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Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-03-30 · 172 added, 127 removed, 131 unchanged (70% of the section changed)

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This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions, as set forth under “Disclosure Regarding Forward-Looking Statements.” Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the following discussion and under the caption “Risk Factors” in Item 1 A and elsewhere in this report.

ClearOne is a global Company that designs, develops and sells conferencing, collaboration, and network streaming solutions for voice and visual communications.

The performance and simplicity of our advanced, comprehensive solutions offer a high level of functionality, reliability and scalability.

We derive a major portion of our revenue from audio conferencing products and microphones by promoting our products in the professional audio-visual channel.

ClearOne is a global market leader enabling conferencing, collaboration and network streaming solutions.

The performance and simplicity of our advanced, comprehensive solutions offer unprecedented levels of functionality, reliability and scalability.

We derive a major portion of our revenue from audio conferencing products and microphones by primarily promoting our products in the professional audio-visual channel.

We have extended our total addressable market from the installed audio conferencing market to adjacent complementary markets – microphones, video collaboration and AV networking.

We have achieved this through strategic technological acquisitions as well as by internal product development.

During the first quarter of 2019 , we began shipping our patented Beamforming Microphone Array Ceiling Tile (BMA CT) to our partners.

All of the innovations developed for the BMA CT make the integrator’s job easier and more profitable.

The BMA CT dramatically transforms how integrators can approach system design for ceiling tile installations, allowing for multi-array setups that can utilize a single, low-channel count digital-signal-processing (DSP) mixer while maintaining ClearOne’s high level of performance and reliability.

Further simplification comes from the array’s built-in power amplifier, which allows each array to drive two 10 -Watt, 8 -Ohm loudspeakers.

The BMA CT also features ClearOne’s proprietary adaptive steering technology (think of it as smart switching).

This provides impeccable room coverage while eliminating the need to adjust individual beams.

Integrators can daisy chain ceiling tiles via P-Link ( ClearOne’s proprietary peripheral link) for larger conference setups – for simpler wiring and longer distances compared to networked home-run connections.

P-Link also allows integrators to daisy chain additional peripherals such as wireless mics, USB Expanders, and GPIO Expanders.

The system supports all of this functionality with zero consumption of analog I/O and signal processing in the DSP mixer leaving those resources available for other needs.

The Company was awarded a Sound & Video Contractor magazine “Best of Show Award” for BMA CT, showcased at InfoComm conference in Orlando, Florida in June 2019.

During 2019 we introduced COLLABORATE® Live video collaboration solutions , which include a full line of five solutions, tailored to fit any installation.

COLLABORATE Live 1000 , which includes the BMA CT, creates the ultimate video collaboration solution for larger spaces.

COLLABORATE Live 900 , 600 , 300 , and 200 systems provide different choices of microphones, cameras, and group speakerphones to fit every type of installation from auditoriums and lecture halls to boardrooms and huddle spaces.

All COLLABORATE Live systems feature built-in cloud connectivity and capabilities that empower users to collaborate like never before, in large conferencing space environments, with unmatched audio and video, interactive whiteboard, presentation, recording, streaming and cloud connectivity with a user interface that is as intuitive and simple as using their familiar mobile or tablet devices.

We introduced during the year five different models of COLLABORATE Live to suit different room environments from small huddle spaces to larger conference rooms.

We also introduced COLLABORATE ® Space to our growing family of collaboration solutions.

It’s a suite that unifies messaging, calls and meetings and will energize workflows and increase productivity for everyone involved in the enterprise.

Designed as a persistent, user-friendly collaboration suite, COLLABORATE Space contains many powerful UCC capabilities, as well as the seamless ability to make calls outside the network.

We also added new features including classroom functionality, multiple screen support, and more.

The new classroom functionality now found within COLLABORATE Space provides Q&A participation, giving each user electronic “hand raise” capability.

There’s also new moderator control over audio and video for all participants, which can number up to 100 .

If needed, additional participants can be added to any classroom in increments of 100 .

The moderator also has the ability to transfer the “presenter” role to any participant during the session.

Additionally, COLLABORATE Space now includes multi-display support for the moderator host of any conference.

Up to 3 displays can be used – one for local participants, one for remote participants, and one for content sharing.

COLLABORATE Space, users can work together one -on- one , or in groups of hundreds, with integrated file sharing, searchable archives, and user presence information.

They can connect with colleagues and contacts, via audio and video, with the most intuitive collaboration tools.

Users can meet immediately or schedule a meeting and access a full suite of collaboration features, including file sharing, whiteboarding, annotation, chat, and meeting minutes.

We have achieved this historically through strategic technological acquisitions as well as by internal product development.

During the first quarter of 2020 , we announced two new additions to our COLLABORATE Versa family of products.

COLLABORATE® Versa Room CT, provides all the equipment and accessories needed for exceptional room cloud-based conferencing.

At the heart of the system, is the USB audio-enabled Beamforming Mic Array Ceiling Tile (BMA CTH).

Thanks to its onboard processing, the BMA CTH performs acoustic echo cancellation, noise cancellation, and beam selection, so no external DSP mixer is required.

The array’s adaptive steering (think of it as smart switching) provides impeccable room coverage.

The Versa Room CT brings cost-effective professional conferencing audio to small and mid-sized meeting rooms.

COLLABORATE Versa Lite CT is a USB audio enabled BMA CTH room solution.

This solution dramatically enhances the audio experience for any cloud-collaboration application such as COLLABORATE Space, Zoom™, Microsoft® Teams, and Webex™, without the need for a DSP mixer.

The system can be easily and quickly configured using ClearOne’s CONSOLE® AI Lite software with Audio Intelligence™ and Auto Connect™.

A laptop or a desktop PC can be connected to the BMA CTH directly through the USB port on the USB Expander to share room audio.

The included 50 -foot CAT 6 cable connects the USB Expander to the BMA CTH.

During February 2020, we announced a new Touch-Panel Controller, a highly intuitive 10 -inch touch-screen device, designed for ClearOne’s CONVERGE® Pro 2 audio DSP mixers as well as COLLABORATE Live video conferencing room systems.

Paired with CONVERGE Pro 2 DSP mixers, users can make and receive PSTN and/or VoIP conference calls, and multiparty calls with the easy-to-use on-screen dial pad.

When paired with COLLABORATE Live, users can make and receive video calls as well as manage content sharing options.

COLLABORATE Space, our powerful cloud-based collaboration solution, added two new valuable features - webinar hosting and Web RTC.

COLLABORATE Space Pro and Enterprise meeting plans can be upgraded to include the new Webinar feature allowing session hosts to conduct video and audio presentations for up to 1000 participants.

The new Web RTC feature works with all popular browsers including Microsoft Edge, Google Chrome, Safari and Mozilla Firefox.

The new Web RTC feature enables users to easily join full-featured COLLABORATE Space audio and video meetings using a browser with no downloads or plug-ins required.

Users can accept meeting, webinar, and classroom invitations and join with a single click;

easily sharing and viewing content within a browser window.

COLLABORATE Space also added a feature where Microsoft Teams users can now enjoy a richer collaboration than that available within the Teams environment today.

This richer collaboration experience includes better video quality, support for multiple cameras, support for multiple displays, and a persistent meeting space where chats, audio and video recordings, documents, meeting minutes, whiteboard sessions, and more can be shared in private or public channels for later access.

Users can easily initiate a Space video meeting or join an existing Space video meeting within the MS Teams environment.

During April 2020, we introduced UNITE 20 Pro Webcam, which easily mounts on a PC or laptop to provide full 1080 p 30 image with an ultra wide-angle field-of-view up to 120 °.

A super-high signal-to-noise ratio and advanced 2 D and 3 D noise reduction provides superior desktop camera video quality.

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

We also expanded our bring your own device (BYOD) room solutions, by introducing COLLABORATE Versa 50 , Vera Pro 50 , Versa Pro 150 and Versa Pro CT.

They bring together plug-and-play connectivity with high-quality audio and HD video to enhance the BYOD conference experience in huddle spaces, mid-size meeting rooms and executive offices.

All COLLABORATE Versa solutions are compatible with high-quality cloud-based applications such as ClearOne COLLABORATE Space, Skype® for Business, Zoom, WebEx, GoToMeeting and ClearOne Spontania , among others.

In August 2019, the United States Patent and Trademark Office issued patent number 10,397,697 to ClearOne .

This patent, entitled “Band-Limited Beamforming Microphone Array,” describes a method, among other things, of making or using a band-limited beamforming microphone array by augmenting beamformed audio signals with additional audio signals that are not included in the beamforming process.

The microphones that generate these additional signals are referred to as non-beamforming microphones.

The invention significantly extends design flexibility because the augmented beamforming technology enables a broad range of design choices from larger, higher performance, higher cost beamforming arrays, to smaller beamforming arrays with good performance for less demanding environments at a lower cost.

On August 5, 2019, the Honorable Edmond E.

Chang of the Northern District of Illinois issued a preliminary injunction order in the Company’s ongoing litigation with Shure Incorporated in Case No.

17 -cv- 3087 (N.D.

In that litigation, ClearOne asserts that Shure’s MXA 910 Ceiling Array Microphone, which competes with ClearOne’s beamforming microphone array products, infringes certain of ClearOne’s patents.

The August 5 order held that ClearOne had "met its burden of demonstrating entitlement to the extraordinary relief of a preliminary injunction" on U.S.

During July 2020, we were awarded a significant new patent relating to beamforming microphone array technology by the US Patent and Trademark Office.

ClearOne’s innovative new patent, US Patent No.

10,728,653 (the “’ 653 Patent”), describes a ceiling tile microphone that includes beamforming, acoustic echo cancellation, and adaptive acoustic processing that automatically adjusts to a room configuration.

There is no language in the claims of the new patent limiting its scope to flush-mounted ceiling tile beamforming microphone arrays, as opposed to non-flush mounted ceiling tile beamforming microphone arrays.

The ’ 653 Patent is a member of a family of patents and applications that includes US Patent No.

9,813,806 ( the “’806 Patent”) .

The Court held that ClearOne established that "Shure is likely infringing the ’ 806 Patent and [that Shure] has not raised a substantial question of the patent’s validity." The injunction order prohibits Shure from “manufacturing, marketing, and selling the MXA 910 to be used in its drop-ceiling mounting configuration, including marketing and selling the MXA 910 in a way that encourages or allows integrators to install it in a drop-ceiling mounting configuration."

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.

On December 17, 2019, we completed the issuance and sale of $ 3,000,000 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.

The Notes are convertible to shares of the Company’s common stock at an initial conversion price of $2.11 per share, and the Warrants have an initial exercise price of $1.76 per share.

Overall revenue declined in 201 9 across all product groups.

We believe the on-going infringement of ClearOne’s patents — which is improperly forcing the Company to compete against its own patented technology — is the major cause of our revenue decline in the audio conferencing and microphones categories.

We believe the revenue decline in video products was caused partially by increased competition in the space as well as due to reduced attention from our partners caused by the alternatives made available through infringement of our patents.

Our gross profi t margin in 2019 declined to 45 % compared to 47 % in 2018 .

Gross profit margin decreased pr imari ly due to increase in material costs and inventory obsolescence costs partially offset by reduction in overhead costs.

Net loss decreased fro m $ 16.7 million in 2018 to $ 8.4 million in 2019 .

The decrease in net loss was primarily due to reduction in income tax provision and operating expenses partially offset by decrease in gross profit due to reduced revenue in 2019 .

Tax expenses were higher in 2018 due to recording a full valuation allowance on our net deferred tax assets.

That patent family includes issued patents and patent applications that cover ceiling tile and wall tile embodiments of beamforming microphone arrays, as well as augmentation of beamforming microphone arrays with non-beamforming microphones.

Duri ng September 2020, we shipped Conference Controller with 10-inch touch screen designed for easy control of ClearOne’s CONVERGE® Pro 2 audio DSP mixers as well as COLLABORATE® Live video conferencing room systems from a single device.

The Conference Controller functions can also be conveniently accessed from a personal mobile device, eliminating the need for touching shared surfaces by downloading the free mobile apps.

A perfect addition to ClearOne’s audio and video platforms, the Conference Controller can be paired with CONVERGE Pro 2 DSPs, allowing users to make and receive VoIP and/or PSTN conference calls and multiparty calls with the easy-to-use, on-screen dial pad.

When paired with COLLABORATE Live room video systems, users can make and receive video calls as well as manage content-sharing options.

A modern user interface makes controlling conferencing functions as intuitive and simple as familiar mobile and tablet devices.

The Conference Controller enables easy contact management with built-in search.

In addition, the slim and modern industrial design blends well with modern conference-room aesthetics.

During 2020 , we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents.

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

During October 2020, we announced the latest update of CONVERGENCE AV Network Manager software.

The new update now has an organizational portal for multiple user accounts with support for up to 2048 combined devices and users.

It also includes LDAP support and two levels of access — a secure administrator level for full access and a viewer level for monitoring with 256-bit encrypted device and user password management.

CONVERGENCE 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 unlimited scalability designed to support organizations of any size.

The solution provides a powerful and elegant user interface on any browser from desktop to mobile.

Users can stay up to date with email status notifications and can search, sort, and filter to find what is needed quickly.

Efficient batch firmware updates can be performed on multiple audio or video devices at once.

Users can also download, back up, or restore project files simultaneously for multiple CONVERGE® Pro 2 and Huddle DSP mixers, as well as their P-Link peripherals.

The software also offers many other features, such as:

provisioning CONVERGE Pro 2 VoIP lines and viewing VoIP registration status;

configuring and managing COLLABORATE® Live room codecs and COLLABORATE Space user accounts;

and downloading logs and reports for devices, users, histories, and calls.

CONVERGENCE supports integration with third-party management systems like IBM Cognos Analytics and Barco Overture via a RESTful web service interface.

ClearOne’s AV network management platform is available in twelve languages.

During October 2020, we also announced our new BMA 360, the world’s most technologically advanced Beamforming Microphone Array Ceiling Tile, delivering unequaled audio performance and deployment ease.

The ClearOne BMA 360 is the world’s first truly wideband, frequency invariant beamforming mic array with uniform gain response across all frequency bands.

With FiBeam™ technology, conference participants will experience the ultimate in natural and full fidelity audio across all beams and within a single beam.

Deep sidelobe beamforming , DsBeam™ , provides unparalleled maximum sidelobe depth, below -40 dB, resulting in superior rejection of reverberation and noise in difficult spaces for superb clarity and intelligibility.

The BMA 360 is based on a dramatically new approach to beamforming that provides a new beam topology to easily achieve distortion-free, full 360-degree coverage of any room shape and any seating arrangement using ClearOne Audio Intelligence™ .

Further advancements in adaptive steering (think of it as smart switching) provide impeccable coverage of each conference participant as well as support for camera tracking.

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

In addition to the advancements in beamforming technology, the 6G Acoustic Echo Cancellation (AEC) delivers unmatched per-beam full-duplex audio performance.

On-board audio algorithms, like noise reduction, filtering, and Automatic Level Control, eliminate the need for per-beam processing in a DSP mixer - requiring fewer DSP mixer resources.

Finally, robust built-in amplifiers, configurable as 4 x 15 Watt or 2 x 30 Watt, provide flexibility for driving loudspeakers.

ClearOne’s breakthrough technologies, FiBeam, DsBeam, and 6G AEC combine to create VividVoice™, a significant advancement for professional conferencing.

The integrated features in the BMA 360 significantly reduce system design complexity, simplify installation, consume less rack space, and lower system cost.

The BMA 360 also supports daisy-chaining of up to three ceiling tiles via P-Link for divisible rooms, or larger conference setups – for simpler wiring, longer distances, and lower-cost deployments compared to networked “home-run” connections via Ethernet.

ClearOne’s BMA technology is protected by at least a dozen patents and pending patent applications.

During November 2020, we introduced Aura™, a comprehensive range of Good, Better and Best packages of enterprise quality audio, video, audio-video options and a free COLLABORATE® Space lifetime subscription, the award-winning video collaboration app to meet the growing home office market demand for professional audio and video collaboration solutions that match the quality found in a traditional corporate office.

COVID 19 pandemic had brought long lasting changes to the workplace.

Home has become the new office for tens of millions of professionals who now need a work environment every bit as productive as their corporate office.

Aura was developed to deliver that much-needed enterprise quality experience in the home.

For homeowners, prospective homebuyers, builders, architects and designers, the purpose-built home office is rapidly replacing the home theater in importance.

Aura solutions are geared for high performance professionals across multiple industries.

Aura meets this growing need for easy to purchase and install commercial quality solutions that deliver HDConference® audio and true-to-life video technology through a variety of professional microphone, audioconferencing, videoconferencing, camera and collaboration component choices that optimize home office acoustic and aesthetic aspirations.

Designed to be easily installed by both homeowners and installers, Aura owners are also supported by a dedicated sales and support team that is available 24/7.

During 2020 , our overall revenue increased by 16 % when compared to revenue during 2019 .

The increase in revenues were largely due to increase in revenue from video products, also helped by increase in revenue from microphones and partially offset by declines in revenue from audio conferencing products.

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") resulted in overall Beamforming Microphone Array ("BMA") revenue being significantly higher than last year.

However, revenue from BMA products as well as from our pro audio products are far below the levels prior to infringement of our patents.

Our revenue performance reflects an impact of the on-going harm of infringement of ClearOne’s patents despite the preliminary injunction granted against Shure as we believe Shure continues to infringe 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 notwithstanding a significant growth in revenue from video products this year.

Our gross profit margin decreased to 43.2 % during 2020 from 44.7 % during 2019 .

Net profit changed from net loss of $ 8.4 million in 2019 to net income of $ 0.5 million in 2020 .

The change from net loss to net income is primarily due to recognition of income tax refund receivable of approximately $ 7.1 million arising out of the carryback of net operating losses that became possible due to the enactment of the CARES Act, as well as an increase in gross profit due to increase in revenues and decrease in operating costs.

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 '806 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.

On September 1, 2020, the U.S.

District Court of Northern Illinois held that "Shure has violated the preliminary injunction order and is found in contempt because it designed the MXA 910 -A in such a way that allows it to be easily installed flush in most ceiling grids”.

The Court also opined that, “[t]he record is clear and convincing that Shure - through its design choices - violated the injunction order by allowing integrators to install the MXA 910 -A in the enjoined flush configuration.” Ultimately, the Court ordered that “Shure shall no longer manufacture, market, or sell the MXA 910 ...” .

ClearOne’s motion to accuse Shure’s MXA 910 -US of infringing the ’ 806 Patent is still pending with the Court.

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

Industry conditions

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The industry is also characterized by venture capitalist funded start-ups and private companies willing to fund cumulative cash losses in order to gain market share and achieve certain non-financial goals.

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

Economic conditions, challenges and risks

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Despite our strong leadership position in the installed professional audio conferencing 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 due to higher margins.

Despite the decline in revenue, our video products and beamforming microphone arrays, especially BMA-CT are critical to our long term growth.

Our video products and beamforming microphone arrays, especially BMA-CT and the newly introduced BMA 360 are critical to our 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 Collaborate Space , our cloud-based video conferencing product, Collaborate Live , our appliance-based media collaboration product, our high quality professional cameras, and our high-end audio conferencing technology will generate high growth 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 (approximately 46 % for the year ended December 31 , 201 9 ) from international operations and expect this trend to continue in the future.

We derive a significant portion of our revenue (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 ou tside the U.S.

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Dollar denominated prices of our products less competitive.

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China.

The COVID-19 pandemic has continued to spread and has already caused severe global disruptions.

The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape.

If the pandemic continues to evolve into 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 common stock.

In 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 other hand, COVID- 19 generated higher than normal demand for our video products and personal conferencing products due to the significant 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 common stock.

Deferred Revenue

De ferred revenue decreased from $ 0.3 million in 2018 to $ 0.2 million in 2019 .

De ferred revenue decreased from $ 173 thousand in 2019 to $ 123 thousand in 2020 .

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

DISCUSSION OF RESULTS OF OPERATIONS

The following table sets forth certain items from our consolidated statements of operations and comprehensive loss for t he years ended December 31, 2019 and 2018 , together with the percentage change each item represents.

The following table sets forth certain items from our consolidated statements of operations and comprehensive income (loss) for t he years ended December 31, 2020 and 2019 , together with the percentage change each item represents.

Throughout this discussion, we compare results of operations for the year ended December 31, 2020 (“ 2020 ”) to the year ended December 31, 2019 (“ 2019 ” or “the comparable period”).

(In thousands, except percentages)

Percentage Change 2019 vs 2018

Favorable (Adverse)

Cost of goods sold

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Loss before income taxes

Provision for income taxes

Provision for (benefit from) income taxes

Net income (loss)

Our revenue increased to $ 29.1 million in 2020 compared to $ 25.0 million in 2019 .

The highest increase was seen in video products with a 95 % increase, followed by an increase in microphones of 4 %.

These increases were partially offset by a 6 % decline in audio conferencing.

The increase in revenue from video products was mainly fueled by growth in demand for media collaboration products.

Microphones increased in revenue on the back of significant growth from BMA products despite decline in revenues from other microphones.

Except personal audio conferencing products, which had a significant increase in revenues, all other categories under audio conferencing declined in revenue during 2020 .

We believe t he on-going infringement of ClearOne’s patents is the major cause of our revenue decline in certain categories of audio conferencing and microphones.

The share of audio conferencing products in our product mix declined sharply from 46 % in 2019 to 38 % in 2020 .

The share of microphones in the revenue mix marginally dropped from 35 % in 2019 to 31 % in 2020 .

Share of video products in the revenue mix jumped up significantly from 18 % in 2019 to 31 % in 2020 .

During 2020 , revenue increased significantly in North America and Europe, while it declined considerably in China and the Middle East.

Asia Pacific inclu ding the Middle East decreased by 23 %, Europe and Africa increased by 47 % a nd the Americas increased by approximately 30 %.

We believe, although there can be no assurance, that we can sustain our revenue growth and return to generating operating profits through our strategic initiatives namely product innovation, cost reduction and defense of our intellectual property.

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

Our revenue decreased to $ 25.0 million in 2019 compared to $ 28.2 million in 2018 .

The highest decline was seen in aud io conferencing category with 17 % decline followed by video products with 11 % decline and microphones with 2 % decline .

The decline in audio conferencing category was due to decline in all product lines led by CONVERGE Pro and CHAT product line s .

The decline in microphones category was primarily due to decline in beamforming microphones.

The decline in revenue from video products was mainly due to fall in demand for our network media streaming products.

We believe t he on-going infringement of ClearOne’s patents is the major cause of our revenue decline in audio conferencing and microphones categories.

The share of audio conferencing products in our product mix declined marginally from 50 % to 46 %.

The share of microphones in the revenue mix increased from 32 % in 2018 to 35 % in 2019 .

Share of video products in the revenue mix remained the same at 18.5 % .

During 2019 , revenue declined across all major markets except India, Middle East and certain parts of Asia .

The decline was more pronounced in the USA, C anada, Northern Europe, China and Latin America .

Asia Pacific inclu ding Middle East decreased by 2 %, Europe and Africa declined by 13 % a nd Americas declined by about 15 %.

We believe, although there can be no assurance, that we will return to growth path through our strategic initiatives namely product innovation, cost reduction and defense of our intellectual property.

Cost of Goods Sold and Gross Profit

Cost of goods sold (“COGS”) includes expenses associated with finished goods purchased from outsourced manufacturers, the manufacture 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.

Our gross profit during 2020 was approximately $ 12.6 million or 43 % compared to approximately $ 11.2 mill ion or 45 % in 2019 .

Gross profit margin declined primarily due to increase in material costs and inventory obsolescence costs partially offset by reduction in overhead costs.

The gross profit margin was negatively impacted due to increase in share of lower margin products in the revenue mix, increased freight and tariff costs and increased inventory obsolescence costs, partially offset by increased deferral of overhead costs added to the inventory.

Our profitability in the near-term continues to depend significantly on our revenues from 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 $ 1.3 million of wireless microphones related finished goods and assemblies, $ 1 .

7 million of CONVERGE Pro , CONVERGE Pro 2 and BMA products and about $ 2 .

2 million of raw materials that will be used primarily for manufacturing installed professional audio conferencing products.

Our long-term inventory includes approximately $ 1.1 million of wireless microphone-related finished goods and assemblies, $ 0.9 million of Converge Pro and Beamforming microphone array products , $ 0.3 million of network media streaming products and about $ 1.9 million of raw materials that will be used primarily for manufacturing installed professional audio conferencing products.

Operating Expenses and Profits (Losses)

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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 $ 19.8 million in 2019 , compared to $ 23.7 million in 2018 , which included $ 0.2 million in impairment of assets.

Total operating expenses were $ 18.1 million in 2020 , compared to $ 19.8 million in 2019 .

The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items.

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S&M expenses in 2020 decreased by 15 % from $ 7.9 million in 2019 to $ 6.7 million in 2020 .

The decrease was mainly due to decreases in commissions to independent reps, payments to consultants, inventory costs for demonstration equipment, employee related costs and tradeshow exhibition costs.

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

The decrease was mainly due to decreases in trade-show related expenses, demonstration inventory costs and employee travel related expenses partially offset by an increase in sales commissions.

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

R& D expenses decreased during 2019 to $ 5.8 million from $ 7.8 million in 2018 .

The decrease was primarily due to decreases in employee-related costs and allocations of overhead expenses .

R& D expenses decreased from $ 5.8 million in 2019 to $ 5.5 million in 2020 .

The decrease was primarily due to decreases in employee-related costs partially offset by increase in consulting expenses and project related 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.

G&A expenses were approximately $ 6,045 thousand in 2019 compared with approximately $ 5,950 thousand in 2018 which included $ 161 thousand of impairment of assets.

The increase was primarily due to increases in overhead allocations, amortization of intangible assets, miscellaneous taxes and insurance costs partially offset by decreases in legal expenses, employee related costs, stock based compensation and consulting expenses

G&A expenses were approximately $ 5.9 million in 2020 compared with approximately $ 6.0 million in 2019 .

The slight decrease was primarily due to decreases in audit and accounting fees, stock based compensation, miscellaneous taxes and overhead allocations, partially offset by increases in legal expenses and amortization of intangible assets.

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

Provision for income taxes

The effective tax benefit rate was 1 % (benefit) in 2019 as comp ared to effective tax rate of 62.9 % during 2018 .

Income tax expense for 2019 was $ 0.1 million as compared to $ 6.4 million in 2018 .

The decrease in the effective tax rate as well as income tax expense was primarily due to decrease in the change in valuation allowance on the Company’s net deferred tax assets from approximately $9.9 million in 2018 to $2.4 million in 2019.

We have been recording valuation allowance since 2018 and have not been claiming tax benefit against our losses as we have concluded that it is more likely than not that our deferred tax assets were not realizable primarily due to our recent pre-tax losses.

The effective tax benefit rate was 110% (benefit) in 2020 as comp ared to the effective tax rate of 1% during 2019 .

Income tax benefit for 2020 was $ 6.4 million as compared to an income tax provision of $ 0.1 million in 2019 .

The significant change in income taxes was primarily due to recognition of income tax refunds receivable of approximately $ 7.1 million arising out of the carryback of net operating losses that became possible due to the enactment of the CARES Act.

Since the company had set up a full valuation allowance against net operating losses from earlier years, the carryback of these losses resulted in the recognition of a substantial tax benefits.

We have been recording a valuation allowance against net deferred tax assets since 2018 and have not been claiming tax benefit for our losses as we have concluded that it is more likely than not that our deferred tax assets were not realizable, primarily due to our recent pre-tax losses.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION

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Net cash flows used in operating activities were approximately $ 1.0 million during 2020 , a decrease of ap proximately $ 3.7 million from $ 4.7 million used in opera ting activities in 2019 .

The decrease in cash used was primarily due to a decrease in net loss by $ 8.3 million partially offset a decrease in non-cash charges of $ 6.1 million and increase in cash outflows due to change in operating assets and liabilities of $ 0.2 million which includes $ 4.5 million towards payment of a bond for securing the preliminary injunction in our litigation to stop the infringement of our patents and decrease in inventories by $ 3.6 million .

Net cash used in investing activities was $ 5.1 million during 2019 compared to net cash provided by investing activities of $ 3.2 million during 2018 , a decrease in cash used of $ 8.3 million.

The increase in cash used in investing activities was primarily due to a decrease in net cash inflows from marketable securities of approximately $ 8.0 million.

The decrease in cash used was primarily due to a decrease in net loss by $ 8.9 million and an increase in non-cash charges of $ 1.1 million, partially offset by an increase in cash outflows due to change in operating assets and liabilities of $ 6.4 million which includes an increase of $ 7.5 million in income tax receivable, partially offset among other things by decrease in inventories by $ 2.4 million .

Net cash used in investing activities was $ 5.5 million in 2020 compared to $ 5.1 million in 2019 , an increase in cash used of $ 0.4 million.

The increase in cash used in investing activities was primarily due to increase of about $ 1.6 million in the capitalization of our patent defense costs partially offset by increase in net cash inflows from marketable securities of approximately $ 1.4 million.

Capitalization of patent defense costs .

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During 2020 we spent $ 6.7 million of legal costs related to the defense of our patents and capitalized the entire amount.

Net cash provided by financing activities was $ 2.7 million during 2019 compared to net cash provided by financing activities of $ 9.2 million during 2018 , a decrease in cash provided of $ 6.5 million.

The decrease was primarily to decrease in capital raised by $ 7.2 million partially offset by the absence of payments for dividends and stock repurchases of $ 0.7 million.

We are currently pursuing all available legal remedies to defend our strategic patents from infringement.

We have already incurred approximately $13.6 million in costs from 2016 through December 31, 2019 towards this litigation and may be required to incur more to continue to enforce our patents.

We have been actively engaged in preserving cash by suspending our dividend program, allowing the share repurchase program to expire and implementing company-wide cost reduction measures.

We have already spent approximately $ 20.3 million from 2016 through 2020 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 ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from further infringing our Graham patent (U.S.

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.

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.

Net cash provided by financing activities was $ 6.3 million during 2020 compared to net cash provided by financing activities of $ 2.7 million during 2019 , an increase in cash provided of $ 3.6 million.

The increase was primarily to cash inflows from issuance of common stock and borrowing through the Paycheck Protection Program.

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

During 2018 , we raised additional proceeds of $ 9.9 million (net of issuance costs) from the Rights Offering .

During December 2019 we raised approximately $ 2.7 million (net of issuance costs) from the issue of senior convertible notes .

We also believe additional cash will be generated as we consume our inventory and bring it down to historical levels.

We also believe that the measures taken by us to defend our patents and enforce our intellectual property rights will yield higher revenues in the future.

We believe all of these 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.

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 the Paycheck Protection Program and $4.8 million in September 2020 by issuing common stock and warrants.

In addition, we expect to generate 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 through March 31, 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;

In addition to capital expenditures, we may use cash in the near future for selective infusions of technology, sales and marketing, infrastructure, and other investments to fuel our growth.

At December 31, 2019 , we had inventory totaling $ 17.7 million, of which non-current inventory ac counte d for $ 6.3 million.

This compares to total inventories of $ 22.2 million and non-curr ent in ventory of $ 9.0 million as of December 31, 2018.

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 secure financing, we may be required to further reduce expenses, delay product development and enhancement, or revise our strategy regarding ongoing litigation.

At December 31, 2020 , we had open purchase orders of approximately $ 3.4 million mostly for purchase of inventory.

At December 31, 2020 , we had inventory totaling $ 15.1 million, of which non-current inventory accounted for $ 4.6 million.

This compares to total inventories of $ 17.7 million and non-current inventory of $ 6.3 million as of December 31, 2019 .

Contractual Obligations and Commitments

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Senior Convertible Notes

Payroll Protection Program borrowing

Operating lease obligations

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We believe the following critical accounting policies identify our most critical accounting policies, which are the policies that are both important to the representation of our financial condition 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.

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

Revenue and Associated Allowances for Revenue Adjustments and Doubtful Accounts

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This typically occurs when products are shipped or delivered, depending on the delivery terms, or when products that are consigned at customer locations are sold to dealers or end users.

Revenue recognized during the twelv e months ended December 31, 2019 for equipment sales was $ 24,51 3 , and for software, licenses, etc.

Revenue recognized during the twelv e months ended December 31, 2020 for equipment sales was $ 28.7 million, and for software, licenses, etc.

was $ 0.4 million .

Sales returns and allowances are estimated based on historical experience.

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The Company reviews warranty and related claims activity and records provisions, as necessary.

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

Frequently, the Company receives orders with multiple delivery dates that may extend across reporting periods.

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The Company has elected to record freight and handling costs associated with outbound freight after control over a product has transferred to a customer as a fulfillment cost and include it in cost of revenues.

Taxes assessed by government authorities on revenue-producing transactions, including value-added and excise taxes, are presented on a net basis (excluded from revenues) in the Consolidated Statements of Operations and Comprehensive Income.

The details of deferred revenue and associated cost of goods sold and gross profit are as follows:

The details of deferred revenue and associated cost of goods sold and gross profit are as follows (in thousands):

As of December 31,

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The inventory due from the customer is accounted at cost or market value whichever is lower.

Impairment of Goodwill and Intangible Assets

We perform impairment tests of goodwill and intangible assets with indefinite useful lives 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.

Impairment testing for these assets involves a two -step process.

In the first step, the fair value of the reporting unit holding the assets is compared to its carrying amount.

If the carrying amount of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of the impairment loss, if any.

In the second step, the fair value of the reporting unit is allocated to all of its assets and liabilities, including intangible assets and liabilities not recorded on the balance sheet.

The excess, if any, of the fair value of the reporting unit over the sum of the fair values allocated to identified assets and liabilities is the value of goodwill to be compared to its carrying value.

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

Impairment of Long-Lived Assets

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Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell.

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

Accounting for Income Taxes

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

What changed 10-K

Item 7. Management’s Discussion and Analysis