UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORMForm 10-Q

(Mark One)

[X]

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period endedSeptember 30, 20172021

☐

or
[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period _______ to _______

Commission file number:001-33660

 

CLEARONE, INC.

(Exact name of registrant as specified in its charter)

Utah

Delaware

87-0398877

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification number)

5225 Wiley Post Way, Suite 500, Salt Lake City, Utah

84116

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (801) 975-7200

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

+1 (801) 975-7200

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

(Registrant’s telephone number, including area code)

Common Stock, $0.001

CLRO

The NASDAQ Capital Market

Indicate by check 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 for 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 [X]☐ No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding /1212 months (or for such shorter period that the registrant was required to submit and post such files). ☒Yes [X]☐ No [  ]

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

Larger Accelerated Filer [  ]☐

Accelerated Filer [X]☐

Non-Accelerated Filer [  ] (Do not check if a smaller reporting company)☒

Smaller Reporting Company [  ]☒

Emerging growth company [  ]

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. [  ]☐ Yes ☐ No


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

The number of shares of ClearOne common stock outstanding as of November 3, 201711, 2021 was 8,414,153.

22,402,970. 

1
Table of Contents


CLEARONE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 20172021

INDEX

​




PART I –- FINANCIAL INFORMATION



Item 1.Financial Statements23




Unaudited Condensed Consolidated Balance Sheets as of September 30, 20172021 and December 31, 2016202023




Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)Loss for the three and nine months ended September 30, 20172021 and 2016202034




Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20172021 and 2016202045




Unaudited Notes to Condensed Consolidated Financial Statements67



Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1518



Item 3.Quantitative and Qualitative Disclosures About Market Risk2325



Item 4.Controls and Procedures2425




PART II –- OTHER INFORMATION



Item 1.Legal Proceedings2426



Item 1A.Risk Factors2426



Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2426



Item 3.Defaults Upon Senior Securities2526



Item 4.Mine Safety Disclosures2526



Item 5.Other Information2526



Item 6.Exhibits2527

12
Table of Contents

Table of Contents

PART I –- FINANCIAL INFORMATION

Item 1.1. FINANCIAL STATEMENTS

CLEARONE, INC.INC

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

 September 30, December 31,
 2017 2016

 

September 30, 2021

 

 

December 31, 2020

 

ASSETS        

 

 

 

 

 

 

 

 

Current assets:        

 

Cash and cash equivalents $3,013  $12,100 

 

$

9,161

 

$

3,803

 

Marketable securities  3,953   5,030 

 

713

 

1,117

 

Receivables, net of allowance for doubtful accounts of $304 and $187, as of September 30, 2017 and December 31, 2016 respectively  8,061   7,461 
Inventories  19,695   11,377 
Distributor channel inventories  1,394   1,530 

Receivables, net of allowance for doubtful accounts of $505 and $506, respectively

 

5,243

 

5,194

 

Inventories, net

 

9,218

 

10,463

 

Income tax receivable
7,221
7,169
Prepaid expenses and other assets  2,207   2,642 

 

 

2,505

 

 

 

1,536

 

Total current assets  38,323   40,140 

 

34,061

 

29,282

 

Long-term marketable securities  16,480   21,365 

 

707

 

1,762

 

Long-term inventories, net  2,446   1,664 

 

3,313

 

4,590

 

Property and equipment, net  1,587   1,513 

 

688

 

906

 

Operating lease - right of use assets, net

 

1,690

 

1,936

 

Intangibles, net  5,283   5,677 

 

23,179

 

19,248

 

Goodwill  —   12,724 
Deferred income taxes  9,875   4,654 
Other assets  378   387 

 

 

4,599

 

 

 

4,599

 

Total assets $74,372  $88,124 

 

$

68,237

 

 

$

62,323

 

LIABILITIES AND SHAREHOLDERS’ EQUITY        

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:        

 

Accounts payable $5,811  $3,545 

 

$

4,015

 

$

3,950

 

Accrued liabilities  1,852   1,894 

 

2,746

 

2,352

 

Deferred product revenue  3,870   3,882 

 

57

 

 

123

 

Short-term debt

3,504

672
Total current liabilities  11,533   9,321 

 

10,322

 

7,097

 

Deferred rent  39   103 

Long-term debt, net

 

2,291

 

3,245

 

Operating lease liability, net of current

 

1,181

 

1,489

 

Other long-term liabilities  1,216   1,251 

 

 

678

 

 

 

678

 

Total liabilities  12,788   10,675 

 

 

14,472

 

 

 

12,509

 

Shareholders’ equity:        
Common stock, par value $0.001, 50,000,000 shares authorized, 8,433,182 and 8,812,644 shares issued and outstanding as of September 30, 2017 and December 31, 2016 respectively  8   9 

 

Shareholders' equity:

 

Common stock, par value $0.001, 50,000,000 shares authorized, 22,402,970 and 18,775,773 shares issued and outstanding, respectively

 

22

 

19

 

Additional paid-in capital  47,300   46,669 

 

72,756

 

63,359

 

Accumulated other comprehensive loss  (49)  (205)

 

(225

)

 

(186

)

Retained earnings  14,325   30,976 
Total shareholders’ equity  61,584   77,449 
Total liabilities and shareholders’ equity $74,372  $88,124 

Accumulated deficit

 

 

(18,788

)

 

 

(13,378

)

Total shareholders' equity

 

 

53,765

 

 

 

49,814

 

Total liabilities and shareholders' equity

 

$

68,237

 

 

$

62,323

 

See accompanying notes

23
Table of Contents

CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share amounts)

  Three months ended September 30, Nine months ended September 30,
  2017 2016 2017 2016
Revenue $10,560  $12,908  $32,549  $37,907 
Cost of goods sold  4,051   5,240   13,293   14,110 
Gross profit  6,509   7,668   19,256   23,797 
                 
Operating expenses:                
Sales and marketing  3,006   2,389   8,393   7,695 
Research and product development  2,268   2,116   6,947   6,481 
General and administrative  1,281   1,739   5,597   4,904 
Impairment of an intangible asset  736   —   736   — 
Impairment of goodwill  12,724   —   12,724   — 
Total operating expenses  20,015   6,244   34,397   19,080 
                 
Operating income (loss)  (13,506)  1,424   (15,141)  4,717 
Other income, net  78   100   264   194 
Income (loss) before income taxes  (13,428)  1,524   (14,877)  4,911 
Provision for (benefit from) income taxes  (4,152)  315   (4,313)  1,379 
Net income (loss) $(9,276) $1,209  $(10,564) $3,532 
                 
Basic earnings (loss) per common share $(1.09) $0.14  $(1.22) $0.39 
Diluted earnings (loss) per common share $(1.09) $0.13  $(1.22) $0.37 
                 
Basic weighted average shares outstanding  8,520,041   8,921,480   8,641,173   9,076,305 
Diluted weighted average shares outstanding  8,520,041   9,164,165   8,641,173   9,452,616 
                 
Comprehensive income:                
Net income (loss) $(9,276) $1,209  $(10,564) $3,532 
Other comprehensive income:                
Change in unrealized gains (losses) on available-for-sale securities, net of tax  10   (39)  68   179 
Change in foreign currency translation adjustment  23   7   88   19 
Comprehensive income (loss) $(9,243) $1,177  $(10,408) $3,730 

 

 

Three months ended September 30,

 


Nine months ended September 30,


 

 

2021

 

 

2020

 


2021

2020

Revenue

 

$

6,992

 

 

$

8,412

 


$21,765

$20,503

Cost of goods sold 

 

 

4,141

 

 

 

4,892

 



12,487


11,527

Gross profit

 

 

2,851

 

 

 

3,520

 



9,278


8,976

 

 

 

 

 

 

 

 

 









Operating expenses:

 

 

 

 

 

 

 

 









Sales and marketing

 

 

1,692

 

 

 

1,736

 



5,020


4,932

Research and product development

 

 

1,492

 

 

 

1,501

 



4,253


4,319

General and administrative

 

 

1,676

 

 

 

1,443

 



5,024


4,475

Total operating expenses

 

 

4,860

 

 

 

4,680

 



14,297


13,726

 

 

 

 

 

 

 

 

 









Operating loss

 

 

(2,009

)

 

 

(1,160

)



(5,019)

(4,750)

 

 

 

 

 

 

 

 

 









Interest expense

(150)

(108)

(369)

(325)

Other income, net

 

 

7

 

 

19

 



17


70

 

 

 

 

 

 

 

 

 









Loss before income taxes

 

 

(2,152

)

 

 

(1,249

)

(5,371)

(5,005)

 

 

 

 

 

 

 

 

 









Provision for income taxes

 

 

17

 

 

 

11

 



39


39

 

 

 

 

 

 

 

 

 









Net loss

 

$

(2,169

)

 

$

(1,260

)
$(5,410)
$(5,044)

 

 

 

 

 

 

 

 

 









Basic weighted average shares outstanding

 

 

19,449,283

 

 

 

17,000,215

 



19,002,758


16,768,088

Diluted weighted average shares outstanding

 

 

19,449,283

 

 

 

17,000,215

 



19,002,758


16,768,088

 

 

 

 

 

 

 

 

 









Basic loss per share

 

$

(0.11

)

 

$

(0.07

)
$(0.28)
$(0.30)

Diluted loss per share

 

$

(0.11

)

 

$

(0.07

)


$(0.28)
$(0.30)

 

 

 

 

 

 

 

 

 









 

 

 

 

 

 

 

 

 









Comprehensive loss:

 

 

 

 

 

 

 

 









Net loss

 

$

(2,169

)

 

$

(1,260

)
$(5,410)
$(5,044)

Unrealized gain (loss) on available-for-sale securities, net of tax

 

 

(8

)

 

 

4



(13)

11

Change in foreign currency translation adjustment

 

 

(4

)

 

 

17



(26)

(25)

Comprehensive loss

 

$

(2,181

)

 

$

(1,239

)


$(5,449)
$(5,058)

See accompanying notes

34
Table of Contents

CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)

 

 

Nine months ended September 30,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(5,410

)

 

$

(5,044

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,042

 

 

 

1,682

 

Amortization of right-of-use assets

 

 

458

 

 

 

417

 

Share-based compensation expense

 

 

100

 

 

 

55

 

Provision for doubtful accounts, net

 

 

(1

)

 

 

82

 

Change of inventory to net realizable value

 

 

798

 

 

 

937

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(48

)

 

 

(1,319

)

Inventories

 

 

1,724

 

 

 

2,667

 

Prepaid expenses and other assets

 

 

(973

)

 

 

(985

)

Accounts payable

 

 

65

 

 

1,484


Accrued liabilities

 

 

360

 

 

179

Income taxes receivable

 

 

(52

)

 

 

0—

Deferred product revenue

 

 

(66

)

 

 

(14

)

Operating lease liabilities

 

 

(474

)

 

 

(421

)
Other long-term liabilities

0—

(29)

Net cash used in operating activities

 

 

(1,477

)

 

 

(309

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(39

)

 

 

(266

)

Purchase of intangibles

 

 

(220

)

 

 

(140

)

Capitalized patent defense costs

 

 

(5,348

)

 

 

(5,565

)

Proceeds from maturities and sales of marketable securities

 

 

1,971

 

 

 

3,697

 

Purchases of marketable securities

 

 

(526

)

 

 

(2,155

)

Net cash used in investing activities

 

 

(4,162

)

 

 

(4,429

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from issuance of common stock and warrants

 

 

 9,288

 

 

 

4,764

 

Proceeds from issuance of short-term notes

2,000


0—
Net proceeds from Paycheck Protection Program loan

0—


1,499

Net proceeds from equity-based compensation programs

 

 

12

 

 

 

11

 

Principal payments of long-term debt

(270)

0—

Net cash provided by financing activities

 

 

11,030

 

 

6,274

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(33

)

 

 

(17

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents 

 

 

5,358

 

 

1,519

  

Cash and cash equivalents at the beginning of the period

 

 

3,803

 

 

 

4,064

 

Cash and cash equivalents at the end of the period 

 

$

9,161

 

 

$

5,583

 

  Nine months ended September 30, 
  2017  2016 
Cash flows from operating activities:        
Net income (loss) $(10,564) $3,532 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:        
Depreciation and amortization expense  1,172   1,408 
Impairment of goodwill and intangible assets  13,460   — 
Amortization of deferred rent  (53)  (57)
Stock-based compensation expense  514   494 
Provision for (recovery of) doubtful accounts, net  106   (6)
Write-down of inventory to net realizable value  —   458 
Loss on disposal of assets  1   54 
Tax benefit from exercise of stock options  —   (721)
Deferred income taxes  (5,221)  107 
Changes in operating assets and liabilities:        
Receivables  (649)  234 
Inventories  (8,964)  1,353 
Prepaid expenses and other assets  (226)  (147)
Accounts payable  2,257   770 
Accrued liabilities  (67)  (134)
Income taxes payable  699   429 
Deferred product revenue  (23)  (284)
Other long-term liabilities  (61)  (51)
Net cash provided by (used in) operating activities  (7,619)  7,439 
         
Cash flows from investing activities:        
Purchase of property and equipment  (537)  (544)
Purchase of intangibles  (203)  — 
Proceeds from maturities and sales of marketable securities  9,946   5,371 
Purchase of marketable securities  (3,915)  (6,608)
Capitalized patent defense costs  (845)   — 
Net cash provided by (used in) investing activities  4,446   (1,781)
         
Cash flows from financing activities:        
Net proceeds from equity-based compensation programs  117   736 
Tax benefit from equity-based compensation programs  —   721 
Repurchase and cancellation of stock options  (285)  (1,752)
Dividend payments  (1,650)  (1,373)
Repurchase and cancellation of stock  (4,151)  (5,139)
Net cash used in financing activities  (5,969)  (6,807)
         
Effect of exchange rate changes on cash and cash equivalents  55   10 
Net decrease in cash and cash equivalents  (9,087)  (1,139)
Cash and cash equivalents at the beginning of the period  12,100   13,412 
Cash and cash equivalents at the end of the period $3,013  $12,273 

See accompanying notes

45
Table of Contents
Table of Contents



CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)

The following is a summary of supplemental cash flow activities:

 Nine months ended September 30, 

 

Nine months ended September 30,

 

 2017 2016 

 

2021

 

 

2020

 

Supplemental disclosure of cash flow information:        
Cash paid for income taxes $6 $893 

 

$

91

 

$

23

 

Cash paid for interest200189

See accompanying notes

56
Table of Contents
Table of Contents


CLEARONE, INC.

UNAUIDTED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

1. Business Description, Basis of Presentation and Significant Accounting Policies

Business Description:

ClearOne, Inc., together with its subsidiaries (collectively, “ClearOne” or the “Company”), is a global company that designs, develops and sellsmarket leader enabling conferencing, collaboration, streaming and digital signageAV streaming solutions for audiovoice and visual communications. The performance and simplicity of itsour advanced, comprehensive solutions offer unprecedented levels of functionality, reliability and scalability.

Basis of Presentation:

The fiscal year for ClearOne is the 12twelve months ending on December 31st. The condensed consolidated financial statements include the accounts of ClearOne and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.

These accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are not audited. Certain information and footnote disclosures that are usually included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been either condensed or omitted in accordance with SEC rules and regulations. The accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 20172021 and December 31, 2016,2020, the results of operations for the three and nine months ended September 30, 20172021 and 2016,2020, and the cash flows for the nine months ended September 30, 20172021 and 2016.2020. The results of operations for the three months and nine months ended September 30, 20172021 and 20162020 are not necessarily indicative of the results for a full-year period. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 20162020 filed with the SEC.

Significant Accounting Policies:

The significant accounting policies were described in Note 1 to the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.2020. There have been no changes to these policies during the nine months ended September 30, 20172021 that are of significance or potential significance to the Company.


Recent accounting pronouncements: The Company excepthas determined that recently issued accounting standards will not have a material impact on its consolidated financial position, results of operations or cash flows.


Liquidity:

As of September 30, 2021, our cash and cash equivalents were approximately $9,161 compared to $3,803 as of December 31, 2020. Our working capital was $23,739 as of September 30, 2021. Net cash used in operating activities was $1,477 for the treatmentnine months ended September 30, 2021, an increase of patent defense costs described below.

Patent Defense Costs - The Company relies on patents and proprietary technology and seeks patent protection for products and production methods. The Company capitalizes external legal costs incurred$1,168 from $309 of cash used in activities in the defensenine months ended September 30, 2021.

We are currently pursuing all available legal remedies to defend our strategic patents from infringement. We have already spent approximately $25,668 from 2016 through September 30, 2021 towards this litigation and may be required to spend more to continue our legal defense. We believe the decision by the U.S. District Court in August 2019 granting our request for a preliminary injunction to prevent our competitor from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. We believe that the decision validates the strength and importance of its patents when it believes thatClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from further infringing our Graham patent (U.S. Patent No. 9,813,806) pending a future economic benefitfull trial. Although there can be no assurance of any outcome of a full trial, we believe this ruling will resulthelp pave the way for ClearOne’s recovery from the defenseimmense harm inflicted by our competitor's infringement of our valuable patents. For more information about our intellectual property litigation, See Note 8. Commitments and a successful outcomeContingencies - Legal Proceedings, in our annual report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1. Legal Proceedings in this quarterly report.

6
Table of Contents

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)


Recent Accounting Pronouncements:

In May 2014, the FASB released Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entityWe have been actively engaged in preserving cash by suspending our dividend program and allowing our share repurchase program to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidanceexpire in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. We plan to adopt the standard when it becomes effective for us beginning January 1, 2018. We currently anticipate adopting the standard using the modified retrospective method with a cumulative catch up adjustment and providing additional disclosures comparing results to previous rules. We continue to evaluate the impact of the new standard on our consolidated financial statements but anticipate this standard will have a material impact on our consolidated financial statements.

In February 2016, the FASB released ASU No. 2016-02, Leases (Topic 842) to bring transparency to lessee balance sheets. The ASU will require organizations that lease assets (lessees) to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The standard will apply to both types of leases-capital (or finance) leases and operating leases. Previously, GAAP has required only capital leases to be recognized on lessee balance sheets. The standard is effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2018. Early applicationimplementing company-wide cost reduction measures. We have also raised additional capital in 2019 by issuing senior convertible notes, in 2020 by borrowing through the CARES Act Paycheck Protection Program and issuing common stock and warrants and in 2021 by issuing short term notes and issuing common stock and warrants. In addition, we have been generating additional cash as our inventory levels are brought down to historical levels.


We also believe that the measures taken by us will yield higher revenues in the future. We believe, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet our operating needs through at least November 12, 2022. We also believe that our strong portfolio of intellectual property and our solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs; however, there can be no assurance that, if needed, we will be permitted for all organizations. successful in obtaining the necessary funds through equity or debt financing. If we need additional capital and are unable to secure financing, we may be required to further reduce expenses, delay product development and enhancement, or revise our strategy regarding ongoing litigation.

2. Revenue Information 

The Company has not yet selected a transition method and is currently evaluatingfollowing table disaggregates the effect thatCompany’s revenue into primary product groups:

 

 

Three months ended September 30,

 


Nine months ended September 30,


 

 

2021

 

 

2020

 


2021



2020


Audio conferencing

 

$

2,916

 

 

$

2,766

 


$8,847

$
8,201

Microphones

 

 

2,659

 

 

 

2,435

 



8,227


6,469

Video products

 

 

1,417

 

 

 

3,211

 



4,691


5,833

 

 

$

6,992

 

 

$

8,412

 


$21,765

$20,503

The following table disaggregates the updated standard will have on the consolidated financial statements.Company’s revenue into major regions:


 

 

Three months ended September 30,

 


Nine months ended September 30,


 

 

2021

 

 

2020

 


2021



2020


North and South America

 

$

3,419

 

 

$

6,215

 


$10,583

$13,570

Asia Pacific (includes Middle East, India and Australia)

 

 

2,130

 

 

 

1,149

 



6,153


4,145

Europe and Africa

 

 

1,443

 

 

 

1,048

 



5,029


2,788

 

 

$

6,992

 

 

$

8,412

 


$21,765

$20,503

In March 2016, the FASB released ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company on January 1, 2017. As a result of the adoption of ASU 2016-09, excess tax benefits or deficiencies related to stock-based compensation are now reflected in the Consolidated Statements of Operations as a component of the provision for income taxes, whereas they previously were recognized in additional paid-in capital. In addition, our Consolidated Statements of Cash Flows will now present, on a prospective basis, excess tax benefits as an operating activity. Finally, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures.

In August 2016, the FASB released ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for the Company beginning January 1, 2018 and we are currently evaluating the impact that ASU 2016-15 will have on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The accounting standard update will be effective for The Company beginning January 1, 2018 on a prospective basis, and early adoption is permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

78
Table of Contents
Table of Contents


UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)


2. Earnings (Loss)3. Loss Per Share

Earnings (loss)Loss per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive potential common stock outstanding during the period. Stock options, warrants and convertible portion of senior convertible notes are considered to be potential common stock. The computation of diluted earnings (loss) per share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Basic earnings (loss) per common share is the amount of net earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted earnings (loss) per common share is the amount of earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period and to each share of potential common stock outstanding during the period, unless inclusion of potential common stock would have an anti-dilutive effect.


The following table sets forth the computation of basic and diluted earnings (loss) per common share:

 

 

Three months ended September 30,

 


Nine months ended September 30,


 

 

2021

 

 

2020

 


2021



2020


Numerator:

 

 

 

 

 

 

 

 









Net loss

 

$

(2,169

)

 

$

(1,260

)


$(5,410)
$(5,044)

Denominator:

 

 

 

 

 

 

 

 









Basic weighted average shares outstanding

 

 

19,449,283

 

 

 

17,000,215

 



19,002,758


16,768,088

Dilutive common stock equivalents using treasury stock method

 

 

0—

 

 

 

0—

 



0—


0—

Diluted weighted average shares outstanding

 

 

19,449,283

 

 

 

17,000,215

 



19,002,758


16,768,088

 

 

 

 

 

 

 

 

 









Basic loss per common share

 

$

(0.11

)

 

$

(0.07

)


$(0.28)
$(0.30)

Diluted loss per common share

 

$

(0.11

)

 

$

(0.07

)


$(0.28)
$(0.30)

 

 

 

 

 

 

 

 

 









Weighted average options, warrants and convertible portion of senior convertible notes outstanding

 

 

4,240,247

 

 

 

511,332

 



3,826,807


528,107

Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation

 

 

4,240,247

 

 

 

511,332

 



3,826,807


528,107

9
Table of Contents

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  Three months ended September 30,  Nine months ended September 30, 
  2017  2016  2017  2016 
Numerator:                
Net income (loss) $(9,276) $1,209  $(10,564) $3,532 
Denominator:                
Basic weighted average shares outstanding  8,520,041   8,921,480   8,641,173   9,076,305 
Dilutive common stock equivalents using treasury stock method  —   242,686   —   376,312 
Diluted weighted average shares outstanding  8,520,041   9,164,165   8,641,173   9,452,616 
                 
Basic earnings (loss) per common share $(1.09) $0.14  $(1.22) $0.39 
Diluted earnings (loss) per common share $(1.09) $0.13  $(1.22) $0.37 
                 
Weighted average options outstanding  782,012   832,766   832,953   900,687 
Anti-dilutive options not included in the computations  782,012   312,372   832,953   312,477 

(Unaudited - Dollars in thousands, except per share amounts)

3.4. Marketable Securities

The Company has classified its marketable securities as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive income (loss)loss in stockholders’ equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned.

The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of securities at September 30, 20172021 and December 31, 20162020 were as follows:

 

 

Amortized cost

 

 

Gross unrealized holding gains

 

 

Gross unrealized holding losses

 

 

Estimated fair value

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

$

808

 

 

$

11

 

 

$

0—

 

$

819

 

Municipal bonds

 

 

600

 

 

 

1

 

 

 

0—

 

 

 

601

 

Total available-for-sale securities

 

$

1,408

 

 

$

12

 

 

$

0—

 

$

1,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

$

1,312

 

 

$

26

 

 

$

0—


 

$

1,338

 

Municipal bonds

 

 

1,536

 

 

 

5

 

 

 

0—


 

 

1,541

 

Total available-for-sale securities

 

$

2,848

 

 

$

31

 

 

$

0—


 

$

2,879

 

  Amortized cost  Gross
unrealized
holding gains		  Gross
unrealized
holding losses		  Estimated
fair value		 
September 30, 2017                
Available-for-sale securities:                
Corporate bonds and notes $14,446  $65  $(52) $14,459 
Municipal bonds  5,974   8   (8)  5,974 
Total available-for-sale securities $20,420  $73  $(60) $20,433 

8
Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

  Amortized cost Gross
unrealized
holding gains		 Gross
unrealized
holding losses		 Estimated
fair value
December 31, 2016        
Available-for-sale securities:                
Corporate bonds and notes $20,028  $64  $(122) $19,970 
Municipal bonds  6,463   6   (44)  6,425 
Total available-for-sale securities $26,491  $70  $(166) $26,395 

Maturities of marketable securities classified as available-for-sale securities were as follows at September 30, 2017:2021:

 Amortized
cost		 Estimated
fair value

 

Amortized cost

 

 

Estimated fair value

 

September 30, 2017    
Due within one year $3,945  $3,953 

 

$

705

 

$

713

 

Due after one year through five years  16,475   16,480 

 

703

 

707

 

Due after five years

 

 

0—

 

 

 

0—

 

Total available-for-sale securities $20,420  $20,433 

 

$

1,408

 

 

$

1,420

 


10

Table of Contents


UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

Debt securities in an unrealized loss position as of September 30, 20172021 were not deemed impaired at acquisition and subsequent declines in fair value are not deemed attributed to declines in credit quality. Management believes that it is more likely than not that the securities will receive a full recovery of par value, although there can be no assurance that such recovery will occur. The


There were no available-for-sale marketable securities with continuous gross unrealized loss position for less than 12 months and 12 months or greater and their related fair values were as follows:positions. 


  Less than 12 months More than 12 months Total
(In thousands) Estimated fair value Gross unrealized holding losses Estimated fair value Gross unrealized holding losses Estimated fair value Gross unrealized holding losses
As of September 30, 2017            
Corporate bonds and notes $4,288  $(24) $2,148  $(27) $6,436  $(51)
Municipal bonds  3,157   (5)  566   (4)  3,723   (9)
Total $7,445  $(29) $2,714  $(31) $10,159  $(60)

4. Goodwill and5. Intangible Assets

Goodwill

There was a decrease in goodwill during the three and nine months ended September 30, 2017 from $12,724 as of December 31, 2016 to $0 as of September 30, 2017 due to the impairment of goodwill. During the three months ended September 30, 2017, there was a decrease in the Company’s market capitalization which was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed a goodwill impairment analysis. The Company utilized the market capitalization to estimate the fair value. Our total stockholders’ equity exceeded the estimated fair value. The failure of step one of the goodwill impairment test triggered a step two impairment test. As a result of step two of the impairment test, the Company determined the implied fair value of goodwill and concluded that the carrying value of goodwill exceeded its implied fair value as of September 30, 2017. Accordingly, an impairment charge of $12,724, which represents a full impairment charge, was recognized in the three months ended September 30, 2017.

9
Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

Intangible Assets

Intangible assets as of September 30, 20172021 and December 31, 20162020 consisted of the following:

 

 

Estimated useful lives (years)

 

 

September 30, 2021

 

 

December 31, 2020

 

Tradename

 

 5

to

7

 

 

$

555

 

 

$

555

 

Patents and technological know-how

 

10

 to

20

 

 

 

30,994

 

 

 

25,427

 

Proprietary software

 

 3

to

15

 

 

 

2,981

 

 

 

2,981

 

Other

 

 3

to

5

 

 

 

323

 

 

 

323

 

Total intangible assets

 

 

 

 

 

 

 

34,853

 

 

 

29,286

 

Accumulated amortization

 

 

 

 

 

 

 

(11,674

)

 

 

(10,038

)

Total intangible assets, net

 

 

 

 

 

 

$

23,179

 

 

$

19,248

 

  Estimated useful
lives		 September 30, 2017 December 31, 2016
Tradename 5 to 7 years $555  $555 
Patents and technological know-how 10 years  7,058   6,010 
Proprietary software 3 to 15 years  2,981   4,341 
Other 3 to 5 years  324   324 
Total intangible assets    10,918   11,230 
Accumulated amortization    (5,635)  (5,553)
Total intangible assets, net   $5,283  $5,677 

The amortization of intangible assets for the three and nine months ended September 30, 20172021 and 20162020 was as follows:

 

 

Three months ended September 30,

 


Nine months ended September 30,


 

 

2021

 

 

2020

 


2021



2020


Amortization of intangible assets

 

$

582

 

 

$

446

 


$1,636

$1,220

  Three months ended September 30, Nine months ended September 30,
  2017 2016 2017 2016
Amortization of intangible assets $231 $328  $699  $458 

During the three and nine months ended September 30, 2017 we recorded a $0.7 million charge for impairment of an intangible asset consisting of customer relationships.

The estimated future amortization expense of intangible assets is as follows:

Years ending December 31,  
2017 (remainder) $246 
2018  829 
2019  725 
2020  546 
2021  546 
Thereafter  2,391 
  $5,283 

Years ending December 31,

 

Amount

 

2021 (Remainder)

 

$

611

 

2022

 

 

2,445

 

2023

 

 

2,438

 

2024

 

 

2,174

 

2025

 

 

2,113

 

Thereafter

 

 

13,398

 

Total

 

 

23,179

 

11
Table of Contents

5. Inventories

Inventories, net of reserves, as of September 30, 2017 and December 31, 2016 consisted of the following:

  As of
  September 30, 2017 December 31, 2016
Current:        
Raw materials $4,097  $2,291 
Finished goods  15,598   9,086 
  $19,695  $11,377 
         
Long-term:        
Raw materials $423  $599 
Finished goods  2,023   1,065 
  $2,446  $1,664 

10
Table of Contents

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)


6. Inventories

Inventories, net of reserves, as of September 30, 2021 and December 31, 2020 consisted of the following:

 

 

September 30, 2021

 

 

December 31, 2020

 

Current:

 

 

 

 

 

 

 

 

Raw materials

 

$

1,772

 

 

$

1,182

 

Finished goods

 

 

7,446

 

 

 

9,281

 

 

 

$

9,218

 

 

$

10,463

 

 

 

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

Raw materials

 

$

1,648

 

 

$

1,977

 

Finished goods

 

 

1,665

 

 

 

2,613

 

 

 

$

3,313

 

 

$

4,590

 

Long-term inventory represents inventory held in excess of our current (next 12 months) requirements based on our recent sales and forecasted level of sales. We expect to sell the above inventory, net of reserves, at or above the stated cost and believe that no loss will be incurred on its sale, although there can be no assurance of the timing or amount of any sales.

Current finished goods do not include distributor channel inventories in the amounts of approximately $1,394 and $1,530 as of September 30, 2017 and December 31, 2016, respectively. Distributor channel inventories represent inventories at distributors and other customers where revenue recognition criteria have not yet been achieved.

Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory duringfor the three and nine months ended September 30, 20162021 and 2020 was $328. Duringas follows:

 

 

Three months ended September 30,

 


Nine months ended September 30,


 

 

2021

 

 

2020

 


2021



2020


Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory

 

$

116

 

 

$

277

 


$798

$937

7. Leases

Rent expense is recognized on a straight-line basis over the period of the lease taking into account future rent escalation and holiday periods.

Rent expense for the three and nine months ended September 30, 2017 there2021 and 2020 was no write off on the valuation of inventory.as follows: 

 

 

Three months ended September 30,

 


Nine months ended September 30,


 

 

2021

 

 

2020

 


2021



2020


Rent expense

 

$

181

 

 

$

175

 


$540

$534

6. Share-based Compensation

Employee Stock Option Plans

The Company’s share-based incentive plans offering stock options primarily consists of two plans. Under both plans, one new share is issued for each stock option exercised. The plans are described below.

The Company’s 1998 Incentive Plan (the “1998 Plan”) was the Company’s primary plan through November 2007. Under this plan shares of common stock were made available for issuance to employees and directors. Through December 1999, 1,066,000 options were granted that would cliff vest after 9.8 years; however, such vesting was accelerated for 637,089 of these options upon meeting certain earnings per share goals through the fiscal year ended September 30, 2003. Subsequent to December 1999 and through March 2002, 1,248,250 options were granted that would cliff vest after 6.0 years; however, such vesting was accelerated for 300,494 of these options upon meeting certain earnings per share goals through the fiscal year ended September 30, 2005.

The Company’s 2007 Equity Incentive Plan (the “2007 Plan”) was restated and approved by the shareholders on December 12, 2015. Provisions of the restated 2007 Plan include the granting of up to 2,000,000 incentive and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Options may be granted to employees, officers, non-employee directors and other service providers and may be granted upon such terms as the Compensation Committee of the Board of Directors determinesWe occupy a 1,350 square-foot facility in their sole discretion.

Of the options granted subsequent to March 2002, all vesting schedules are based on 3 or 4-year vesting schedules, with either one-third or one-fourth vesting on the first anniversary and the remaining options vesting ratably over the remainder of the vesting term. Generally, directors and officers have 3-year vesting schedules and all other employees have 4-year vesting schedules. Additionally, in the event of a change in control or the occurrence of a corporate transaction, the Company’s Board of Directors has the authority to elect that all unvested options shall vest and become exercisable immediately prior to the event or closing of the transaction. All options outstanding as of September 30, 2017 had contractual lives of ten years.

Under the 1998 Plan, 2,500,000 shares were authorized for grant. As of September 30, 2017, there are no options outstandingGainesville, Florida under the 1998 Plan.terms of an operating lease expiring in February 2023. The remaining 50,000 of these options were exercised on July 11, 2017.Gainesville facility is used primarily to support our research and development activities. 

As of September 30, 2017, there were 767,156 options outstandingWe occupy a 21,443 square-foot facility in Salt Lake City, Utah under the 2007 Plan. Asterms of September 30, 2017,an operating lease expiring in March 2024, with an option to extend for additional five years. The facility supports our principal administrative, sales, marketing, customer support, and research and product development activities.  

We occupy a 950 square-foot facility in Austin, Texas under the 2007 Plan had 471,500 authorized unissued options.terms of an operating lease expiring in October 2022. This facility supports our sales, marketing, customer support, and research and development activities.

12
Table of Contents


11
Table of Contents

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)


A summary of the stock option activityWe occupy a 3,068 square-foot facility in Zaragoza, Spain under the Company’s plans forterms of an operating lease expiring in March 2022.  This office supports our research and development and customer support activities.

We occupy a 6,175 square-foot facility in Chennai, India under the nine months ended September 30, 2017 isterms of an operating lease expiring in August 2024. This facility supports our administrative, marketing, customer support, and research and product development activities.

We occupy a 40,000 square-foot warehouse in Salt Lake City, Utah under the terms of an operating lease expiring in April 2025, which serves as follows:our primary inventory fulfillment and repair center.  

  Number of shares Weighted average
exercise price
     
Options outstanding at beginning of year  850,232  $8.06 
Granted  105,000   9.90 
Less:        
Exercised  (178,662)  5.90 
Forfeited prior to vesting  (7,103)  10.88 
Canceled or expired  (2,311)  9.68 
Options outstanding at September 30, 2017  767,156   8.79 
Options exercisable at end of September 30, 2017  502,940  $7.71 


AsSupplemental cash flow information related to leases was as follows: 

 

 

Nine months ended September 30,

 

 

 

2021

 

 

2020

 

Cash paid for amounts included in the measurement of lease liabilities

 



 

 



 

Operating cash flows from operating leases
$502
$537
Right-of-use assets obtained in exchange for lease obligations:







Operating leases
$212

$97

Supplemental balance sheet information related to leases was as follows:

 

 

September 30, 2021

 

 

December 31, 2020

 

Operating lease right-of-use assets

 

$

 1,690

 

 

 $

 1,936

 


 








Current portion of operating lease liabilities, included in accrued liabilities
$625

$579

Operating lease liabilities, net of current portion

 

 

1,181

 

 

 

1,489

 

Total operating lease liabilities

 

$

1,806

 

 

$

2,068

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term for operating leases (in years) 

2.87


3.54
Weighted average discount rate for operating leases

5.9%

6.1%

The following represents maturities of operating lease liabilities as of September 30, 2017, the total remaining unrecognized compensation cost related to non-vested stock options, net2021:

Years ending December 31,

 

 

 

 

2021 (Remainder)

 

$

183

 

2022

 

 

703

 

2023

 

 

671

 

2024

 

 

343

 

2025

 

 

69

 

Thereafter

 

 

0—

 

Total lease payments

 

 

1,969

 

Less: Imputed interest

 

 

163

Total

 

$

1,806

 


13
Table of forfeitures, was approximately $975, which will be recognized over a weighted average period of 1.99 years.Contents

Stock Option Repurchase

From March 11, 2016 to March 17, 2016, the Company offered to repurchase eligible vested options to purchase shares under the 1998 Plan and the 2007 Plan from employees. The Company repurchased delivered options at a repurchase price equal to the difference between the closing market price on the date of the employee’s communication of accepting the repurchase offer and the exercise price of such employee’s delivered options, subject to applicable withholding taxes and charges. The Company repurchased 225,542 stock options from employees at an average purchase price of $7.77.

Employee Stock Purchase Plan

The Company issues shares to employees under the Company’s 2014 Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s shareholders on December 12, 2014. As of September 30, 2017, 471,160 of the originally approved 500,000 shares were available for offerings under the ESPP. Offering periods under the ESPP commence on each January 1 and July 1, and continue for a duration of six months. The ESPP is available to all employees who do not own, or not are deemed to own, shares of stock making up an excess of 5% of the combined voting power of the Company and its subsidiaries. During each offering period, each eligible employee may purchase shares under the ESPP after authorizing payroll deductions. Under the ESPP, each employee may purchase up to the lesser of 2,500 shares or $25 of fair market value (based on the established purchase price) of the Company’s stock for each offering period. Unless the employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase common stock on the last business day of the period at a price equal to 85% (or a 15% discount) of the fair market value of the common stock on the first or last day of the offering period, whichever is lower.

Share-based compensation expense related to ESPP has been recorded as follows:

  Three months ended September 30, Nine months ended September 30,
  2017 2016 2017 2016
Cost of goods sold $5  $7  $16  $18 
Sales and marketing  10   15   31   42 
Research and product development  25   40   80   106 
General and administrative  122   113   341   328 
  $162  $175  $468  $494 

12
Table of Contents

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

8. Shareholders' Equity

7. Shareholders’ Equity

 

 

Three months ended September 30,

 


Nine months ended September 30,

 

 

2021

 

 

2020

 


2021

2020

Common stock and additional paid-in capital

 

 

 

 

 

 

 

 









Balance, beginning of period

 

$

63,450

 

 

$

58,597

 


$63,378

$58,537
Issuance of common stock and warrants, net

                9,288


          4,764


9,288


4,764

Share-based compensation expense

 

 

35

 

 

 

1

 



100


55

Proceeds from employee stock purchase plan

 

 

5

 

 

 

5

 



12


11

Balance, end of period

 

$

72,778

 

 

$

63,367

 


$72,778

$63,367

 

 

 

 

 

 

 

 

 









Accumulated other comprehensive loss

 

 

 

 

 

 

 

 









Balance, beginning of period

 

$

(213

)

 

$

(211

)


$(186)
$(176)

Unrealized loss on available-for-sale securities, net of tax 

 

 

(8

)

 

 

4



(13)

11

Foreign currency translation adjustment

 

 

(4

)

 

 

17



(26)

(25)

Balance, end of period

 

$

(225

)

 

$

(190

)


$(225)
$(190)

 

 

 

 

 

 

 

 

 









Accumulated deficit

 

 

 

 

 

 

 

 









Balance, beginning of period

 

$

(16,619

)

 

$

(17,667

)
$(13,378)
$(13,883)

Net loss

 

 

(2,169

)

 

 

(1,260

)



(5,410)

(5,044)

Balance, end of period

 

$

(18,788

)

 

$

(18,927

)


$(18,788)
$(18,927)

 

 

 

 

 

 

 

 

 









Total shareholders' equity

 

$

53,765

 

 

$

44,250

 


$53,765

$44,250

Issue of Common Stock and Warrants

Stock Repurchase Program

On March 9, 2016,September 13, 2020, the Board of DirectorsCompany entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued and sold in a registered direct offering 2,116,050 shares of the Company's common stock, par value $0.001 per share at an offering price of $2.4925 per share. The Company authorizedreceived gross proceeds of approximately $5,275 and net proceeds $4,764 after deducting placement agent fees and related offering expenses. In a concurring private placement, the repurchaseCompany also issued to the same purchasers warrants exercisable for an aggregate of up to $10,000 of the Company’s outstanding1,058,025 shares of common stock under a stock repurchase program. In connection withat an exercise price of $2.43 per share. Each warrant became immediately exercisable and will expire five years from the repurchase authorization,issuance date. 


On  September 12, 2021, the Company was authorizedentered into a securities purchase agreement with certain purchasers named therein, pursuant to completewhich the repurchase through open market transactions or through an accelerated share repurchase program, in each case to be executed at management’s discretion based on business and market conditions, stock price, trading restrictions, acquisition activity and other factors. The repurchase program may be suspended or discontinued at any time without prior notice. The transactions effectuated to date occurred in open market purchases.

On March 1, 2017, the Board of DirectorsCompany issued 3,623,189 shares of the Company's common stock, par value $0.001 per share at an offering price of $2.76 per share. The Company renewedreceived gross proceeds of approximately $10,000 and extendednet proceeds of $9,288 after deducting placement agent fees and related offering expenses. In a concurring private placement the repurchase programCompany also issued to the same purchasers warrants exercisable for up to an additional $10,000aggregate of 3,623,189 shares of common stock over the next twelve months. In connection with the repurchase extension authorization, the Company was authorized to complete the repurchase through open market transactions or throughat an accelerated share repurchase program, in each case to be executed at management’s discretion basedexercise price of $2.76 per share. Each warrant became immediately exercisable and will expire on business and market conditions, stock price, trading restrictions, acquisition activity and other factors. The repurchase program may be suspended or discontinued at any time without prior notice. The transactions effectuated to date occurred in open market purchases.March 15, 2027. 


Period Total Number of
Shares Purchased		 Average Price
Paid per Share		 Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs		 Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or Programs
(in $ millions)
July 2017  11,794  $9.69   11,794  $7.6 
August 2017  37,247   7.77   37,247   7.3 
September 2017  90,529   7.62   90,529   6.6 
Total  139,570   7.84   139,570     
14
Table of Contents


Cash Dividends

On August 7, 2017, the Company declared a cash dividend of $0.07 per share of ClearOne common stock paid September 7, 2017 to shareholders of record as of August 22, 2017.

Changes in Shareholders’ Equity

The following table summarizes the change in shareholders’ equity during the three and nine months ended September 30, 2017 and 2016, respectively:

  Three months ended September 30,  Nine months ended September 30, 
  2017  2016  2017  2016 
Balance at the beginning of the period $72,444  $79,783  $77,449  $82,569 
Exercise of stock options, restricted stock and stock option cancelled  (113)  238   (225)  671 
Stock repurchased  (1,094)  (1,024)  (4,151)  (5,139)
Options repurchased  —   —   —   (1,752)
Proceeds from stock purchase plan  15   21   55   65 
Dividends  (599)  (449)  (1,650)  (1,373)
Share-based compensation  174   175   514   494 
Tax benefit - stock option exercise  —   33   —   690 
Unrealized gain or loss on investments, net of tax  10   (38)  68   179 
Foreign currency translation adjustment  23   7   88   19 
Net income/(loss) during the period  (9,276)  1,209   (10,564)  3,532 
Balance at end of the period $61,584  $79,955  $61,584  $79,955 

13
Table of Contents

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)


9. Debt

8.

Senior Convertible Notes and Warrants

On December 17, 2019, the Company completed the issuance and sale of $3,000 aggregate principal amount of secured convertible notes of the Company (the “Notes”) and warrants (the “Warrants”) to purchase 340,909 shares of common stock, par value $0.001 per share of the Company (the “Common Stock”), in a private placement transaction. The Notes and Warrants were issued and sold to Edward D. Bagley, an affiliate of the Company, on the terms and conditions of a Note Purchase Agreement dated December 8, 2019 between the Company, certain subsidiary guarantors of the Company, and Mr. Bagley. Mr. Bagley is an affiliate of the Company and was the beneficial owner of approximately 46.6% of the Company’s issued and outstanding shares of Common Stock at the time that the Notes and Warrants were issued to him. 

The Notes will mature on December 17, 2023 (the “Maturity Date”) and will accrue interest at a variable rate adjusted on a quarterly basis and equal to two and one-half percent (2.5%) over the greater of (x) five and one-quarter percent (5.25%) and (y) the Prime Rate as published in the Wall Street Journal (New York edition) as of the beginning of such calendar quarter.  The Notes may be converted into shares of the Company’s Common Stock at any time at the election of Mr. Bagley at an initial conversion price of $2.11 per share (the “Conversion Price”), or 120% of the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market. Also, the Company can cause a mandatory conversion of the Notes if the volume weighted average closing price of the Common Stock over 90 consecutive trading days exceeds 200% of the Conversion Price. In addition, the Notes may be redeemed by the Company for cash at any time after December 17, 2020 upon payment of the outstanding principal balance of the Notes and any unpaid and accrued interest.  The Company also is required to redeem the Notes upon the occurrence of a change in control of the Company.

The Warrants have an initial exercise price equal to $1.76, the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market, and are exercisable until December 17, 2026.  The Warrants must be exercised for cash, unless at the time of exercise there is not a then effective registration statement for the resale of the shares of Common Stock issuable upon exercise of the Warrants, in which case the Warrants may be exercised via a cashless exercise feature that provides for net settlement of the shares of Common Stock issuable upon exercise. 

Concurrent with the issuance of the Notes and Warrants pursuant to the Note Purchase Agreement, the Company, the Guarantors and Mr. Bagley entered into a Guaranty and Collateral Agreement (the “Collateral Agreement”) pursuant to which the Company and the Guarantors granted Mr. Bagley a first priority lien interest in all of the Company’s assets as security for the Company’s performance of its obligations under the Notes and Warrants.

The net proceeds after original issue discount and issuance costs of $346 were approximately $2,654. The Company expects to use the proceeds from the sale of the Notes and Warrants for general corporate purposes and working capital. 

In accounting for the issuance of the Notes, the Company separated Notes and Warrants into liability and equity components. The carrying amount of Warrants, being an equity component, was first calculated using Black-Scholes method with the following assumptions:

Risk-free interest rate

1.82%

Expected life of warrants (years)

7

Expected price volatility

49.94%

Expected dividend yield

0%


The carrying amount of the Notes was then determined by deducting the fair value of the Warrants from the principal amount of the Notes. The carrying amount of the Notes was further separated into equity and liability components after separating the value of the conversion feature into an equity component and leaving the remaining value as liability. The equity component is notremeasuredwhile the Notes and Warrants continue to meet the conditions for equity classification for equity components.


The original issue discount and issuance costs are netted against the liability. The following table represents the carrying value of Notes and Warrants:


15
Table of Contents


UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)


 

 

September 30, 2021

 

 

December 31, 2020

 

Liability component:

 

 

 

 

 

 

 

 

Principal

 

$

2,730

 

 

$

3,000

 

Less: debt discount and issuance costs, net of amortization

 

 

(434

)

 

 

(581

) 

Net carrying amount

 

$

2,296

 

 

$

2,419

 

Equity component(1):

 

 

 

 

 

 

 

 

Warrants

 

$

318

 

 

$

318

 

Conversion feature

 

122

 

 

122

 

Net carrying amount

 

$

440

 

 

$

440

 










Current portion of liability component included under short-term debt
$630

$360
Long-term portion of liability component included under long-term debt

1,666


2,059
Liability component total
$2,296

$2,419

(1) Recorded on the condensed consolidated balance sheets as additional paid-in capital. 


Debt discount and issuance costs are amortized over the life of the note to interest expense using the effective interest method. During the three and nine months ended September 30, 2021, amortization of debt discount and issuance costs was $49 and $147, respectively and for the three and nine months ended September 30, 2020, amortization of debt discount and issuance costs was $50 and $148, respectively. The following table represents schedule of maturities of principal amount contained in the Notes as of September 30, 2021:

Year ending December 31,

 

Principal Amount Maturing

 

2021 (Remainder)

 

$

90

 

2022

 

 

720

 

2023

 

 

1,920

 

2024

 

 

0—

 

Total principal amount

 

$

2,730

 


Short-term Bridge Loan


On July 2, 2021, the Company obtained a bridge loan in the principal amount of $2,000 from Edward D. Bagley (the “Bridge Loan”), an affiliate of the Company. The Bridge Loan is evidenced by a promissory note dated July 2, 2021 (the “Note”) issued by the Company to Mr. Bagley.  The Note bears interests at a rate of 8.0% per annum, matures on the earlier to occur of (i) October 1, 2021 or (ii) within two business days of the Company’s receipt of its expected U.S. federal income tax refund, and contains other customary covenants and events of default. On September 11, 2021, the Company amended and restated the terms of the Bridge Loan to extend the latest maturity date from October 1, 2021 to January 3, 2022. All other terms and conditions of the Bridge Loan remained the same. This Bridge Loan of $2,000 is included under short-term debt. 


Paycheck Protection Program Loan


On April 18, 2020, the Company, entered into a loan agreement with U.S. Bank National Association Bank, which provided for a loan in the principal amount of $1,499 (“PPP Loan”) pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for approximately sixteen months after the date of disbursement.


The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP Loan contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to use the entire PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act.


 

 

September 30, 2021

 

 

December 31, 2020

 

Current portion of the PPP Loan included under short-term debt
$874

$312
Long-term portion of the PPP Loan included under long-term debt

625


1,187
Liability component total
$1,499

$1,499


16
Table of Contents


UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)


10. Fair Value Measurements

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:

Level 1 - Quoted prices in active markets for identical assets and liabilities.

Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. This category generally includes U.S. Government and agency securities; municipal securities; mutual funds and securities sold and not yet settled.

Level 3 - Unobservable inputs.

The substantial majority of the Company’s financial instruments are valued using observable input.inputs. The following table sets forth the fair value of the financial instruments re-measured by the Company as of September 30, 20172021 and December 31, 2016:2020:

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

$

0—

 

 

$

819

 

 

$

0—

 

 

$

819

 

Municipal bonds

 

 

0—

 

 

 

601

 

 

 

0—

 

 

 

601

 

Total

 

$

0—

 

 

$

1,420

 

 

$

0—

 

 

$

1,420

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

$

0—

 

 

$

1,338

 

 

$

0—

 

 

$

1,338

 

Municipal bonds

 

 

0—

 

 

 

1,541

 

 

 

0—

 

 

 

1,541

 

Total

 

$

0—

 

 

$

2,879

 

 

$

0—

 

 

$

2,879

 

 

  Level 1  Level 2  Level 3  Total 
September 30, 2017                
Corporate bonds and notes $—  $14,459  $—  $14,459 
Municipal bonds  —   5,974   —   5,974 
Total $—  $20,433  $—  $20,433 

  Level 1 Level 2 Level 3 Total
December 31, 2016                
Corporate bonds and notes $—  $19,970  $—  $19,970 
Municipal bonds  —   6,425   —   6,425 
Total $—  $26,395  $—  $26,395 

9.11. Income Taxes

The Company’s forecasted effectivecurrent year loss did not result in income tax benefit rate at September 30, 2017 is 36.1%,due to recording a 0.9% decrease from the 37.0% effectivefull valuation allowance against expected benefits. The valuation allowance was recorded as we concluded that it was more likely than not that our deferred tax rate recorded at December 31, 2016. The forecasted effective tax benefit rate of 36.1% excludes jurisdictions for which no benefit from forecasted current year losses is anticipated. Including losses from such jurisdictions results in a forecasted effective tax benefit rate of 30.1%. Our forecasted effective tax rate could fluctuate significantly on a quarterly basis and could change,assets were not realizable primarily due to the extent that earnings in countries with tax rates that differ from that of the U.S. differ from amounts anticipated at September 30, 2017.

After a discrete tax expense of $145, the effective tax benefit rateCompany's recent pre-tax losses. Provision for income taxes for the quarternine months ended September 30, 2017 is 29.0%. The discrete2021 represents income tax expense of $145 is primarily attributable to changes in income tax reserves related to research and development tax credits.recorded for jurisdictions outside the United States. 


12. Subsequent events

10. Subsequent Events

None. 


On November 8, 2017 the Company announced a quarterly cash dividend for the third quarter of 2017 at $0.07 per share to be paid on December 6, 2017 to shareholders of record as of November 22, 2017.


1417
Table of Contents


Table of Contents

Item 2.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report on Form 10-Q includes “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 (the “Exchange Act”). All statements in this report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are based upon reasonable assumptions at the time made, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not anticipate, including, without limitation, product recalls and product liability claims; infringement of our technology or assertion that our technology infringes the rights of other parties; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth; delays in obtaining regulatory approvals or the failure to maintain such approvals; concentration of our revenue among a few customers, products or procedures; development of new products and technology that could render our products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition, availability of labor and materials, cost increases, and fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; integration of business acquisitions; and other factors referred to in our reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2016.2020. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are discussed in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and inPart I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.

BUSINESS OVERVIEW

 

BUSINESS OVERVIEW

ClearOne is a global companyCompany that designs, develops and sells conferencing, collaboration, and network streaming & signageAV networking solutions for voice and visual communications. The performance and simplicity of our advanced, comprehensive solutions offer unprecedented levelsa high level of functionality, reliability and scalability.

We derive mosta major portion of our revenue from professional audio conferencing products and microphones by promoting our products in the professional audio visualaudio-visual channel. We have extended our total addressable market from the installed audio conferencing market to adjacent complementary markets – microphones, video collaboration and networked media streaming.AV networking. We have achieved this through strategic technological acquisitions as well as by internal product development.

 

During the nine months ended September 30, 2017,first quarter of 2021, we were awardedannounced two new patents, onepowerful cameras that enhance the ease and visual quality of which was our innovative patent on a systemonline collaboration beyond the capabilities of integrated laptop and method involving the combination of echo cancellation, beamforming microphone arrays, and smart beam selection--the technology underpinning the ‘acoustic intelligence’ of our ground-breaking Beamforming Microphone Array. We continued to take the necessary steps to enforce this strategic patent to remedy having to compete against our own patented technology, and to defend the validity of our patents.

During the nine months ended September 30, 2017, our efforts primarily centered on shipping remaining models in our newly introduced next-gen DSP conferencing platform and Beamforming Microphone Array, and promoting the transition from our legacy Converge Pro 1 (CP1) platform toPC cameras. With the new Converge Pro 2 (CP2) platform.

Overall revenue declinedClearOne UNITE® 10, the company’s most affordable camera ever, and the feature-rich ClearOne UNITE 50 4K AF that includes Auto-Framing technology for automatic single- or multi-person capture, everyone can take on the new year with the confidence provided by stunning video that puts them in the threebest possible light. We recognized that millions of people were expected to use video collaboration tools, for the first time, and nine months ended Septemberthe rapid societal shift to home-based and remote work left a lot of people desiring higher quality video solutions to ensure they make a good impression and enjoy reliable, clear and efficient communication. For users who want to upgrade from the basic camera included in their laptop or PC, ClearOne has lowered the barrier of entry with its most affordable webcam ever, the UNITE 10. The small, powerful webcam supports up to 1080p video quality and offers autofocus. The UNITE 10 can capture five-megapixel images with a field of view up to 87 degrees, while major competitors at this price point only achieve 78-degree field of view. The UNITE 10 attaches to any PC or laptop with a simple mounting bracket, and a 1.5m USB-A cable ensures simple connection to most modern computers. The UNITE 10 is also available to dealers and distributors in 20 packs for commercial sale. The new UNITE 50 4K AF camera is a major upgrade over traditional webcams and introduces ClearOne’s new Auto-Framing technology that automatically frames meeting participants to maximize screen use through intelligent image algorithms and ePTZ automation (electronic pan, tilt and zoom). With 4K video quality at 30 2017 when compared to the three and nine months ended September 30, 2016 notwithstanding a large order that was fulfilled in the quarter ended September 30, 2017. The declines in revenue from professional audio products and unified communications end pointsHz, auto-focus capability, 4x digital zoom, more than offset8 megapixels of total resolution and an ultra-wide 110-degree field of view, the increaseUNITE 50 4K AF ePTZ is equally capable of delivering incredible image quality from a home office as it is at capturing all participants in revenue from video products. Our gross profit margin decreased to 59% from 63% for the nine months ended September 30, 2017 and 2016, respectively. Gross profit margin decrease was primarily due to the decrease in the mixan office boardroom. 

18
Table of higher margin products and the price reductions associated with transition from CP1 to CP2 partially offset by the absence of inventory scrapping costs in 2017. Our gross profit margin increased to 62% from 59% for the three months ended September 30, 2017 and 2016, respectively. The increase is primarily due to the significantly higher margin enjoyed by the large order fulfilled in the third quarter of 2017 and the absence of inventory scrapping costs in the third quarter of 2017 compared to third quarter of 2016.

15
Contents
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Industry conditionsThe camera can be controlled through an IR remote, further simplifying use and enabling real-time control of pan, tilt and zoom to provide greater control when capturing multi-person meeting environments. A standard damping mount ensures fast, easy installation, while an included USB 3.0 cable provides both power and video. Both new ClearOne cameras enable life-like video quality to web-based conferencing applications including ClearOne’s COLLABORATE® Space, WebEx™, Google Meet, Zoom™, GoToMeeting™, and Microsoft® Teams.


During February 2021, we expanded the applications for our BMA 360, Beamforming Microphone Array Ceiling Tile with the addition of a new Voice Lift feature that allows its impeccable audio to be locally amplified and heard throughout classrooms, lecture halls, and large meeting rooms. ClearOne’s powerful breakthrough technologies, FiBeam™ and DsBeam™, already found on the BMA 360, enable exceptional new levels of Voice Lift performance. FiBeam technology makes the BMA 360 the world’s first truly wideband, frequency-invariant beamforming mic array that provides the ultimate in natural and full-fidelity sound. DsBeam provides unparalleled sidelobe depth below -40 dB, resulting in superior rejection of reverb and noise and providing superb clarity and intelligibility. With the addition of the new Voice Lift feature, the BMA 360 offers everything desired in a beamforming microphone array ceiling tile—superior beamformed audio, echo cancellation, noise cancellation, auto-mixing, power amplifiers, and camera-tracking functions. The ClearOne architecture offers easy setup and configuration for foolproof installation which benefits AV practitioners. End-users also benefit from the BMA 360’s reduced overall system cost for maximum return on investment. Each BMA 360 can have up to four Voice Lift zones to provide a simple and intuitive way to drive multiple speaker groups, allowing everyone to easily hear and be heard. Built-in 4 channel power amplifiers make wiring simple, convenient, and provide a large cost savings. ClearOne’s innovative combination of built-in power amplifiers and mix-minus zones makes the Voice Lift feature extremely simple to create and deploy. The BMA 360, now with Voice Lift, sets another industry standard for exceptional mic pickup distance and system gain.


During May 2021, we announced the immediate availability of CONVERGENCE AV Cloud, which significantly expands AV Practitioner recurring revenue opportunities for remote, real-time Management as a Service (MaaS). CONVERGENCE Cloud software is a unified AV network management platform to monitor, control, and audit ClearOne Pro Audio and Video products and services. Remote real-time system access provides at-a-glance and all-inclusive dashboard views with auto-discovery of Pro Audio devices and unlimited scalability designed to support organizations of any size. With the new Cloud option, AV Practitioners can profit on value-added MaaS opportunities to easily support multiple clients and multiple networks with fully secure, real-time remote system access on a single multi-tenant platform. The powerful and elegant user interface, in twelve languages, works on any browser and will allow full support of the AV Network with built-in video, audio, and chat tools for real-time communications as well as email and immediate SMS text alerts. Relevant information is quickly found with search, sort, and filter options. CONVERGENCE AV Cloud can be virtually partitioned for AV management by location such as building, floor, room, or any desired global topology. Practitioners can easily manage accounts, assigning three levels of access with Owner, Administrator, and Monitor roles; all housed on encrypted secure cloud servers. Client tenant usage can be conveniently tracked for invoicing and optional auto-payment reminders.

During July 2021 we introduced UNITE 180 ePTZ professional camera that provides a full 180-degree panoramic field-of-view with “real-time stitching” to achieve a variety of useful viewing modes for any application and environment. Designed for professional-quality visual collaboration, conferencing, UC applications, distance learning, and more, the new UNITE 180 camera provides six viewing mode options as well as panoramic view for the ultimate in camera flexibility. Real-time stitching creates a seamless 180-degree panoramic view of wide spaces by bringing the views of multiple lenses together as one complete image. Large classroom settings, training centers, or any wide conferencing area are all captured and presented with perfect clarity in any of the viewing mode options. A 4x zoom further enhances the UNITE 180 feature set. The UNITE 180 is compatible with all popular cloud-based video collaboration applications including Microsoft Teams, Zoom, WebEx, Google Meet, ClearOne’s COLLABORATE Space and others.


19
Table of Contents


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


During July 2021 we also announced the market introduction of Versa Mediabar, the company’s first professional quality all-in-one audio and video capture device that combines the elegance and simplicity of a soundbar with the power of ClearOne’s intelligent audio capture and 4K camera technologies. Versa Mediabar provides high-quality visual collaboration, audio conferencing, and UC applications from a single integrated device, offering the simplest solution available for offices, conference rooms and home offices with virtually no setup required. With a compact design that can be mounted on a wall or attached to a video display, the Versa Mediabar connects via a single USB cable to elevate the soundbar concept into a powerful tool for virtual collaboration that includes AI-enabled auto-framing and people tracking. The Versa All-In-One Mediabar features a built-in 4K Ultra HD camera with a 110-degree ultra wide-angle field of view and a four-element microphone array with 360-degree voice pickup and intelligent DSP that provides acoustic echo cancellation (AEC) and automatic noise reduction to ensure crystal clear audio capture. The camera combines electronic pan, tilt and zoom functions (ePTZ) with artificial intelligence to enable auto-framing and people tracking that keeps the speaker in view even if they move around the room. From huddle spaces and small meeting rooms to executive offices and home offices, the compact Versa Mediabar delivers all the power and clarity needed for daily virtual communications. In addition to its professional-quality audio and video capture, the Versa Mediabar also features a powerful built-in speaker with Bluetooth connectivity that allows it to serve double duty as a fully-featured conferencing solution or a Bluetooth speaker for impromptu calls using any Bluetooth device. These attributes make the Versa Mediabar perfect for popular cloud-based collaboration applications such as Microsoft Teams, Zoom, WebEx, Google Meet, and ClearOne’s COLLABORATE® Space. The Versa Mediabar supports standard UVC commands for control, making it a great addition to existing systems, while dual wall and display mounting options deliver freedom of placement and movement.


During the first nine months of 2021, we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents. We believe the decision by the U.S. District Court in August 2019 granting our request for a preliminary injunction to prevent Shure from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. The decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops Shure from further infringing the Graham patent pending a full trial. Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave the way for ClearOne’s recovery from the immense harm inflicted by Shure's infringement of our valuable patents. However, we are not getting the full benefits of the Court’s extraordinary remedy in the form of the preliminary injunction granted against Shure with respect to infringement of our ’806 Patent as we believe that Shure is still infringing ClearOne’s patent. 


We also continued our programs to cut costs and to speed up product development that we believe will enable us to get back to a growth path.

 

Overall revenue decreased by 17% in the third quarter of 2021 when compared to the third quarter of 2020, primarily due to a sharp decline in revenues from video products partially offset by increase in revenues from microphones and audio conferencing products. Overall revenue increased by 6% during the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to increase in revenue from microphones, especially the BMA based solutions and audio conferencing products partially offset by a decline in revenues from video products.  Revenue from video products was impacted negatively during 2021-Q3 when compared to 2020-Q3 due to lack of demand for video products and personal audio conferencing products at the same level as it was in latter half of 2020 when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act.


Our revenue performance in 2021-Q3 was also impacted negatively due to the raw material supply shortages that have affected the global manufacturing of high tech products as well as due to logistics bottlenecks. Despite the negative impact of COVID-19 and the infringement of our patents by Shure on all professional installed products, our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") continued to result in overall Beamforming Microphone Array ("BMA") revenue to be significantly higher than last year. However, revenue from BMA products as well as from our pro audio products are still far below the levels prior to infringement of our patents. Our revenue is negatively impacted  due to on-going harm of infringement of ClearOne’s patents despite the preliminary injunction granted against Shure as we believe Shure continues to infringe certain of our patents and violates the preliminary injunction. The patent infringement also has negatively impacted directly the revenue from ClearOne’s other products not related to the infringed patents.  


Our gross profit margin decreased to 40.8% during the third quarter of 2021 from 41.8% during the third quarter of 2020. Net loss increased from $1.3 million in the third quarter of 2020to $2.2 million in the third quarter of 2021. The increase in net loss was mainly due to (a) decrease in absolute gross profit dollars as a result of lower revenue (b) increased amortization costs relating to our capitalized patent defense costs, and (c) increase in trade show related marketing expenses. During the nine months ended September 30, 2021, our absolute gross profit dollars increased to $9.3 million from $9.0 million in the same period in 2020 despite gross profit margin declining to 42.6% from 43.8% due to increase in revenues. During the nine months ended September 30, 2021, net loss increased to  $5.4 million compared to $5.0 million during the same period in 2020 mainly due to increased amortization costs relating to our capitalized patent defense costs, partially offset by higher gross profit dollars from higher revenue.


20
Table of Contents


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Industry conditions

We operate in a very dynamic and highly competitive industry which is dominated on theonehand by a few players with respect to certain products like traditional video conferencing appliances while on the other influenced heavily by a fragmented reseller market consisting of numerous regional and local players. The industry is also characterized by the influx of venture capitalist funded start-ups and private companies keenwilling to winfund cumulative cash losses in order to gain market share even at the expense of mounting financial losses.and achieve certain non-financial goals. 

Economic conditions, challenges and risks

The audio-visual products market is characterized by intense competition and rapidly evolving technology. Our competitors vary within each product category. Our installed professional audio communicationconferencing products, which contribute the most tois our revenue, continuesflagship product category, continue to be ahead of the competition despite the reduction in revenues through our transition from the CP1 platform to the next generation CP2 platform.revenues. Our strength in this space is largely due to our industry leading conferencing technologies and the fullfully integrated suite of products consisting of DSP mixers, wide range of professional microphone products especially Beamforming Microphone Arrays.and video collaboration products. Despite our strong leadership position in the installed professional audio communications productsconferencing market, we face challenges to revenue growth due to the limited size of the market and pricing pressures from new competitors attracted to the commercial market. Our revenues from our flagship professional audio conferencing products continue to suffermarket due to the delay in transitioning from our old CP1 platform to CP2 platform and due to increased competition for our beamforming microphones from competitors who are infringing our patents.higher margins.


Revenue from ourOur video products inand beamforming microphone arrays, especially BMA-CT and the overall revenue mix has been improving on the back of a strong growth fornewly introduced BMA 360 are critical to our video products in 2016 that has continued in 2017.long term growth. We face intense competition in this market from well-established market leaders as well as emerging players rich with marketing funds. We expect our strategy of combining Spontania,curated audio solutions with our cloud-based video conferencing product, Collaborate, our appliance based media collaboration producthigh quality professional cameras, and our high-end audio conferencing technology to providewill generate high growth in revenue in the near future. We believe we are also well positioned to capitalize on the continuing migration away from the traditional hardware based video conferencing systems to software based video conferencing applications.


We derive a major portion of our revenue (about 49%)(approximately 38% for the year ended December 31, 2020) from international operations and expect this trend to continue in the future. Most of our revenue from outside the U.S. is billed in US DollarsU.S. dollars and is not exposed to any significant currency risk. In spite ofHowever, we are exposed to foreign exchange risk if the U.S. dollar losing strengthis strong against other currencies a strongas it will make U.S. dollar would makeDollar denominated prices of our products less competitive.


Deferred Revenue

Each quarter-end, we evaluateIn December 2019, a novel strain of coronavirus (“COVID-19”) started spreading from China and was declared a pandemic. The COVID-19 pandemic caused severe global disruptions and had varying impact on our business. The installed audio conferencing market was negatively impacted due to lockdowns, postponement of projects and restrictions on installers to visit commercial sites. On the inventory inother hand, COVID-19 generated higher than normal demand for our video products and personal conferencing products due to the distribution channel through information provided by certainsignificant expansion of work-from-home market. The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the vaccination rate, effectiveness of vaccines especially on novel strains of COVID-19, government regulations, etc., all of which are uncertain and difficult to predict considering the rapidly evolving landscape. If the pandemic continues to be a severe worldwide health crisis, the disease could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our distributors. The level of inventory in the channel fluctuates up or down each quarter based upon our distributors’ individual operations. Accordingly, each quarter-endcommon stock.

Deferred Product Revenue

Deferred product revenue deferral is calculated and recorded based upon the underlying channel inventory at quarter-end. Deferred revenue was approximately $3.9 million as ofdecreased to $57 thousand on September 30, 2017,2021 compared to $3.8 million of deferred revenue as of June 30, 2017 and $3.9 million of deferred revenue as of$123 thousand on December 31, 2016.2020.

A detailed discussion of our results of operations follows below.


21
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations for thethree and nine months ended September 30, 2017 and 20162021

The following table sets forth certain items from our unaudited condensed consolidated statements of operations (dollars in thousands) for the three and nine months ended September 30, 2017 (“2017-Q3”2021(“2021-Q3”)("2021-YTD") and 2016 (“2016-Q3” 2020 ("2020-Q3")("2020-YTD"), respectively, together with the percentage of total revenue which each such item represents:


16
Table of Contents
  

Three months ended September 30,



Nine months ended September 30,
(dollars in thousands) 

2021

  

2020

  

Percentage Change 2021 vs 2020



2021

2020

Percentage Change 2021 vs 2020

Revenue

 $6,992  $8,412   -17%
$21,765

$20,503


6%

Cost of goods sold

  4,141   4,892   -15%

12,487


11,527


8%

Gross profit

  2,851  3,520   -19%

9,278


8,976


3%

Sales and marketing

  1,692   1,736   -3%

5,020


4,932


2%

Research and product development

  1,492   1,501   -1%

4,253


4,319


-2%

General and administrative

  1,676   1,443   16%

5,024


4,475


12%

Total operating expenses 

  4,860   4,680  
4%

14,297


13,726


4%

Operating loss

  (2,009)  (1,160)  73%

(5,019)

(4,750)

6%

Interest expense net of other income

  (143)  (89)  61%

(352)

(255)

38%

Loss before income taxes

  (2,152)  (1,249)  72%

(5,371)

(5,005)

7%

Provision for income taxes

  17   11  55%

39


39


0%

Net loss

 $(2,169) $(1,260)  72%
$(5,410)
$(5,044)

7%

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSRevenue

  Three months ended September 30,  Nine months ended September 30, 
  2017  2016  Percentage Change 2017 vs. 2016  2017  2016  Percentage Change 2017 vs. 2016 
Revenue $10,560  $12,908   (18)% $32,549   37,907   (14)%
Cost of goods sold  4,051   5,240   (23)%  13,293   14,110   (6%
Gross profit  6,509   7,668   (15)%  19,256   23,797   (19)%
Sales and marketing  3,006   2,389   26%  8,393   7,695   9%
Research and product development  2,268   2,116   7%  6,947   6,481   7%
General and administrative  1,281   1,739   (26)%  5,597   4,904   14%
Impairment of an intangible asset  736   —   100%  736   —   100%
Impairment of goodwill  12,724   —   100%  12,724   —   100%
Operating income/(loss)  (13,506)  1,424   (1,048)%  (15,141)  4,717   (421)%
Other income  78   100   (22)%  264   194   36%
Income (loss) before income taxes  (13,428)  1,524   (981)%  (14,877)  4,911   (403)%
Provision for (benefit from) income taxes  (4,152)   315   (1,418)%  (4,313)  1,379   (413)%
Net income (loss) $(9,276) $1,209   (867)% $(10,564) $3,532   (399)%

Revenue

Our revenue decreased by $2.3 million, or 18%, to $10.6$7.0 million in 2017-Q32021-Q3 compared to $12.9$8.4 million in 2016-Q3. The 66%2020-Q3 primarily due to a 55% decrease in video products partially offset by increases in microphones revenue by 9% and audio conferencing revenue by 4%. Video products suffered declines in 2021-Q3 compared to 2020-Q3 due to lack of demand for video products and personal audio conferencing products at the same level as it was in 2020-YTD when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act. Microphones growth continued to be led by our new solutions incorporating BMA-CT and BMA 360 while our traditional ceiling mics suffered a decline in revenues.  Audio Conferencing category as a whole increased mainly due to a strong revenue performance of our professional mixers despite significant decline in revenues from personal audio conferencing products. During the third quarter of 2021, revenues from Americas declined by 45% primarily due to decline in revenues from USA and Canada despite significant revenue growth from Latin America, while revenues from Asia Pacific, including the Middle East, India and Australia grew by 88% primarily due to overall increase in revenues from all regions except Korea, and revenues from Europe and Africa increased by 34% primarily due to significant revenue increases from video products was more than offsetNorthern Europe followed by a 30% declineoverall revenue growth in professional audio conferencing revenueall other regions of Europe and a 25% decline in revenue from unified communication (UC) end points. For the nine months ended September 30, 2017, revenue decreased by $5.4 million, or 14%, to $32.5 million, as compared to $37.9 million for the nine months ended September 30, 2016. The 51% increase in revenue from video products was more than offset by a 21% decline in professional audio conferencing revenue and a 26% decline in revenue from unified communication (UC) end points. Africa. 


During the nine months ended September 30, 2017, premium2021 our revenues increased from $20.5 million to $21.8 million compared to same period in 2020 due to increases in microphones revenue increasing by 27%, and audio conferencing revenue by 7%, partially offset by a decrease in video products declined the most while media collaboration products increased the most. The decline in revenue from professional audio conferencing products was mostly due to decline in revenue from legacy CP1 products and reductions in CP1 pricing effected in the last quarter of 2016. The share of professional audio communications products (which includes microphone products but not premium products) in our product mix declined from 77% in 2016-Q3 to 66% in 2017-Q3.by 19%. The increase in revenue from microphones continued to be led by our new solutions incorporating BMA-CT and BMA 360 with wireless microphones also enjoying revenue growth. Audio Conferencing category as a whole increased mainly due to a strong revenue performance by our professional mixers. However other product categories within audio conferencing category suffered revenue declines during 2021-YTD when compared to 2020-YTD. Video products suffered declines in 2021-YTD compared to 2020-YTD due to lack of demand for video products and personal audio conferencing products at the same level as it was due toin latter half of 2020 when the success of Unite camerademand from work from home and favorable reception to the new Collaborate SKUs containing integrated audio solutions. Share of video products in the revenue increasedlearn from 12% in 2016-Q3 to 24% in 2017-Q3, while share of UC end points in the revenuehome markets was boosted by stimulus funding through CARES Act. During 2021-YTD revenues from Americas declined from 11% in 2016-Q3 to 10% in 2017-Q3.

During 2017-Q3, revenue declined in the US, Canada, South Eastby 22%, Asia Japan, Korea and some parts of Europe while revenue from China,Pacific, including the Middle East, India Australia and some part of Europe grew. Asia Pacific including Middle EastAustralia increased by 43%;49% and Europe and Africa declinedincreased by 3%78%. Revenues increased from all major regions except USA and Americas declined by about 37%. TheCanada during 2021-YTD compared to 2020-YTD with rate of revenue decline was primarily caused by the delay in the transition to our next generation audio platform, CP2, combined with price reduction offered to stimulate customer interestgrowth from Southern Europe and sales in the legacy CP1 products. Revenue was also negatively affected by less than robust infrastructure and capital equipment spending. In spiteLatin America far exceeding rate of the generally less than robust infrastructure spending, we did complete the sale to a major project by a Chinese entity. This caused the revenue increase for the Asia Pacific region quarter-over-quarter. from other regions.  


We believe, although there can be no assurance, that we willcan sustain our revenue growth and return to a growth path once the transition from CP1 platform to the newer CP2 platform occurs. However, we anticipate that the growth will depend on the speed at whichgenerating operating profits through our customers transition to the new platformstrategic initiatives namely product innovation, cost reduction and the economic recovery in certain key markets which remains weak.defense of our intellectual property.

Costs of Goods Sold and Gross Profit

Cost of goods sold (“COGS”) includes expenses associated with finished goods purchased from outsourced manufacturers, the manufacturerepackaging of our products, (including material and direct labor), our manufacturing and operations organization, property and equipment depreciation, warranty expense, freight expense, royalty payments, and the allocation of overhead expenses.expenses.


Our gross profit for the three months ended September 30, 2017 was approximately $6.5 million or 62% comparedmargin decreased from 41.8% during 2020-Q3 to approximately $7.7 million, or 59%, for the three months ended September 30, 2016. Gross margin for the three months ended September 30, 2017 improved primarily due to the significantly higher margin enjoyed by the large order fulfilled in the third quarter of 2017 and the absence of inventory scrapping costs in the third quarter of 2017. Our40.8% during 2021-Q3. The gross profit for the nine months ended September 30, 2017margin was approximately $19.3 million, or 59%, compared negatively impacted due to approximately $23.8 million, or 63%, for the nine months ended September 30, 2016. Gross margin declined for the nine months ended September 30, 2017 primarily due to the following reasons: (1) price reductions made to CP1 products to encourage CP1 salesincreased freight and (2) decline in higher margin professional audio conferencing products in the mixtariff costs, and inventory obsolescence and scrap costs as a percentage of revenue, partially offset by the absencedecrease in material costs and inventory adjustment costs as a percentage of inventory scrapping costs in 2017.revenue.

22
Table of Contents


17
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our gross profit margin decreased from 43.8% during 2020-YTD to 42.6% during 2021-YTD. The gross profit margin decreased primarily due to increased material costs, freight and tariff costs, and inventory obsolescence and scrap costs as a percentage of revenue, partially offset by decrease inventory adjustment costs as a percentage of revenue.

Our profitability in the near-term continues to depend significantly on our revenues from professional audio conferencinginstalled audio-conferencing products. We hold long-term inventory and if we are unable to sell our long-term inventory, our profitability might be affected by inventory write-offs and price mark-downs. Our long-term inventory includes approximately $0.6 million of wireless microphone-related finished goods and assemblies, $0.5 million of Converge Pro and Beamforming microphone array products, $0.2 million of network media streaming products, $0.3 million of tabletop conferencing products and about $1.0 million of raw materials that will be used primarily for manufacturing professional audio conferencing products. Any business changes that are adverse to these product lines could potentially impact our ability to sell our long-term inventory in addition to our current inventory.

Operating Expenses

Operating income, or income from operations, is the surplus after operating expenses are deducted from gross profits. Operating expenses include sales and marketing (“S&M”) expenses, research and product development (“R&D”) expenses and general and administrative (“G&A”) expenses. Total operating expenses were $20.0$4.9 million for the three months ended September 30, 20172021-Q3 compared to $6.2$4.7 million for the three months ended September 30, 2016.2020-Q3. Total operating expenses were $34.4$14.3 million for the nine months ended September 30, 2017, of which $13.4 million was related to the impairment of the goodwill and intangibles in Q3 2017,2021-YTD compared to $19.1$13.7 million for the nine months ended September 30, 2016.2020-YTD. The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items.

Sales and Marketing - S&M expenses include sales,selling, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses.

S&M expenses for the three months ended September 30, 2017 increased2021-Q3 remained almost unchanged at $1.7 when compared to $3.0 million from $2.4 million for the three months ended September 30, 2016.2020-Q3. The increase was mainly due to increasesincreases in inventories used for customer demonstrations, higher commission expenses booked in the third quarter of 2017, higher marketing expenses related to tradeshows, and increased spendingincluding trade-show expenses were more than offset by a decline in employee related expenses. sales commissions. 


S&M expenses for the nine months ended September 30, 20172021-YTD increased to $8.4$5.0 million from $7.7$4.9 million for the nine months ended September 30, 2016.2020-YTD. The increase was primarily due to an increase in headcount and employee related expenses, increases in  inventories used for customer demonstrationsemployee sales commissions and increase in marketing expenses related to tradeshowswere partially offset by declinedecreases in commissions paid to independent agents.reps, travel expenses and shipping costs.

Research and Product Development - R&D expenses include research and development, product line management, engineering services, and test and application expenses, including employee relatedemployee-related costs, outside services, expensed materials, depreciation, and an allocation of overhead expenses.

R&D expenses were approximately $2.3remained almost the same at $1.5 million for both quarters compared. The increase in R&D project expenses were offset by decreases in legal expenses and employee related expenses.


R&D expenses remained almost the three months ended September 30, 2017,same at $4.3 million for 2021-YTD, as compared to $2.1 million for the three months ended September 30, 2016.2020-YTD. The increase was primarily due to increasedecreases in employee costs related to salaries, benefitsexpenses and patent bonuses.legal expenses were offset by increases in R&D project expenses were approximately $6.9 million for the nine months ended September 30, 2017, as compared to $6.5 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in employee-related costs mainly salaries and benefitsone-time employment termination expenses.

General and Administrative - G&A expenses include employee-related costs, professional service fees, allocations of overhead expenses, litigation costs, and corporate administrative costs, including costs related to finance and human resources.resources teams.

G&A expenses decreased approximately 26%increased from $1.4 million in 2020-Q3 to $1.2 million for the three months ended September 30, 2017 compared with approximately $1.7 million in 2016.2021-Q3. The reductionincrease was primarily due to theincreased amortization costs relating to our capitalized patent defense costs and an increase in insurance expenses partially offset by a decrease in legal costs. expenses.


G&A expenses increased approximately 14% to $5.6 million for the nine months ended September 30, 2017 compared with approximately $4.9from $4.5 million in 2016. 2020-YTD to $5.0 million in 2021-YTD. The increase in G&A expenses was primarily due to increasesincreased amortization costs relating to our capitalized patent defense costs and increase in legalinsurance expenses and consulting fees partially offset by a declinedecrease in salaries and bonuses.legal expenses.

Impairment of Goodwill and an intangible asset - Based on the results of the Company’s recent impairment analysis triggered by the fall in the Company’s stock price and recent financial results, the Company determined that goodwill and an intangible asset consisting of customer relationships were impaired and recognized a charge of $12.7 million towards goodwill impairment and $0.7 million towards the intangible asset impairment for the three and nine months ended September 30, 2017.

Other income (expense), net

Other income (expense), net includes interest income interest expense, and foreign currency changes. Other income remained immaterial during the third quarter of2021and2020 and between 2021-YTD and 2020-YTD.

Interest expense increased from $0.1 million in 2020-Q3 to $0.15 million in 2021-Q3 due to increased debt during 2021-Q3 compared to 2020-Q3.


Interest expense increased to $0.4 million in 2021-YTDcompared to $0.3 million in 2020-YTD due to increased debt during 2021-YTD compared to 2020-YTD.


Provision for income taxes

During 2021-YTD, we did not recognize any benefit from the nine months ended September 30, 2017, we accruedlosses incurred due to setting up of a full valuation allowance. Provision for income taxes at the forecasted effective tax benefit raterecognized for 2021-Q3 and 2021-YTD relates to foreign jurisdictions.


23
Table of 36.1% as compared to the forecasted effective tax rate of 32.3% used during the nine months ended September 30, 2016. The 3.8% increase in the forecasted effective tax rate was primarily due to projected income in 2016, yet projected losses in 2017. As a result, tax benefits, such as the research and development tax credit, increased the benefit rate in 2017. Inaddition, a discrete tax expense of $145 thousand is primarily attributable to changes in income tax reserves related to research and development tax credits.Contents

18
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2017,2021, our cash and cash equivalents were approximately $3.0 million, a decrease of approximately $9.1 $9.2 million compared to cash and cash equivalents of approximately $12.1$3.8 million as of December 31, 2016.2020. Our working capital was $26.8$23.7 million and $30.8$22.2 million as of September 30, 20172021 and December 31, 2016,2020, respectively.

Net cash used in operating operating activities was approximately $7.6$1.5 million for the nine months ended September 30, 2017,in 2021-YTD, an increaseincrease of cash used of approximately $15.0$1.2 million from $7.4$0.3 million of cash provided by used inoperating activities in the nine months ended September 30, 2016. 2020-YTD. The increase was primarily due to an increase in cash outflowsoutflow was due to a negative change in operating assets and liabilities of $9.2$1.0 million, and a reduction in net income of $14.1 million offset by an increase in non-cash charges by $0.2 million and an increase in net loss by $0.4 million.

Net cash used in investing activities was $4.2 million in 2021-YTD compared to $4.4 million in 2020-YTD, a decrease in cash used of $8.3$0.3 million. The decrease in cash used in investing activities was primarily due to a decrease in capitalized patent defense costs by $0.2 million and a decrease in purchase of property and equipment by $0.2 million, offset partially by a decrease in net cash realized from marketable securities of approximately $0.1 million.


Net cash provided by investingfinancing activities in 2021-YTD was $4.4$11.0 million consisting primarily of net proceeds from issue of common stock and warrants for the nine months ended September 30, 2017 compared to net cash flows used by investing activities$9.3 million and proceeds from short-term bridge loan of $1.8 million during the nine months ended September 30, 2016, an increase in cash provided of $6.2 million. The increase was primarily due to an increase in net sales of marketable securities of approximately $7.2$2.0 million offset by $1.0repayment of principal amounts due on senior convertible notes of $0.3 million compared to cash provided by financing activities of $6.3 million in purchases2020-YTD, which consisted of propertynet proceeds from issue of common stock and equipmentwarrants for $4.8 million and intangibles.proceeds of $1.5 million from Paycheck Protection Program.  

Capitalization of patent defense costs.costs. We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. When we capitalize patent defense costs we amortize the costs over the remaining estimated useful life of the patent,patents, which is 15 to 17 years. During the three and nine months ended September 30, 20172021-Q3 we paid $845 thousand, in grossspent $2.1 million on legal costs related to the defense of our patents and $845 thousand of such costs were capitalized.capitalized the entire amount.

Net cash used in financing activities wasWe are currently pursuing all available legal remedies to defend our strategic patents from infringement. We have already spent approximately $5.9$25.7 million during the nine months endedfrom 2016 through September 30, 2017 primarily consisted of cash outflows of $4.4 million on repurchase2021 towards this litigation and cancellation of stock, $1.7 millionmay be required to spend more to continue our legal defense. We believe the decision by the U.S. District Court in August 2019 granting our request for dividend payments partially offset by $0.1 million proceedsa preliminary injunction to prevent our competitor from stock based compensation programs. Net cash usedmanufacturing, marketing, and selling its competing ceiling microphone array in financing activities was approximately $6.8 million during the nine months ended September 30, 2016 primarily consisted of cash outflows of $6.9 million on repurchasean infringing configuration is an incredibly valuable ruling for ClearOne and cancellation of stock and stock options, $1.4 million for dividend payments offset by $1.5 million proceeds from stock based compensation programs.

its business. We believe that future incomethe decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from operationsfurther infringing our Graham patent (U.S. Patent No. 9,813,806) pending a full trial. Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave way for ClearOne’s recovery from the immense harm inflicted by our competitor's infringement of our valuable patents. However, we are not getting the full benefits of the Court’s extraordinary remedy in the form of the preliminary injunction granted against Shure with respect to infringement of our ’806 Patent as we believe that Shure is still infringing ClearOne’s patent. During September 2020, the U.S District Court of Northern Illinois held Shure in contempt for marketing and selling their new design in violation of the preliminary injunction.

We have been actively engaged in preserving cash by suspending our dividend program and allowing our share repurchase program to expire in 2018 and implementing company-wide cost reduction measures. We have also raised additional capital of $9.9 million (net of issuance costs) in 2018 by issuing common stock, $2.7 million (net of issuances costs) in 2019 by issuing senior convertible notes, $1.5 million in April 2020 by borrowing through Paycheck Protection Program, $4.8 million (net of issuances costs) in September 2020 by issuing common stock and warrants, $2.0 million in July 2021 by issuing short-term debt and $9.3 million (net of issuances costs) in September 2021 by issuing common stock and warrants. In addition, we are generating additional cash as our inventory levels are brought down to historical levels.


We also believe that the measures taken by us will yield higher revenues in the future. We believe, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet our short-term and long-term operating requirements and finance our growth plans.needs through at least through November 12, 2022. We also believe that our strong financial positionportfolio of intellectual property and sound business structureour solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs. In additionneeds; however, there can be no assurance that, if needed, we will be successful in obtaining the necessary funds through equity or debt financing. If we need additional capital and are unable to capital expenditures,secure financing, we may use cash in the near future for selective infusions of technology, salesbe required to further reduce expenses, delay product development and marketing, infrastructure, and other investments to fuelenhancement, or revise our growth, as well as acquisitions that may strategically fit our business and are accretive to our performance. We also intend to use cash to pay quarterly cash dividends and repurchase stock under our repurchase program.strategy regarding ongoing litigation.


At September 30, 2017,2021, we had open purchase orders related to our electronics manufacturing service providers of approximately $6.7$6.0 million primarily related to inventory purchases.mostly for purchase of inventory.

At September 30, 2017,2021, we had inventory totaling $22.1$12.5 million, of which non-current inventory accounted for $2.4$3.3 million. This compares to total inventories of $13.0$15.1 million and non-current inventory of $1.7$4.6 million as of December 31, 2016.2020.


24
Table of Contents

Off-Balance Sheet ArrangementsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2021 (in millions): 

 

 

Payment Due by Period

 

 

 

Total

 

 

Less Than

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More than 5

years

 

Senior convertible notes

 

$

2.7

 

 

$

0.6

 

 

$

2.1

 

 

$

—

 

 

$

—

 

Short-term bridge loan

2.0


2.0


—


—


—
Payroll Protection Plan loan

1.5


0.9


0.6


—


—

Operating lease obligations

 

 

2.0

 

 

 

0.7

 

 

 

1.2

 

 

 

0.1

 

 

 

—

 

Purchase obligations

 

 

6.0

 

 

 

6.0

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

14.2

 

 

$

10.2

 

 

$

3.9

 

 

$

0.1

 

 

$

—

 

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance-sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, results of operations or liquidity.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our results of operations and financial position are based upon our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q, which have been prepared in conformity with U.S.accounting principles generally accepted accounting principles.in the United States. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate our assumptions and estimates on an ongoing basis including those related to revenue recognition, income taxes and valuation of long-lived assets, goodwill and other intangible assets and may employ outside experts to assist in our evaluations. We believe that the estimates we use are reasonable; however, actual results could differ from those estimates.

19
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our significantcertain of our accounting policies are describedcritical to understanding our financial position and results of operations. There have been no changes to the critical accounting policies as explained in our Annual Report on Form 10-K for the year ended December 31, 2016. We believe the following critical2020.

RECENT ACCOUNTING PRONOUNCEMENTS

For a discussion of recent accounting policies identify our most critical accounting policies, which are the policies that are both important to the representationpronouncements, see Note 1: “Business Description, Basis of our financial conditionPresentation and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue and Associated Allowances for Revenue Adjustments and Doubtful Accounts

Included in continuing operations is product revenue, primarily from product sales to distributors, dealers, and end-users. Product revenue is recognized when (i) the products are shipped and any right of return expires, (ii) persuasive evidence of an arrangement exists, (iii) the price is fixed and determinable, and (iv) collection is reasonably assured.

We provide a right of return on product sales to certain distributors under a product rotation program. Under this seldom-used program, once a quarter, a distributor is allowed to return products purchased during the prior quarter for a total value generally not exceeding 15% of the distributor’s net purchases during the preceding quarter. The distributor is, however, required to place a new purchase order for an amount not less than the value of products returned under the stock rotation program. When products are returned, the associated revenue, cost of goods sold, inventory and accounts receivable originally recorded are reversed. When the new order is placed, the revenue, associated cost of goods sold, inventory and accounts receivable are recorded and the product revenue is subject to the deferral analysis described below. In a small number of cases, the distributors are also permitted to return the products for other business reasons.

Revenue from product sales to distributors is not recognized until the return privilege has expired or until it can be determined with reasonable certainty that the return privilege has expired, which approximates when the product is sold-through to customers of our distributors (dealers, system integrators, value-added resellers, and end-users), rather than when the product is initially shipped to a distributor. At each quarter-end, we evaluate the inventorySignificant Accounting Policies” in the distribution channel through information provided bynotes to our distributors. The level of inventory in the channel will fluctuate up or down each quarter based upon our distributors’ individual operations. Accordingly, each quarter-end deferral of revenue and associated cost of goods sold are calculated and recorded based upon the actual channel inventory reported at quarter-end. Further, with respect to distributors and other channel partners not reporting the channel inventory, the revenue and associated cost of goods sold are deferred until we receive payment for the product sales made to such distributors or channel partners.

The accuracy of the deferred revenue and costs depend to a large extent on the accuracy of the inventory reports provided by our distributors and other resellers and any material error in those reports would affect our revenue deferral. However, we believe that the controls we have in place, including periodic physical inventory verifications and analytical reviews, would help us identify and prevent any material errors in such reports.

The amount of deferred cost of goods sold was included in distributor channel inventories. The following table details the amount of deferred revenue, cost of goods sold, and gross profit (in thousands) as of September 30, 2017 and December 31, 2016:

  September 30, 2017  December 31, 2016 
Deferred revenue $3,870  $3,882 
Deferred cost of goods sold  1,394   1,530 
Deferred gross profit $2,476  $2,352 

We offer rebates and market development funds to certain of our distributors, dealers/resellers, and end-users based upon volume of product purchased by them. We record rebates as a reduction of revenue in accordance with GAAP.

We offer credit terms on the sale of our products to a majority of our channel partners and perform ongoing credit evaluations of our customers’ financial condition. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our channel partners to make required payments based upon our historical collection experience and expected collectability of all accounts receivable. Our actual bad debts in future periods may differ from our current estimates and the differences may be material, which may have an adverse impact on our future accounts receivable and cash position.

20
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Intangible and Long-Lived Assets:

Intangible assets with determinable lives consist primarily of customer relationships, unpatented technology, patents and trademarks and are amortized over their estimated useful lives, ranging from 5 to 15 years. We rely on patents and proprietary technology and seek patent protection for products and production methods. We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. These costs are amortized over the remaining estimated useful life of the patent, which is 15 and 17 years. We assess the future economic benefit and/or the successful outcome of legal action related to patent defense involves considerable management judgment and a different outcome could result in material write-offs of the carrying value of these assets. During the three and nine months ended September 30, 2017, we capitalized $845 thousand in legal costs related to the defense of our patents.

Impairment of Goodwill

Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. We perform impairment tests of goodwill on an annual basis in the fourth fiscal quarter, or sooner if a triggering event occurs suggesting possible impairment of the values of these assets.

We assess the recoverability of our one reporting unit’s carrying value of goodwill by making a qualitative or quantitative assessment. If we begin with a qualitative assessment and are able to support the conclusion that it is not more likely than not that the fair value of the Company is less than its carrying value, we are not required to perform the two-step impairment test. Otherwise, using the two−step approach is required. In the first step of the goodwill impairment test, we compare the carrying value the Company, including its recorded goodwill, to the estimated fair value. We estimate the fair value using an equity-value based methodology. The principal method used is an equity-value based method in which the Company’s market-cap is compared to the net book value. This value is then compared to total net assets. If the fair value of the Company exceeds its carrying value, the goodwill is not impaired and no further review is required. However, if the fair value of the reporting unit is less than its carrying value, we perform the second step of the goodwill impairment test to determine the amount of the impairment charge, if any. The second step involves a hypothetical allocation of the fair value of the Company to its net tangible and intangible assets (excluding goodwill) as if the business unit were newly acquired, which results in an implied fair value of goodwill. The amount of the impairment charge is the excess of the recorded goodwill over the implied fair value of goodwill.

During the three and nine months ended September 30, 2017 we recorded $12.7 million or the entire value of goodwill as an impairment charge.

Impairment of Long-Lived Assets

We assess the impairment of long-lived assets, such as property and equipment and definite-lived intangibles subject to amortization, annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also change. Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell.

During the three and nine months ended September 30, 2017 we recorded $736 thousand as a charge for impairment of an intangible asset consisting of customer relationships.

Accounting for Income Taxes

We are subject to income taxes in both the United States and in certain foreign jurisdictions. We estimate our current tax position together with our future tax consequences attributable to temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation, and other reserves for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, prior year carryback, or future reversals of existing taxable temporary differences. To the extent we believe that recovery is not more likely than not, we establish a valuation allowance against these deferred tax assets. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets.

To the extent we establish a valuation allowance in a period, we must include and expense the allowance within the tax provision in the consolidated statement of operations. In accordance with ASC Topic 740, “Accounting for Income Taxes”, we analyzed our valuation allowance at December 31, 2016 and determined that based upon available evidence it is more likely than not that certain of our deferred tax assets related to capital loss carryovers, state research and development credits, and foreign net operating loss carryforwards will not be realized and, accordingly, we have recorded a valuation allowance against these deferred tax assets in the amount of $1.4 million.

Lower-of-Cost or Market Adjustments and Reserves for Excess and Obsolete Inventory

We account for our inventory on a first-in, first-out basis, and make appropriate adjustments on a quarterly basis to write down the value of inventory to the lower-of-cost or market. In addition to the price of the product purchased, the cost of inventory includes our internal manufacturing costs, including warehousing, material purchasing, quality and product planning expenses.

We perform a quarterly analysis of obsolete and slow-moving inventory to determine if any inventory needs to be written down. In general, we write down our excess and obsolete inventory by an amount that is equal to the difference between the cost of the inventory and its estimated market value if market value is less than cost, based upon assumptions about future product life-cycles, product demand, shelf life of the product, inter-changeability of the product and market conditions. Those items that are found to have a supply in excess of our estimated current demand are considered to be slow-moving or obsolete and classified as long-term. An appropriate reserve is made to write down the value of that inventory to its expected realizable value.

21
Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These charges are recorded in cost of goods sold. The reserve against slow-moving or obsolete inventory is increased or reduced based on several factors which, among other things, require us to make an estimate of a product’s life-cycle, potential demand and our ability to sell these products at estimated price levels. While we make considerable efforts to calculate reasonable estimates of these variables, actual results may vary. If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of changing technology and customer requirements, we could be required to increase our inventory allowances and our gross profit could be adversely affected.

Share-Based Compensation

In December 2004, the FASB issued guidelines now contained under FASB ASC Topic 718, “Compensation – Stock Compensation”. ASC Topic 718 establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. Primarily, ASC Topic 718 focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments.

Under ASC Topic 718, we measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide services in exchange for the awards – the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Therefore, if an employee does not ultimately render the requisite service, the costs associated with the unvested options will not be recognized cumulatively.

Under ASC Topic 718, we recognize compensation cost net of forfeitures as they occur and recognize the associated compensation cost for those awards expected to vest on a straight-line basis over the requisite service period. We use judgment in determining the fair value of the share-based payments on the date of grant using an option-pricing model with assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the risk-free interest rate of the awards, the expected life of the awards, the expected volatility over the term of the awards, the expected dividends of the awards, and an estimate of the amount of awards that are expected to be forfeited. If assumptions change in the application of ASC Topic 718 and its fair value recognition provisions in future periods, the stock-based compensation cost ultimately recorded under the guidelines of ASC Topic 718 may differ significantly from what was recorded in the current period.

Recent Accounting Pronouncements:

In May 2014, the FASB released Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. We plan to adopt the standard when it becomes effective for us beginning January 1, 2018. We currently anticipate adopting the standard using the modified retrospective method with a cumulative catch up adjustment and providing additional disclosures comparing results to previous rules. We continue to evaluate the impact of the new standard on ourunaudited condensed consolidated financial statements but anticipateincluded under Item 1 of this standard will have a material impact on our consolidated financial statements.Form 10-Q.

In February 2016, the FASB released ASU No. 2016-02, Leases (Topic 842) to bring transparency to lessee balance sheets. The ASU will require organizations that lease assets (lessees) to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The standard will apply to both types of leases-capital (or finance) leases and operating leases. Previously, GAAP has required only capital leases to be recognized on lessee balance sheets. The standard is effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2018. Early application will be permitted for all organizations. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

22
Table of Contents


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In March 2016, the FASB released ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Shared-Based Payment Accounting. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company on January 1, 2017. As a result of the adoption of ASU 2016-09, excess tax benefits or deficiencies related to stock-based compensation are now reflected in the Consolidated Statements of Income as a component of the provision for income taxes, whereas they previously were recognized in additional paid-in capital. In addition, our Consolidated Statements of Cash Flows will now present, on a prospective basis, excess tax benefits as an operating activity. Finally, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures.

In August 2016, the FASB released ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for the Company beginning January 1, 2018 and we are currently evaluating the impact that ASU 2016-15 will have on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. The new guidance provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The accounting standard update will be effective for The Company beginning January 1, 2018 on a prospective basis, and early adoption is permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.CONTROLS AND PROCEDURES

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2021 was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Financial and Accounting Officer. Based upon this evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures effective at a reasonable assurance level as of September 30, 2021.

There has been no change in the Company's internal control over financial reporting as of September 30, 2021, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 

2325
Table of Contents
Table of Contents

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

On April 25, 2017, theThe Company was awarded a new patent, U.S. Patent No. 9,635,186 (the “186 Patent”), which relates to a system and method involving the combination of echo cancellation and beamforming microphone arrays. Also on April 25, 2017, the Company filed a lawsuitis involved in the U.S. Federal District Court in the District of Utahlitigation against three parties—Shure Inc.Incorporated (“Shure”), Biamp Systems Corporation (“Biamp”), and QSC Audio Products, LLC (“QSC,” together with Shure and Biamp, collectively, the “Defendants”), alleging that the Defendants were jointly and indirectly infringing the newly issued ‘186 Patent (the “Infringement Action”). On that same day, Shure filed a separate action as further described in the U.S. Federal District Court in the Northern District of Illinois (the “Illinois Action”) requesting a declaratory judgment as to the invalidity or non-infringement with respect to the ‘186 Patent. The Illinois Action also seeks the same declaratory judgment with respect to another Company patent, United States Patent No. 9,264,553 (the “553 Patent”), and which has not been asserted by the Company against any defendant and has been submitted to the USPTO for reissue.

On May 22, 2017, the U.S. Supreme Court issued its opinion in theTC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16–341. That opinion changed the law on permissible venues for patent litigation from any district in which there was personal jurisdiction over a defendant to only districts in which a defendant was incorporated or had a regular and established place of business. Given that nonePart I, Item 3 of the Defendants were incorporated or had a regular and established place of business in the District of Utah, on May 30, 2017, the Company filed an answer to the Illinois Action and counterclaims substantially the same as those in the Company’s Infringement Action, joining Biamp and QSC as counter-defendants with Shure in such counterclaims in the Illinois Action, and on May 31, 2017, the Company voluntarily dismissed the Infringement Action in Utah without prejudice. Biamp and QSC have filed motions to dismiss in the Illinois Action based on lack of appropriate venue, which the Illinois court has not ruled on.

The parties are proceeding with discovery. On July 14, 2017, Shure filed a petition forinter partes review against the ‘553 Patent, and on August 6, 2017, the Company filed a motion seeking a preliminary injunction to enjoin the defendants from continuing to infringe on the Company’s 186 Patent. A preliminary injunction hearing is currently set for January 9, 2018.

The Company intends to continue to vigorously enforce and defend its intellectual property rights in the Illinois Action.

Except as set forth above, there have been no material developments in the legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2016.2020 (the “Annual Report”), which information is incorporated herein by reference.  The following recent developments amend and supplement the disclosure of the ongoing litigation proceedings against Shure as at November 12, 2021 as follows:

Shure, Incorporated v. ClearOne, Inc., 17-cv-3078 (N.D. of Illinois)

Shure and ClearOne completed supplemental briefing before the district court relating to the Court’s ruling holding Shure in contempt. The Court has not yet issued a ruling on the supplemental briefing. On July 21, 2021, the Federal Circuit dismissed Shure’s appeal of the Court’s ruling holding Shure in contempt.

ClearOne, Inc. v. Shure, Incorporated, 19-cv-02421 (N.D. of Illinois)

On July 21, 2020, ClearOne informed the Court that it would proceed with its advertising-related claims in Delaware rather than Illinois. ClearOne thus filed a Second Amended Complaint removing the prospective economic advantage and trade libel claims. In July 2021, the parties completed briefing on Shure’s early motion to obtain summary judgment and dismissal of ClearOne’s trade secret misappropriation claims. The parties’ claim construction briefing is still pending.

Shure, Incorporated v. ClearOne, Inc., 19-cv-1343 (D. of Delaware)

On November 1, 2021, a jury trial commenced in the U.S. District Court for the District of Delaware on Shure’s claim of infringement the sole claim of U.S. Patent No. D865,723 (the “’723 patent”). On the third day of trial, November 3, 2021, a jury returned a verdict in favor of ClearOne on all issues. The jury found that ClearOne had not infringed the ’723 patent and that the ’723 patent was invalid.

Shortly before trial, Shure dropped its business tort claims against ClearOne, and ClearOne has asked the Court to dismiss Shure’s now withdrawn business tort claims with prejudice. That request is still pending. The Court also severed ClearOne’s business tort claims from the trial of Shure’s ’723 patent infringement claims, and the parties are waiting for the Court to schedule a trial on ClearOne’s business tort claims.

Shure’s claim of infringement of U.S Patent No. 9,565,493 is stayed pending ClearOne’s appeal to the U.S. Court of Appeals for the Federal Circuit of the U.S. Patent and Trademark Office’s decision regarding the patentability of several amended claims of that patent in an inter partes review proceeding. That appeal is fully briefed.

Item 1A. RISK FACTORS

None.

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 except for the following.

If the costs of defense of our patents exceeds the benefits, such a determination would negatively impact our reported income

We capitalize our legal expenses relating to defense of our patents. Capitalizing these legal expenses removes the related legal costs from our Income Statement and moves them to our Balance Sheet as an asset. This treatment is based on the current determination that our future benefits from the patents will be larger than the associated costs and that success in defense of the patents is probable. If either one of these conditions doesn’t hold true, all or a portion of the capitalized costs may be written off in the quarter in which a new determination is made. Any such future adjustment will affect the profits reported in that quarter.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)  None.

(a) None.

(b) Not applicable.


(c) On March 9, 2016, the Board of Directors of the Company authorized the repurchase of up to $10 million of the Company’s outstanding shares of common stock under a stock repurchase program. In connection with the repurchase authorization, the Company was authorized to complete the repurchase through open market transactions or through an accelerated share repurchase program, in each case to be executed at management’s discretion based on business and market conditions, stock price, trading restrictions, acquisition activity and other factors. The repurchase program may be suspended or discontinued at any time without prior notice. The transactions effectuated to date occurred in open market purchases.None. 

On March 1, 2017, the Board of Directors of the Company renewed and extended the repurchase program for up to an additional $10 million of common stock over the next twelve months. In connection with the repurchase extension authorization, the Company was authorized to complete the repurchase through open market transactions or through an accelerated share repurchase program, in each case to be executed at management’s discretion based on business and market conditions, stock price, trading restrictions, acquisition activity and other factors. The repurchase program may be suspended or discontinued at any time without prior notice. The transactions effectuated to date occurred in open market purchases.


24
Table of Contents

During the three months ended September 30, 2017 we acquired the following shares of common stock under the stock repurchase program:

Period Total Number of
Shares Purchased		  Average Price
Paid per Share		  Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs		  Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or Programs
(in $ millions)		 
July 2017  11,794  $9.69   11,794  $7.6 
August 2017  37,247   7.77   37,247   7.3 
September 2017  90,529   7.62   90,529   6.6 
Total  139,570   7.84   139,570     

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

26
Table of Contents



Item 6. EXHIBITS

Exhibit No.

Title of Document

31.110.1
Promissory Note dated July 2, 2021 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on July 9, 2021 and incorporated herein by reference).



10.2
Securities Purchase Agreement dated September 12, 2021 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 13, 2021 and incorporated herein by reference).



10.3
Registration Rights Agreement dated September 12, 2021 (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed with the SEC on September 13, 2021 and incorporated herein by reference).



10.4
Amended and Restated Promissory Note dated September 11, 2021 (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K as filed with the SEC on September 13, 2021 and incorporated herein by reference).



31.1

Section 302 Certification of Chief Executive Officer (filed herewith)

31.2

Section 302 Certification of Principal Financial Officer (filed herewith)

32.1

Section 906 Certification of Chief Executive Officer (filed herewith)

32.2

Section 906 Certification of Principal Financial Officer (filed herewith)

101.INS

XBRL Instance Document (filed herewith)

101.SCH

XBRL Taxonomy Extension Schema (filed herewith)

101.CAL

XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF

XBRL Taxonomy Extension Definitions Linkbase (filed herewith)

101.LAB

XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE

XBRL Taxonomy Extension Presentation Linkbase (filed herewith)




104.1
The cover page of this Quarterly Report on Form 10-Q, formatted in Inline XBRL.

2527
Table of Contents
Table of Contents

SIGNATURES

SIGNATURES

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

ClearOne, Inc.,

(Registrant)

By:

/s/ Zeynep Hakimoglu

November 14, 2017

12, 2021

Zeynep Hakimoglu

President, Chief Executive Officer and Chairman of the Board

(Principal Executive Officer)

By:

/s/ Narsi Narayanan

November 14, 201712, 2021 

Narsi Narayanan

Senior Vice President of Finance

(Principal Accounting and Principal Financial Officer)

2628