	)%
Percentage of revenue		0.4	%		1.7	%
Total Cost of Sales	$	597		$	368		$	229			62.2	%

Total Gross Margin	$	3,750		$	3,179		$	571			18.0	%

Operating Expense:
Research and development	$	3,536		$	2,939		$	597			20.3	%
Percentage of revenue		81.3	%		82.9	%
Sales and marketing		2,197			1,797			400			22.3	%
Percentage of revenue		50.5	%		50.7	%
General and administrative		3,264			3,034			230			7.6	%
Percentage of revenue		75.1	%		85.5	%
Total Operating Expenses	$	8,997		$	7,770		$	1,227			15.8	%
Percentage of revenue		207.0	%		219.1	%

Operating Loss	$	(5,247	)	$	(4,591	)	$	(656	)		14.3	%
Percentage of revenue		120.7	%		(129.4	)%
Interest expense		11			25			(14	)		(56.0	)%
Percentage of revenue		0.3	%		0.7	%
Provision for income taxes		104			10			94			940.0	%
Percentage of revenue		2.4	%		0.3	%
Less: net loss attributable to noncontrolling interests	$	416		$	366		$	50			13.7	%
Percentage of revenue		9.6	%		10.3	%
Preferred dividends		-			(33	)		33			-	%
Percentage of revenue		-	%		(0.9	)%
Net Loss attributable to Neonode Inc.	$	(4,946	)	$	(4,293	)	$	(653	)		15.2	%
Percentage of revenue		(113.8	)%		(121.0	)%
Net Loss per share attributable to Neonode Inc.	$	(0.43	)	$	(0.45	)	$	0.02			(4.4	)%
Percentage of revenue		0.0	%		0.0	%

Net Revenues

All of our sales for the three and nine months ended September 30, 2021 and 2020 were to customers located in the U.S., Europe and Asia.

The decrease of (35.7)% in total net revenues for the three months ended September 30, 2021 as compared to the same period in 2020 is mainly explained by component shortage within the printer industry and automotive industry and lock-downs in key areas as a result of the pandemic. For the nine months ended September 30, 2021 as compared to the same period in 2020 we saw an increase of 22.6% in total net revenues, which was related to higher license fees and higher TSM sales, partly offset by a decrease in non-recurring engineering revenues.

License Fees Revenues

The decrease in license fees revenues for the three months ended September 30, 2021 compared to the same period in 2020 is mostly pandemic-related. The component shortage within the printer industry and automotive industry resulting from the pandemic reduced production volumes of printers and cars equipped with our technology. License fees revenues for the nine months ended September 30, 2021 were higher than those from the same period in 2020 mostly due to licensing fees revenues being depressed as a result of the general economic slow-down associated with the pandemic in the first and second quarters of 2020.

Product Revenues

The interest for contactless touch is the main driver for our TSM sales, with Asia leading the way as the first adopter of our contactless touch technology. As expected, most of our sales are related to retrofit solutions due to long product development cycles. For the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 we experienced a drop in sales mostly related to new lock-downs in Asia as a result of the pandemic.

Non-recurring Engineering Revenues

Most of our non-recurring revenues are related to both hardware and software related customization of our TSMs and decreased for the three and nine months ended September 30, 2021 compared to the same periods in 2020.

There were no revenues related to Remote Sensing Solutions for the three and nine months ended September 30, 2021.

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

	Three months ended September 30, 2021					Three months ended September 30, 2020
	Amount		Percentage			Amount		Percentage
AMER
License fees	$	376		98	%	$	453		93	%
Products		8		2	%		34		7	%
Non-recurring engineering		-		-	%		-		-	%
	$	384		100	%	$	487		100	%

APAC
License fees	$	411		79	%	$	625		76	%
Products		108		21	%		194		23	%
Non-recurring engineering		4		1	%		6		1	%
	$	523		100	%	$	825		100	%

EMEA
License fees	$	34		62	%	$	129		70	%
Products		20		36	%		54		30	%
Non-recurring engineering		1		2	%		-		-	%
	$	55		100	%	$	183		100	%

	Nine months ended September 30, 2021					Nine months ended September 30, 2020
	Amount		Percentage			Amount		Percentage
AMER
License fees	$	1,534		92	%	$	1,257		93	%
Products		125		8	%		79		6	%
Non-recurring engineering		-		-	%		8		1	%
	$	1,659		100	%	$	1,344		100	%

APAC
License fees	$	1,716		73	%	$	1,517		87	%
Products		589		25	%		211		12	%
Non-recurring engineering		35		1	%		15		1	%
	$	2,340		100	%	$	1,743		100	%

EMEA
License fees	$	224		65	%	$	276		60	%
Products		123		35	%		156		34	%
Non-recurring engineering		1		-	%		28		6	%
	$	348		100	%	$	460		100	%

Gross Margin

Our combined total gross margin was 90% and 86% for the three and nine months ended September 30, 2021, respectively, and 87% and 90% for the three and nine months ended September 30, 2020, respectively. For the three and nine months ended September 30, 2021, gross margin related to TSM sales was 28% and 31%, respectively, compared to 30% and 31% for the same periods in 2020, respectively.

Our cost of sales includes the direct cost of production of certain customer prototypes, costs of engineering personnel, engineering consultants to complete the engineering design contracts. Cost of goods sold for TSMs includes fully burdened manufacturing costs, outsourced final assembly costs, and component costs of TSMs.

Research and Development

Research and development (“R&D”) expenses for the three and nine months ended September 30, 2021 were $1.0 million and $3.5 million, respectively. For the same periods in 2020, the R&D expenses were $0.9 million and $2.9 million, respectively. R&D expenses primarily consist of personnel-related costs in addition to external consultancy costs, such as testing, certifying and measurements, along with costs related to developing and building new product prototypes.

The increases were primarily related to higher staff expenses for the three and nine months ended September 30, 2021, which can be explained by the reduced working hours associated with the governmental pandemic related support program in Sweden during 2020.

Sales and Marketing

Sales and marketing expenses for the three and nine months ended September 30, 2021 were $0.6 million and $2.2 million, respectively. The sales and marketing costs for the same periods in 2020 were $0.6 million and $1.8 million, respectively. The increases for the three and nine months ended September 30, 2021 were primarily due to higher staff expenses and the Swedish governmental support program during 2020

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

General and Administrative

General and administrative (“G&A”) expenses for the three and nine months ended September 30, 2021 were $1.0 million and $3.3 million, respectively. The G&A expenses for the three and nine months ended September 30, 2020 were $1.5 million and $3.0 million, respectively. The decrease for the three months ended September 2021 is primarily due to one-time legal costs in 2020. The increase for the nine months ended September 30, 2021 was primarily due to higher costs related to staff and in-house consultants in combination with higher professional fees.

Income Taxes

Our effective tax rate was (2)% and 2% for the three and nine months ended September 30, 2021, respectively, and 1% and (0)% for the three and nine months ended September 30, 2020, respectively. The positive tax rate for the nine months ended September 30, 2021 and three months ended September 30, 2020 is due to decreased withholding taxes from sales. The negative tax rate for the three months ended September 30, 2021 and the nine months ended September 30, 2020 is due to increased withholding taxes from sales. We recorded valuation allowances for the three and nine-month periods ended September 30, 2021 and September 30, 2020 for deferred tax assets related to net operating losses due to the uncertainty of realization.

Net Loss

As a result of the factors discussed above, we recorded a net loss attributable to Neonode of $1.7 million and $4.9 million for the three and nine months ended September 30, 2021, respectively, and $1.6 million and $4.3 million for the same periods in 2020, respectively.

Contractual Obligations and Off-Balance Sheet Arrangements

We previously agreed to secure the value of inventory purchased by one of our AirBars manufacturing partners. At December 31, 2020, the guaranteed amount was decreased from $210,000 to $100,000. We do not have any other transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to affect our liquidity or capital resources other than the operating leases incurred in the normal course of business.

We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support. We do not engage in leasing, hedging, research and development services, or other relationships that expose us to liability that is not reflected on the face of the consolidated financial statements.

Contractual Obligations and Commercial Commitments

Non-Recurring Engineering Development Costs

On April 25, 2013, we entered into an Analog Device Development Agreement with an effective date of December 6, 2012 (the “NN1002 Agreement”) with Texas Instruments (“TI”) pursuant to which TI agreed to integrate our intellectual property into an ASIC, which is used in our licensed 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 September 30, 2021, we had made no payments to TI under the NN1002 Agreement.

Operating Leases

We did not renew our lease for the office space located at 2880 Zanker Road, San Jose, CA 95134 in August 2020 and we now operate through a virtual office in California.

On December 1, 2020, Neonode Technologies AB entered into a lease for 6,684 square feet of office space located at Karlavägen 100, Stockholm, Sweden. The lease agreement is valid through November 2022. The lease is extended on a yearly basis unless written notice is given nine months prior to the expiration date.

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

In January 2015, our subsidiary Neonode Korea Ltd. entered into a lease agreement located at B-1807, Daesung D-Polis. 543-1, Seoul, South Korea. The lease was terminated on December 18, 2020 and we now only have a virtual office in South Korea.

On December 1, 2015, Neonode Taiwan Ltd. entered into a lease agreement located at Rm. 2406, International Trade Building, Keelung Rd., Sec.1, Taipei, Taiwan. The 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. We now operate through a virtual office in Japan.

For the three and nine months ended September 30, 2021, we recorded approximately $157,000 and $501,000 for rent expense, respectively. For the three and nine months ended September 30, 2020, we recorded approximately $154,000 and $435,000 for rent expense, respectively.

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

Equipment Subject to Finance Lease

In April 2014, we entered into a lease for certain specialized milling equipment. Under the terms of the lease agreement, we are obligated to purchase the equipment at the end of the original six-year lease term for 10% of the original purchase price of the equipment. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2014 when the equipment went into service. On July 1, 2020, the lease contract was extended for one year. The implicit interest rate of the extended lease period is 9.85% per annum.

Between the second and the fourth quarters of 2016, we entered into six leases for component production equipment. Under the terms of five of the lease agreements entered into during 2016, we are obligated to purchase the equipment at the end of the original three to five years lease terms for 5-10% of the original purchase price of the equipment. In accordance with relevant accounting guidance these five leases are classified as finance leases. The lease payments and depreciation periods began between June and November 2016 when the equipment went into service. The implicit interest rate of these five leases is currently approximately 3% per annum. The additional lease entered into during 2016 is a hire-purchase agreement that requires the equipment to be paid off after five years. In accordance with relevant accounting guidance the lease is classified as a finance lease. The lease payments and depreciation period began on July 1, 2016 when the equipment went into service. The implicit interest rate of this lease is approximately 3% per annum.

In 2017, we entered into one lease for component production equipment. Under the terms of the lease agreement the lease will be renewed within one year of the end of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in May 2017 when the equipment went into service. The implicit interest rate of the lease is approximately 1.5% per annum.

In 2018, we entered into one lease for component production equipment. Under the terms of the agreement, the lease will be renewed within one year of the original four-year lease term. In accordance with relevant accounting guidance, the lease is classified as a finance lease. The lease payments and depreciation periods began in August 2018 when the equipment went into service. The implicit interest rate of the lease is approximately 1.5% per annum.

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

Liquidity and Capital Resources

Our liquidity is dependent on many factors, including sales volume, operating profit and the efficiency of asset use and turnover. Our future liquidity will be affected by, among other things:

	●	licensing of our technology;

	●	purchases of our sensor products, including AirBar;

	●	operating expenses;

	●	timing of our OEM customer product shipments;

	●	timing of payment for our technology licensing agreements;

	●	gross profit margin; and

	●	ability to raise additional capital, if necessary.

As of September 30, 2021, we had cash of $5.5 million compared to $10.5 million as of December 31, 2020.

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

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.

Net cash used in operating activities for the nine months ended September 30, 2020 was $3.7 million and was primarily the result of a net loss of $4.6 million and approximately $0.8 million in non-cash operating expenses, comprised of depreciation and amortization and amortization of operating lease right-of-use assets.

Accounts receivable and unbilled revenues decreased by approximately $1.0 million as of September 30, 2021 compared to December 31, 2020. This was due to estimated lower revenues.

Inventory increased by approximately $1.2 million during the nine months ended September 30, 2021 compared to December 31, 2020, primarily due to purchase of components to secure production in line with estimated product sales.

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

During the nine months ended September 30, 2020 we purchased approximately $17,000 of property and equipment, primarily furniture and test equipment.

Net cash used in financing activities of $0.2 million during the nine months ended September 30, 2021 was the result of principal payments on finance leases and proceeds from issuance of preferred and common stock, net of offering.

Net cash provided by financing activities of $13.7 million during the nine months ended September 30, 2020 was the result of proceeds from short-term borrowings of $1.0 million and proceeds of issuance of preferred and common stock net of offering costs of $13.5 million, offset by principal payments on short-term borrowings and finance leases of $742,000.

The condensed consolidated financial statements included in this report have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and the repayment of liabilities in the ordinary course of business. Management evaluated the significance of the Company’s operating loss and determined that the Company’s current operating plan and sources of potential capital would be sufficient to alleviate concerns about the Company’s ability to continue as a going concern. In October 2021, the Company received aggregate net proceeds of approximately $1.4 million from a registered direct offering and sales under its at the market offering program, as described below.

In the future, we may require sources of capital in addition to cash on hand to continue operations and to implement our strategy. If our operations do not become cash flow positive, we may be forced to seek equity investments or debt arrangements. No assurances can be given that we will be successful in obtaining such additional financing on reasonable terms, or at all. If adequate funds are not available to us on acceptable terms, or at all, we may be unable to adequately fund our business plans which could have a negative effect on our business, results of operations and financial condition. If funds are available through the issuance of equity or debt securities, the issuance of equity securities or securities convertible into equity could dilute the value of shares of our common stock and cause the market price to fall, and the issuance of debt securities could impose restrictive covenants that could impair our ability to engage in certain business transactions.

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. 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

At-the-Market Offering Program

On May 10, 2021, we entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley Securities”) with respect to an “at the market” offering program (the “ATM Facility”), under which we may, from time to time, in our sole discretion, issue and sell through B. Riley Securities, acting as sales agent, up to $25 million of shares of our common stock.

During the three and nine months ended September 30, 2021, we sold an aggregate of 93,553 shares of common stock under the ATM Facility, resulting in net proceeds of approximately $593,000 after payment of commissions to B. Riley Securities of $18,000.

During October 2021 we sold an aggregate of 142,169 shares under the ATM Facility with aggregate net proceeds to us of $1,396,000 after payment of commissions to B. Riley Securities of $43,000.

Critical Accounting Policies

Our contracts with customers may include promises to transfer multiple products and services to a customer, particularly when the contract covers a product and related engineering services fees for customizing that product for our customer. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment. Judgment may also be required to determine the stand-alone selling price for each distinct performance obligation identified, although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed. We currently have no outstanding contracts with multiple performance obligations.

Our products are sold with a right of return, and we may provide other credits or incentives to our customers, which could result in variability when determining the amount of revenue to recognize. At the end of each reporting period, we use product returns history and additional information that becomes available to estimate returns and credits. We do not recognize revenue if it is probable that a significant reversal of any incremental revenue would occur.

See Note 2 – Summary of Significant Accounting Policies in the Notes to Unaudited Condensed Consolidated Financial Statements (Part I, Item 1) for further discussion of critical accounting policies and discussion of estimates.

There have been no other changes from the critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

Under the supervision of and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2021. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are currently involved in one legal proceeding as described in Note 5 – Commitments and Contingencies in the Notes to Unaudited Condensed Consolidated Financial Statements. From time to time, we may become subject to legal proceedings, claims, and litigation arising in the ordinary course of business, including, but not limited to, employee, customer and vendor disputes.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit #		Description
3.1		Restated Certificate of Incorporation of Neonode Inc., dated November 7, 2018 (incorporated by reference to Exhibit 3.14 of the registrant’s quarterly report on Form 10-Q (File No. 001-35526) filed on November 8, 2018)
3.1.1		Certificate of First Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.1 of the registrant’s quarterly report on Form 10-Q (File No. 001-35526) filed on August 14, 2019)
3.1.2		Certificate of Second Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.2 of the registrant’s quarterly report on Form 10-Q (File No. 001-35526) filed on August 14, 2019)
3.1.3		Certificate of Third Amendment to the Restated Certificate of Incorporation of Neonode Inc. (incorporated by reference to Exhibit 3.1.3 of the registrant’s quarterly report on Form 10-Q (File No. 001-35526) filed on November 10, 2020)
3.2		Bylaws (incorporated by reference to Exhibit 3.2 of the registrant’s quarterly report (File No. 001-35526) on Form 10-Q filed on November 8, 2018 (file no. 1-35526))
10.1		Placement Agency Agreement, dated October 21, 2021 (incorporated by reference to Exhibit 10.1 of the registrant’s current report on Form 8-K (File No. 333-255964) filed on May 10, 2021)
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002*
32		Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS		Inline XBRL Instance Document.
101.SCH		Inline XBRL Taxonomy Extension Schema Document.
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NEONODE INC.

Date: November 10, 2021	By:	/s/ Fredrik Nihlén
		Fredrik Nihlén
		Chief Financial Officer,
		(Principal Financial and Accounting Officer)