What changed in this filing

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Item 9A. Controls and Procedures

2021-03-31 compared with 2020-03-30 · 258 added, 214 removed, 966 unchanged (33% of the section changed)

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Changes in Internal Control Over Financial Reporting

As part of our remediation efforts to address the material weaknesses in internal control over financial reporting that existed as of December 31, 2018, throughout 2019 we implemented a remediation plan to hire, train, and retain individuals with appropriate skills and experience, assign responsibilities and hold individuals accountable for their roles related to internal control over financial reporting to improve the accounting and financial reporting process as of December 31, 2019.

There were no changes in our internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

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Chairman, Chief Executive Officer, and President

Director ( 1 )( 2 )( 3 )

Narsi Narayanan

Senior Vice President of Finance and Corporate Secretary

Member of the Audit and Compliance Committee

Member of the Compensation Committee

Member of the Nominating Committee

Officer since July 2004;

Director since April 2006;

Chairman of the Board since July 2007.

Member of the Audit and Compliance Committee, Compensation Committee and Nominating Committee

Zee Hakimoglu is our President, Chief Executive Officer and Chairman.

She joined our company in December 2003 as Vice President of Product Line Management and was appointed President and Chief Executive Officer in July 2004;

She joined our company in December 2003 as Vice President of Product Line Management with additional responsibility for Research & Development and was appointed President and Chief Executive Officer in July 2004;

she has served as a director of our company since April 2006 and was named Chairman of the Board in July 2007.

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Hakimoglu has held senior executive level positions for a variety of high-tech Silicon Valley firms in such areas as business development, product marketing, engineering and product-line management.

She served as Vice President of Product Line Management for Oplink Communications, a publicly traded developer of fiber optic subsystems and components, from December 2001 to December 2002;

and, President of OZ Optics USA, a manufacturer of fiber optic test equipment and components, from August 2000 to November 2001.

She served as Vice President of Product Line Management for a publicly traded developer of fiber optic subsystems and components, from December 2001 to December 2002;

and, President of a manufacturer of fiber optic test equipment and components, from August 2000 to November 2001.

From October 1998 to August 2000, she was Vice President of Business Development for Kaifa Technology and was instrumental in its acquisition by E-Tek Dynamics and later by JDS Uniphase.

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He earned a Bachelor's Degree in Accounting from Utah State University and a Master of Business Administration Degree from the University of Utah.

Higley was appointed a director of our company effective July 20, 2020.

Higley has been self-employed as a CPA since June 2009.

Previously, she was the CFO for Daisy D’s Paper Company from March 2007 until January 2009, where she managed all aspects of the company’s financial and accounting responsibilities.

Additionally, Ms.

Higley was the CFO for Tunex International from April 2006 to March 2007 where she was accountable for all financial aspects of the corporation.

Prior to that, Ms.

Higley was a staff tax accountant at Wisen , Smith, Racker & Prescott LLP from February 2004 to April 2006.

Higley earned her Bachelor of Science in Accounting from the University of Oregon and her MBA from Utah State University, and has been a Utah CPA since 2004 .

Hi gley is the daughter of Edward D.

Bagley, our former Chairman of the Board.

Bagley beneficially owns 44 % of our issued and outstanding common stock.

L Robinson has served as a director of our company since July 2015.

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Bruce Whaley was appointed a director of our company effective April 16, 2019.

Whaley has extensive experience as a stockbroker for nearly five decades.

Whaley has extensive experience as a stock broker for nearly five decades.

Whaley is currently a broker trading at Wilson & Davis, a regional brokerage firm based in Salt Lake City, Utah.

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Officers, directors, and greater than 10 % shareholders are required to furnish us with copies of all Section 16 (a) reports they file.

Based solely on a review of the reports and amendments to reports furnished to us for the year ended December 31, 2019, we believe that each person who, at any time during such fiscal year was a director, officer, or beneficial owner of more than 10 % of our common stock complied with all Section 16 (a) filing requirements during such period.

Larry Hendricks, a director, filed one Form 4 late for one transaction;

Bruce Whaley, a director, filed one Form 4 late for one transaction and Dallin E Bagley, a greater than 10 % shareholder filed one Form 4 late for three transactions.

Code of Ethics

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SUMMARY COMPENSATION TABLE

Na me and Principal Position

Name and Principal Position

Option Awards ( 1 )

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Year ended December 31, 2019

The amounts in the “Option Awards” column reflect the aggregate grant date fair value of awards of stock options granted pursuant to our long-term incentive plans during the periods reported above, computed in accordance with FASB ASC Topic 718 , Compensation - Stock Compensation.

The assumptions made in the valuation of our option awards and the material terms of option awards are disclosed in Note 10 - Share-Based Compensation in our Notes to Consolidated Financial Statements included in Part IV of this Form 10-K.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table provides information on the holdings of stock options by the named executive officers as of December 31, 2020 .

Number of Securities Underlying Unexercised

Underlying Unexercised

Options Unexercisable ( 1 )

Number of Securities Underlying Unexercised Options

Option Exercise Price ($)

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Option Expiration Date

Unexercisable

Zeynep Hakimoglu

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One -third of the shares underlying each stock option vest on the first anniversary of the grant date and the remaining shares vest equally over a period of 24 months following the first anniversary of the grant date.

GRANTS OF PLAN-BASED AWARDS

There were no grants of plan-based awards to named executive officers in 2019 .

OPTION EXERCISES AND STOCK VESTED

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5 % Shareholders:

Bryan Bagley ( 4 )

Except as otherwise indicated, each person named in the table has sole voting and investment power, subject to applicable community property law.

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The numbers shown in Column (D) and percentages shown in Column (E) include the shares of common stock actually owned as of March 29, 2021 and the shares of common stock that the identified person or group had the right to acquire within 60 days of such date.

In calculating the percentage of ownership, all shares of common stock that each identified person or group had the right to acquire within 60 days of March 25, 2020 upon the exercise of the stock options shown in Column (C) are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by the persons or groups listed above.

In calculating the percentage of ownership, all shares of common stock that each identified person or group had the right to acquire within 60 days of March 29, 2021 upon the exercise of the stock options , secured convertible notes and warrants shown in Column (C) are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by the persons or groups listed above.

This information is based upon the Form 3 filed with the SEC as of July 20, 2020.

Lisa Higley, who was appointed a Director effective July 20, 2020, is the daughter of Edward D.

Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other.

The share amounts indicated for Ms.

Higley do not include any shares held by Edward D.

The share amounts indicated for Ms.

Higley do not include 6,546 shares owned by her spouse and 2,252,636 shares held by a trust in which she is a co-trustee.

Bagley may be deemed to own an additional 2,252,63 6 shares of common stock that are deemed to be owned by his wife, Carolyn Bagley, as a result of her acting as one of four co-trustees of a trust.

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Bagley and they are excluded from the amounts reported in the table above.

Bagley has sole voting and dispositive power over 7,425,320 shares (including the shares that may be acquired pursuant to the exercise of stock options) and shared voting and dispositive power over the 355,257 shares held by Mr.

Bagley has sole voting and dispositive power over 10,211,274 shares (including the shares that may be acquired pursuant to exercise of options to purchase 28,333 shares of common stock, secured convertible notes to purchase 1,149,289 shares of common stock and warrants to purchase 685,295 shares of common stock ) and shared voting and dispositive power over the 355,257 shares held by Mr.

Bagley’s spouse.

This information is based upon the Schedule 13 D/A and Form 4 , as filed by Mr.

Bagley with the SEC in December 2018 and the issuance of the Notes and Warrants to Mr.

Bagley on December 17, 2019 .

This information is based upon Schedule 13D/A and Form 4 as filed by Mr.

Bagley with the SEC in September 2020 and December 2020 , respectively .

Bryan Bagley, who resigned as Director effective November 6, 2012, is the son of Edward D.

Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other.

Lisa Higley, who was appointed a Director effective July 20, 2020, is the daughter of Edward D.

Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other.

The share amounts indicated for Mr.

Bagley do not include any shares held by E.

Bryan Bagley.

This information is based upon the Form 4 filed with the SEC as of December 6, 2018.

Bryan Bagley or Lisa Higley .

Bryan Bagley has sole voting and dispositive power over 1,573,305 shares (including the shares that may be acquired pursuant to exercise of secured convertible notes to purchase 229,857 shares of common stock and warrants to purchase 106,818 shares of common stock ) This information is based upon Schedule 13D/A as filed by E.

Bryan Bagley with the SEC in September 2020 .

Bryan Bagley, who resigned as Director effective November 6, 2012, is the son of Edward D.

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Bryan Bagley do not include any shares held by Edward D.

The share amounts indicated for Mr.

Bryan Bagley do not include 2,252,636 shares held by a trust in which he is a co-trustee.

Equity Compensation Plan Information

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PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit f ees ( 1 )

Audit fees (1)

Audit-related fees (2)

Tax fees ( 2 )

All other fees

Represents fees billed for professional services rendered for the audit and reviews of our financial statements filed with the SEC on Forms 10-K and 10-Q.

Represents fees billed for consents provided with respect to registration statements and related amendments.

Represents fees billed for tax filing, preparation, and tax advisory services.

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Employee Stock Purchase Plan

Office Lease between Edgewater Corporate Park, LLC and ClearOne Communications, Inc.

dated June 5, 2006

Stock Purchase Agreement Between ClearOne, Inc.

Oster Dated March 4, 2014 for the Sabine Acquisition.

Manufacturing Services Agreement between Flextronics Industrial, Ltd.

and ClearOne Communications, Inc.

dated November 3, 2008

Framework Agreement between ClearOne, Inc.

and Dialcom Networks S.L., dated December 20, 2013

Amendment to Framework Agreement between ClearOne, Inc.

and Dialcom Networks S.L., dated March 31, 2014

Purchase Agreement between ClearOne, Inc.

and Dialcom Networks S.L., dated March 31, 2014

Form of Offer to Repurchase Eligible Options for Cash

Code of Ethics, approved by the Board of Directors on August 23, 2006

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March 31, 2021

CLEARONE, INC.

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Consolidated Balance Sheets as of December 31, 2020 and December 31, 2019

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2019 and 2018

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2020 and 2019

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020 and 2019

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

ClearOne, Inc.

To the Board of Directors and

Stockholders of ClearOne, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of ClearOne, Inc.

and subsidiaries (collectively, C learOne) as of December 31, 2019 and 2018 , and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2019 , and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material aspects, the financial position of Cle arOne as of December 31, 2019 and 2018 , and the results of its operations and its cash flows for each of the years in the two-yea r period ended December 31, 2019 , in conformity with accounting principles generally accepted in the United States of America.

and subsidiaries (collectively, the Company) as of December 31, 2020 and 2019 , and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020 , and the related notes (collectively referred to as the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material aspects, the financial position of ClearOne as of December 31, 2020 and 2019 , and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

T hese consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We were not engaged to examine management's assertion about the effectiveness of ClearOne’s internal control over financial reporting as of December 31, 2019 included in the accompanying management’s annual report on internal control over financial reporting and, accordingly, we do not express an opinion thereon.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Capitalized patent defense costs

As described in Notes 3 and 8 to the consolidated financial statements, the Company is involved in litigation against a competitor related to intellectual property rights.

The Company has capitalized legal expenses related to the defense of certain patents as intangible assets on the balance sheet based on the satisfaction of two conditions:

(i) a determination being made that a successful defense is probable, and (ii) that the monetary benefits arising out of such a successful defense will be in excess of the costs for the defense.

We identified the capitalization of patent defense costs as a critical audit matter because evaluating the likelihood of potential outcomes of the litigation as well as determining the expected monetary benefit involves significant judgment by management.

This required a high degree of auditor judgement and subjectivity in performing procedures and evaluating audit evidence related to management’s assertions that a successful defense is probable and that the monetary benefits will be in excess of the costs.

Addressing this critical audit matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

These procedures included, among others:

(1) testing of legal expenses related to the litigation, (2) obtaining and evaluating a legal confirmation obtained from the Company’s lead counsel in the case (3) obtaining and evaluating a legal opinion letter from another third party intellectual property law firm related to their evaluation of the likelihood of potential outcomes of the litigation based on their review of the case, (4) reviewing and evaluating management’s cost analysis, (5) obtaining and evaluating an expert witness damages report and, (6) evaluating the reasonableness of management’s assumptions.

Assessment of lower of cost or net realizable value of inventories

As described in Notes 1 and 4 to the consolidated financial statements, inventories totaling $15,053,000 as of December 31, 2020 are stated at the lower of cost or market.

The Company performs analyses to identify and estimate the net realizable value of excess or slow-moving inventories based on forecasted future product demand.

We identified the inventory valuation as a critical audit matter because of the significant balance of inventory held by the Company and because forecasting future product demand involves significant judgement by management.

This required a high degree of auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence to evaluate management’s assumptions related to estimating the reserve of obsolete and slow-moving inventory.

Addressing this critical audit matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements.

These procedures included, among others:

(1) evaluating management’s process for estimating obsolete and slow moving inventory levels, (2) comparing historical sales trends and inventory consumption reports for selected products to quantities on hand in order to evaluate potential excess or obsolete inventory, (3) evaluating and discussing forecasts and expectations with management as well as assumptions regarding alternative uses, and (4) evaluating the reasonableness of management’s assumptions.

We have served as the Company’s auditor since October 14, 2015.

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Receivables, net of allowance for doubtful accounts of $ 506 and $ 424 , respectively

Prepaid exp en ses and other assets

Inventories, net

Income tax receivable

Prepaid expenses and other assets

Total current assets

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Operating lease – right of use assets, net

Intangible assets, net

Intangibles, net

LIABILITIES AND SHAREHOLDERS’ EQUITY

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Deferred product revenue

Short-term debt

Total current liabilities

Senior convertible notes

Deferred rent

Op erat ing lease liability

Long-term debt

Op erat ing lease liability, net of current

Other long-term liabilities

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CLEARONE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except per share amounts)

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Operating loss

Interest expense

Other income, net

Loss before income taxes

Provision for income taxes

Basic loss per common share

Diluted loss per common share

Provision for (benefit from) income taxes

Net income (loss)

Basic income (loss) per common share

Diluted income (loss) per common share

Basic weighted average shares outstanding

Diluted weighted average shares outstanding

Comprehensive loss:

Comprehensive income (loss):

Net income (loss)

Other comprehensive income (loss):

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

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

Change in foreign currency translation adjustment

Comprehensive loss

Comprehensive income (loss)

See accompanying notes

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Balance, beginning of period

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

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

Foreign currency translation adjustment

Balance, end of period

Retained earnings (accumulated deficit)

Accumulated deficit

Balance, beginning of period

Stock repurchased

Cash dividends, $ 0.07 per share

Impact on retained earnings for change in revenue recognition policy

Net income (loss)

Balance, end of period

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Cash flows from operating activities:

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

Net income (loss)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization expense

Amortization of right of use of assets

Amortization of deferred rent

Stock-based compensation expense

Share-based compensation expense

Provision for doubtful accounts, net

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Loss on disposal of assets

Deferred income taxes

Changes in operating assets and liabilities:

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Accrued liabilities

Income taxes payable

Income taxes receivable

Deferred product revenue

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Purchase of marketable securities

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash flows from financing activities:

Issuance of common stock

Net proceeds from issuance of senior convertible notes

Net proceeds from equity-based compensation programs

Dividend payments

Payments for stock repurchases

N et proceeds from issuance of senior convertible notes

Proceeds from Pay check Protection Program loan

Proceeds from equity-based compensation programs

Net cash provided by financing activities

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Cash paid for income taxes

Interest paid

See accompanying notes

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Basis of Presentation:

Fiscal Year – This report on Form 10-K includes consolidated balance sheets for t he years ended December 31, 2019 and 2018 and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the years 2019 and 2018 .

Fiscal Year – This report on Form 10-K includes consolidated balance sheets for t he years ended December 31, 2020 and 2019 and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the years 2020 and 2019 .

Consolidation – These consolidated financial statements include the financial statements of ClearOne, Inc.

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Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management 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 sales and expenses during the reporting periods.

Key estimates in the accompanying consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts receivable and product returns, provisions for obsolete inventory, potential impairment of goodwill and of long-lived assets, and deferred income tax asset valuation allowances.

Key estimates in the accompanying consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts receivable and product returns, provisions for obsolete inventory, potential impairment of long-lived assets, and deferred income tax asset valuation allowances.

Actual results could differ materially from these estimates.

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There was an increase in assets of $ 2,966 and liabilities of $ 3,101 due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases with the difference of $ 135 related to existing deferred rent that reduced the ROU asset recorded.

The standard did not have a material impact on our condensed consolidated statements of operations and comprehensive loss.

The standard did not have a material impact on our condensed consolidated statements of operations and comprehensive income (loss).

Change in accounting policy related to leases:

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

Adoption of New Revenue Standard:

On January 1 , 2018 , as required, the Company adopted ASU No.

2014 - 09 - Revenue from Contracts with Customers (Topic 606 ) (“ASU 2014 - 09 ”), ASU No.

2015 - 14 - Revenue from Contracts with Customers (Topic 606 ):

Deferral of the Effective Date (“ASU 2015 - 14 ”), ASU No.

2016 - 08 - Revenue from Contracts with Customers (Topic 606 ):

Principal versus Agent Considerations (“ASU 2016 - 08 ”), ASU No.

2016 - 10 - Revenue from Contracts with Customers (Topic 606 ):

Identifying Performance Obligations and Licensing (“ASU 2016 - 10 ”), ASU No.

2016 - 12 - Revenue from Contracts with Customers (Topic 606 ):

Narrow-Scope Improvements and Practical Expedients (“ASU 2016 - 12 ”) and ASU No.

2016 - 20 - Technical Corrections and Improvements to Topic 606 , Revenue from Contracts with Customers” (“ASU 2016 - 20 ”) (collectively “the New Revenue Standard”).

To conform to the New Revenue Standard, the Company modified its revenue recognition policy as described further below.

Change in Accounting Policy:

On January 1 , 2018 , the Company adopted the New Revenue Standard using the modified retrospective method, applying the guidance to all open contracts and recognized an adjustment to increase retained earnings by $ 2,782 reduce deferred product revenue by $ 4,337 and reduce distributor channel inventories by $ 1,555 as of that date.

The comparative financial information has not been restated and continues to be presented under the accounting standards in effect for the respective periods.

The Company applied the practical expedient and has not disclosed the revenue allocated to future shipments of partially completed contracts.

Prior to our change in accounting policy, revenue from product sales to distributors was not recognized until the return privilege had expired or until it can be determined with reasonable certainty that the return privilege had expired, which approximated when the product was sold-through to customers of our distributors (dealers, system integrators, value-added resellers, and end-users), rather than when the product was initially shipped to a distributor.

At each quarter-end, we evaluated the inventory in the distribution channel through information provided by our distributors.

The level of inventory in the channel fluctuated up or down each quarter based upon our distributors’ individual operations.

Accordingly, each quarter-end deferral of revenue and associated cost of goods sold were 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 were deferred until we received payment for the product sales made to such distributors or channel partners.

After the change in the accounting policy, substantially all of the Company’s revenue is recognized following the transfer of control of the products to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts.

During the 1 2 months ended December 31, 201 8 , revenue decreased by $ 1,252 due to the impact of the adoption of the New Revenue Standard.

Revenue Recognition Policy:

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Although payment terms vary, most distributor agreements require payment within 45 days of invoicing.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company recognizes revenue when it satisfies a performance obligation.

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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:

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Deferred gross profit

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company offers rebates and market development funds to certain of its distributors, dealers/resellers, and end-users based upon the volume of product purchased by them.

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Video products

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table disaggregates the Company’s revenue into major regions:

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Balance at end of year

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Advertising – The Company expenses advertising costs as incurred.

Advertising costs consist of trade shows, magazine advertisements, and other forms of media.

Advertising expenses for t he years ended December 31, 2019 and 2018 totaled $ 902 and $ 1,037 , respectively, and are included in sales and marketing on the consolidated statements of operations and comprehensive loss.

Advertising expenses for t he years ended December 31, 2020 and 2019 totaled $ 440 and $ 902 , respectively, and are included in sales and marketing on the consolidated statements of operations and comprehensive income (loss).

Income Taxes – The Company uses the asset and liability method of accounting for income taxes.

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Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of such allowances.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered.

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Recent changes:

The Company follows the provisions contained in ASC Topic 740 , Income Taxes.

The Company recognizes the tax benefit from an uncertain tax position only if it is at least more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.

There were no changes that had a material impact on the Company's consolidated financial position, results of operations or cash flows.

Earnings Per Share – The following table sets forth the computation of basic and diluted loss per common share:

Year Ended December 31,

Net income (loss)

Basic weighted average shares

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Diluted weighted average shares

Basic loss per common share:

Diluted loss per common share:

Weighted average options outstanding

Anti-dilutive options not included in the computation

Basic income (loss) per common share:

Diluted income (loss) per common share:

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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We have already spent approximately $ 20,319 from 2016 through 2020 towards this litigation and may be required to spend more to continue our legal defense.

We believe the recent decision by the U.S.

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.

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

We have also raised additional capital in 2018 by issuing common stock and in 2019 by issuing senior convertible notes.

We have also raised additional capital in 2019 by issuing senior convertible notes and in 2020 by borrowing through the CARES Act Paycheck Protection Program and 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 also believe that the measures taken by us will continue to 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 operating needs through at least March 31, 2022.

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Total available-for-sale securities

Debt securities in an unrealized loss position as of December 31, 2019 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.

The available-for-sale marketable securities in a gross unrealized loss position as of December 31, 2019 are summarized as follows:

Less than 12 months

More than 12 months

Estimated fair value

Gross unrealized holding losses

Estimated fair value

Gross unrealized holding losses

Estimated fair value

Gross unrealized holding losses

As of December 31, 2019

Corporate bonds and notes

Municipal bonds

There were no debt securities in an unrealized loss position as of December 31, 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Total intangible assets, net

Intangible assets include capitalized legal expenses, net of amortization of $ 11,040 million related to our defense of patents from infringement by our competitors.

Patents and technological know-how include capitalized legal expenses, net of amortization of $ 16,582 related to our defense of patents from infringement by our competitors.

Legal expenses have been capitalized upon satisfaction of two conditions:

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Depreciation expense on property and equipment for t he years ended December 31, 2020 and 2019 was $ 422 and $ 512 , respectively.

During the twelv e months ended December 31, 2019 we recorded a loss of $ 34 for the disposal of fixed assets consisting of software, manufacturing equipment and furniture.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2 unchanged sentences

Rent expense for the years ended December 31, 2020 and 2019 was as follows:

We occup ied a 5,000 square-foot facility in Gainesville, Florida under the terms of an operating lease that was terminated in January 202 0 .

The Gainesville facility was used primarily to support our research and development activities.

During January 2020 we entered into an operating lease for a 1,350 square-foot facility in Gainesville , Florida expiring in February 2023.

We currently occupy a 21,443 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in March 2024 , with an option to extend for additional five years.

W e occup y a 1,350 square-foot facility in Gainesville, Florida under the terms of an operating lease expiring in February 2023 .

The Gainesville facility is used primarily to support our research and development activities.

We occupy a 21,443 square-foot facility in Salt Lake City, Utah under the terms of 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.

7 unchanged sentences

Supplemental cash flow information related to leases was as follows:

December 31, 2019

Year ended December 31,

Cash paid for amounts included in the measurement of lease liabilities:

6 unchanged sentences

December 31, 2020

December 31, 2019

Operating lease right-of-use assets

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Accrued salaries and other compensation

Sales and marketing programs

Sales and marketing programs and customer credit balances

Product warranty

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Uncertain Tax Positions.

As further discussed in Note 12 , we had $ 233 of uncertain tax positions as of December 31, 2019 .

As further discussed in Note 13 - Income Taxes , we had $ 861 of uncertain tax positions as of December 31, 2020 .

Due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability to any particular year.

2 unchanged sentences

The Company is involved in litigation against Shure Incorporated (“Shure”).

Shure initiated this litigation on April 24, 2017, by filing a complaint in the U.S.

District Court for the Northern District of Illinois seekin g a declaratory judgment of non-infringement and invalidity of the Company’s U.S.

Shure, Incorporated v.

ClearOne, Inc.

, 17-cv-3078 (N.D.

Shure filed the first lawsuit on April 24, 2017, by filing a complaint in the U.S.

District Court for the Northern District of Illinois seeking a declaratory judgment of non-infringement and invalidity of the Company’s U.S.

9,635,186 (“’186 Patent”) and Patent No.

8 unchanged sentences

9,813,806 (“’806 Patent”).

On August 6, 2017, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’186 Patent.

On March 16, 2018, the Court denied the Company’s motion for preliminary injunction regarding the ’186 Patent.

On February 6, 2019, the Company filed a motion for reconsideration in light of the PTAB’s January 24, 2019, decision confirming the patentability of the related ’553 Patent.

On August 25, 2019, the Court denied the Company’s motion for reconsideration.

On April 17, 2018, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’806 Patent.

On August 6, 2019, the Court granted the Company’s motion for preliminary injunction regarding the ’806 Patent preventing Shure from manufacturing, marketing, and selling the Shure MXA910 Ceiling Array Microphone for use in its “drop-ceiling mounting configuration.” The Court determined that such sales are likely to infringe the ’806 Patent and that Shure had not raised a substantial question of the ’806 Patent validity.

The Court’s order also prevents Shure from encouraging others to use the Shure MXA910 beamforming microphone array in the “drop-ceiling mounting configuration” and “applies to Shure’s officers, agents, servants, employees, and attorneys, as well as anyone who is in active concert or participation with those listed persons.” On August 20, 2019, the Company deposited $4,452,149.60 with the Court to satisfy a bond securing the preliminary injunction.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

On February 21, 2020, the Company asked for a Court order that Shure has been manufacturing, marketing, and selling its redesigned MXA910, the MXA910-A released in December 2019, in violation of a preliminary injunction issued on August 20, 2019.

On September 1, 2020, the Court held Shure in contempt of court for violating the Court’s August 2019 preliminary injunction order.

The Court held that “Shure has violated the preliminary injunction order and is found in contempt because it designed the MXA910-A in such a way that allows it to be easily installed flush in most ceiling grids.” The Court’s order prohibited Shure from continuing to “manufacture, market, or sell the MXA910-A.” In addition, the Court held that “[t]he record is also clear as to the MXA910-60CM, but in an abundance of caution, the Court will refrain from granting that aspect of the contempt motion to allow for additional discovery” on that and the “possibility that Shure also violated the preliminary injunction order” by “pushing” sales of the MXA910 immediately after the issuance of the August 2019 preliminary injunction order.

The parties will soon complete supplemental briefing relating to this contempt finding.

On September 15, 2020, Shure filed an appeal of the contempt ruling with the United States Court of Appeals for the Federal Circuit, seeking reversal of the Court’s order finding contempt and disallowing further sales of the MXA910-A.

The briefing on Shure’s appeal will be complete in April 2021 and then the Federal Circuit may order a hearing on the appeal.

On July 9, 2020, the Company moved for summary judgment, or partial summary judgment, of infringement by Shure of the ’186 and ’806 patents, and Shure moved on the same day for summary judgment of invalidity of the ’186 and ’806 patents.

On August 12, 2020, Shure also moved for summary judgment on various other aspects of the Company’s infringement claims, including arguing that the MXA910 after a recent firmware update does not infringe the ’186 Patent, that the MXA910-A and MXA910-US do not infringe the ’806 Patent, and that the Company is not entitled to lost profits or treble damages.

The motions remain pending.

Shure Incorporated v.

ClearOne, Inc., No.

IPR2017-01785 (PTAB)

On July 14, 2017, Shure filed a petition with Patent Trial and Appeals Board (“PTAB”) for inter partes review against the ’553 Patent.

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Court of Appeals for the Federal Circuit, which issued a judgment affirming the PTAB’s decision on March 6, 2020.

On August 6, 2017, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’186 Patent.

On March 16, 2018, the Court denied the Company’s motion for preliminary injunction regarding the ’186 Patent.

On February 6, 2019, the Company filed a motion for reconsideration in light of the PTAB’s January 24, 2019, decision confirming the patentability of the related ’553 Patent.

On August 25, 2019, the Court denied the Company’s motion for reconsideration.

On April 17, 2018, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’806 Patent.

The Court’s order also prevents Shure from encouraging others to use the Shure MXA910 beamforming microphone array in the “drop-ceiling mounting configuration” and “applies to Shure’s officers, agents, servants, employees, and attorneys, as well as anyone who is in active concert or participation with those listed persons.” On August 20, 2019, the Company deposited $ 4,452 with the Court to satisfy a bond securing the preliminary injunction.

ClearOne, Inc.

Shure Acquisition Holdings, Inc., IPR2019-00683 (PTAB)

On February 15, 2019, the Company filed a petition for inter partes review of Shure’s U.S.

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Shure opposed the petition, but the PTAB instituted inter partes review on August 16, 2019.

A final decision is expected by August 2020.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Shortly over a year later, on August 14, 2020, the PTAB issued its final written decision, holding that all but two of the original claims in the ’493 Patent, claims 6 and 34, are unpatentable in light of the ’806 and other prior art, and granting Shure’s request to amend 11 claims.

On August 24, the Company filed a request for rehearing with the PTAB, arguing that the 11 amended claims are not patentable based upon the Company’s allegation that Shure withheld from the PTAB two allegedly material references that render those claims unpatentable.

Also on August 24, the Company filed a request for sanctions with the PTAB, arguing that Shure’s failure to disclose two material references to the PTAB violated Shure’s duty of candor.

PTAB denied both the request for hearing and request for sanctions.

The Company has appealed the PTAB’s final written decision to the U.S Court of Appeal for the Federal Circuit.

ClearOne, Inc.

Shure, Incorporated, 19-cv-02421 (N.D.

On April 10, 2019, the Company filed a lawsuit against Shure in the United States District Court for the Northern District of Illinois alleging that Shure’s MXA910 and MXA310 infringes the ’553 Patent and that Shure has misappropriated ClearOne’s trade secrets.

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On January 13, 2020, Shure moved to dismiss the Company’s new claims.

The Company opposed the motion, which is pending before the Court.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Shure, Incorporated v.

ClearOne, Inc., 19-cv-1343 (D.

On July 18, 2019, Shure, Inc.

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Court for the District of Delaware alleging that ClearOne’s BMA CT product, launched in February of 2019, infringes Shure’s ’493 Patent and that ClearOne engaged in unfair competition, tortious interference, deceptive trade practices, and false advertising.

The matter is Shure, Incorporated v.

ClearOne, Inc.

, 19-cv-1343 (D.

of Delaware).

Shure is seeking monetary damages and injunctive relief.

ClearOne successfully moved to stay Shure’s infringement claim relating to the ’493 Patent until August 2020 when the PTAB is set to issue a Final Written Decision on its inter partes review of the ’493 Patent.

ClearOne successfully moved to stay Shure’s infringement claim relating to the ’493 Patent because the PTAB instituted inter partes review of the ’493 Patent.

On November 19, 2019, the Court granted Shure’s request for leave to amend its complaint to add a claim of infringement of Shure’s recently issued U.S.

D865723 (the “Design Patent”) and additional claims of trade libel.

ClearOne has moved to dismiss Shure’s claims or to transfer them to the Northern District of Illinois.

Those motions are pending.

The Company believes that the lawsuit is without merit and intends to vigorously defend itself.

On November 4, 2019, the Company filed a lawsuit against Shure in the U.S.

District Court for the Northern District of Illinois seeking a declaratory judgment of non-infringement of Shure’s Design Patent.

The matter is ClearOne, Inc.

19-cv-07825 (N.D.

Ill.), and is stayed pending a decision on the Company’s motion to dismiss Shure’s claims in the Delaware Action.

On February 21, 2020, the Company asked for a Court order that Shure has been manufacturing, marketing, and selling its redesigned MXA910, the MXA910W-A released in December 2019, in violation of a preliminary injunction issued on August 20, 2019.

Under the law, that court-ordered injunction applied to Shure’s MXA910 as well as “colorable imitations” thereof.

ClearOne’s filings assert that Shure has been willfully manufacturing, marketing, and selling its MXA910W-A in a way that “encourages or allows integrators to install it in a drop-ceiling mounting configuration.” The Company argues that the measurements of the MXA910W-A allow it to be installed securely in the prohibited configuration in the majority of U.S.

drop-ceiling grids, and Shure’s marketing materials encourage such installation.

In addition, ClearOne has found evidence that third parties are in fact installing the MXA910W-A in the prohibited configuration.

ClearOne has asked the Court to order Shure to cease marketing and selling the MXA910W-A in the United States, notify all customers that the MXA910W-A violates the preliminary injunction and is thus subject to recall, award ClearOne its attorneys’ fees associated with the contempt motion, and for additional discovery relating to how Shure’s customers are installing the MXA910W-A.

On March 9, 2020, Shure filed its opposition, arguing that it has fully complied with the preliminary injunction, its MXA910W-A is not subject to the preliminary injunction, and it instructs customers not to install the MXA910W-A in a drop ceiling mounting configuration.

On March 10, the Court granted ClearOne leave to conduct limited additional discovery, and granted ClearOne leave to submit a reply in support of the motion by April 1, which was later extended to April 22 due to the COVID-19 crisis.

In July 2020, the Company filed counterclaims accusing Shure of false advertising.

Both parties’ claims are still pending.

The Company believes that Shure’s lawsuit is without merit and intends to vigorously defend itself.

On April 14, 2020, Shure moved for a temporary restraining order and preliminary injunction to prevent the Company from selling the BMA CT and BMA CTH, alleging that these products infringed Shure’s Design Patent.

The Company opposed the motions, and on May 1, Magistrate Judge Burke issued a report and recommendation denying Shure’s request for a temporary restraining order, finding that Shure had failed to show that it would suffer irreparable harm in the absence of injunctive relief and that ClearOne had raised a “substantial question” as to the validity of the Design Patent.

On September 21, 2020, the Court held a hearing on Shure’s motion for a preliminary injunction seeking to enjoin further sale of the BMA CT and Versa bundles that included the BMA CTH.

On January 20, 2021, Magistrate Judge Burke issued a report and recommendation denying Shure’s motion for failure to show both a likelihood of success on the merits and irreparable harm.

After Shure did not file an objection to the report and recommendation, Judge Andrews adopted it and denied Shure’s preliminary injunction motion.

Shure did not file a notice of appeal.

On July 28, 2020, Judge Burke held a claim construction hearing on the Design Patent and issued a report and recommendation on claim construction in October 2020.

Since neither party objected, the district court judge adopted the report and recommendation in November 2020.

Shure, Incorporated v.

Inc., PGR2020-00079 (PTAB)

Also on July 28, 2020, Shure challenges the patentability of the Company’s U.S.

10,728,653 in a post-grant review proceeding before the PTAB.

The matter is Shure, Incorporated v.

, PGR2020-00079 (PTAB).

The Company filed a preliminary response on November 17, 2020, and the PTAB instituted trial by an institution decision dated February 16, 2021.

The institution decision found that five of the seven challenges in the petition were not reasonably likely to prevail, but instituted trial under its all-or-nothing institution policy.

The Company may file its initial set of trial papers by May 11, 2021.

A trial hearing is scheduled to take place November 16, 2021, and a final written decision is due from the PTAB by February 16, 2022.

The Company intends to continue to vigorously enforce and defend its intellectual property rights in these proceedings.

3 unchanged sentences

However, based on the information available to us, we do not believe any such other proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

We believe there are no other items that will have a material adverse impact on the Company’s financial position or results of operations.

2 unchanged sentences

If adverse outcomes were to occur, our financial position, results of operations and cash flows could be negatively affected materially for the period in which the adverse outcomes are known.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Long-Term Debt

Senior Convertible Notes and Warrants

3 unchanged sentences

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.

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 mature on December 17, 2023 (the “Maturity Date”) and 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.

31 unchanged sentences

Net carrying amount

Current portion of liability component included under short-term debt

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

Liability component total

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

5 unchanged sentences

Net carrying amount

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

December 31, 2020

December 31, 2019

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

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

Share-Based Payments

9 unchanged sentences

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 December 31, 2019 had contractual lives of ten years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of December 31, 2020 , the Company had 505,946 options with contractual lives of ten years and 337,500 options with contractual lives of 6 years.

As of December 31, 2020 , there were 843,446 options outstanding under the 2007 Plan.

3 unchanged sentences

The Company uses the Black-Scholes option pricing model to determine the fair value of share-based payments granted under the guidelines of ASC Topic 718 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company did not grant any options during the year ended December 31, 2019.

In applying the Black-Scholes methodology to the options granted during the year ended December 31, 2020, the Company used the following assumptions:

Risk free interest rate, average

Expected option life, average

Expected price volatility, average

Expected dividend yield

The risk-free interest rate is determined using the U.S.

21 unchanged sentences

Vested at December 31, 2020

The total pre-tax compensation cost related to stock options recognized during the years ended December 31, 2019 and 2018 was $ 208 and $ 463 , respectively.

Tax benefit from compensation cost related to stock options during the years ended December 31, 2019 and 2018 was $ 0 .

As of December 31, 2019 , the total compensation cost related to stock options not yet recognized and before the effect of any forfeitures was $ 51 , which is expected to be recognized over approximately the next 0.38 year on a straight-line basis.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The total pre-tax compensation cost related to stock options recognized during the years ended December 31, 2020 and 2019 was $ 58 and $ 208 , respectively.

Tax benefit from compensation cost related to stock options during the years ended December 31, 2020 and 2019 was $ 0 .

As of December 31, 2020 , the total compensation cost related to stock options not yet recognized and before the effect of any forfeitures was $ 457 , which is expected to be recognized over approximately the next 3.72 years on a straight-line basis.

Employee Stock Purchase Plan

10 unchanged sentences

Plan compensation expense

Cash Dividends

On February 21, 2018, the Company declared a cash dividend of $ 0.07 per share of ClearOne common stock.

The dividend was paid on March 21, 2018 to shareholders of record as of March 7, 2018 .

On June 13, 2018, the Company announced the suspension of its dividend program.

Issuance of Common Stock

The Company raised additional capital through an oversubscribed subscription rights offering (the "Rights Offering") which closed on December 4, 2018 and which raised $ 9,883 (net of stock issuance costs).

In the Rights Offering, we issued one subscription right to each of our shareholders for each share of our common stock that they held.

Each subscription right entitled the shareholder to purchase one share of our common stock at a purchase price of $ 1.20 per share.

At the closing, we sold 8,306,535 shares of our common stock and returned subscriptions for 754,868 shares that were oversubscribed after allocating oversubscribed shares on a pro-rata basis.

Issuance of Common Stock and Warrants

O n September 13 , 2020, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”), pursuant to which the Company issued and sold, in a registered direct offering 2,116,050 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share (the “Common Stock”) at an offering price of $ 2.4925 per share, (the “Registered Offering”).

The Company received gross proceeds of approximately $ 5,275 ( 4,764 net of issuance costs) in connection with the Registered Offering, before deducting placement agent fees and related offering expenses.

In a concurrent private placement, the Company issued to the Purchasers who participated in the Registered Offering warrants exercisable for an aggregate of 1,058,025 shares of common stock at an exercise price of $ 2.43 per share.

Each warrant became immediately exercisable and had an expiry term of five years from the issuance date.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3 unchanged sentences

Year ended December 31,

The following table summarizes the percentage of total gross accounts receivable from significant customers:

The following table summarizes the percentage of total gross accounts receivable from significant customers that represented more than 10 percent of total gross accounts receivable:

As of December 31,

* Sales to Customer A in 2018 did not exceed 10 % of the revenue.

* Accounts r eceivable from Customer B in 2019 did not exceed 10 % of t otal gross accounts receivable .

* Sales and accounts r eceivable from Customer A in 2020 did not exceed 10 % of revenue and t otal gross accounts receivable .

Fair Value Measurements

22 unchanged sentences

Year ended December 31,

The Company’s provision for income taxes consisted of the following:

The Company’s benefit from (provision for) income taxes consisted of the following:

Year ended December 31,

2 unchanged sentences

Total deferred

Tax provision

Tax benefit (provision)

The income tax (provision) differs from that computed at the federal statutory corporate income tax rate as follows:

4 unchanged sentences

Foreign earnings or losses taxed at different rates

Tax rate change

Tax rate change, due primarily to loss carryback

Change in valuation allowance

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Net deferred income tax asset (liability)

The Company has not provided for foreig n withholding taxes on undistributed earnings of its non-U.S.

T he C oronavir u s Aid, Relief, and Eco nomic Security Act (the “CARES Act”) was enacted on March 27, 2020.

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side payroll tax, Paycheck Protection Program, net operating loss carryback periods, and modifications to the net interest deduction limitations.

The most significant impact to the Company from the CARES Act relates to the Paycheck Protection Program and modifications to the net operating loss car ryback periods.

In November 2020, the Company completed its assessment of the impact of the carryb ack provisions from the CARES Act and elected to carry back its net operating losses to previous years.

The Company has not provided for foreig n withholding t axes on undistributed earnings of its non-U.S.

subsidiaries since these earnings are intended to be reinvested indefinitely, in accordance with guidelines contained in ASC Topic 740 , Accounting for Income Taxes .

12 unchanged sentences

Accordingly, the Company recorded a full valuation allowance at September 30, 2018, and continues to be in a full valuation allowance position at December 31, 2020 .

The Company has federal and state net operating loss (“NOL”) carryforwards of approximately $ 16.3 million (pre-tax), and Spain NOL carryforwards of approximately $ 8.6 million.

The majority of the federal NOL carryforward and the Spain NOL carryforward do not expire.

Under the five-year carryback provision of the CARES Act, the Company carried back its 2018 and 2019 taxable losses to 2013 and 2014.

The Company also intends to carry back its 2020 taxable loss to 2015.

As no tax benefit was previously recorded for the 2018 – 2020 losses, due to the full valuation allowance, the carryback of these losses resulted in a tax benefit of $7.1M.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As of December 31, 2020 the Company has federal net operating loss (“NOL”) carryforwards of approximately $ 0.8 million (pre-tax), state NOL carryforwards of approximately $ 20.5 million (pre-tax) and Spain NOL carryforwards of approximately $ 9.9 million (pre-tax).

The federal NOL carryforward begins to expire in 2029.

T he Spain NOL carryforward does not expire.

The state NOL carryforwards expire over various periods.

7 unchanged sentences

We account for interest expense and penalties for unrecognized tax benefits as part of our income tax provision.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Although we believe our estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals.

13 unchanged sentences

income tax examinations by tax authorities for years prior to 2017.

The Company completed its audit by the Internal Revenue Service (“IRS”) for its 2012 and 2013 tax returns in 2017 .

As a result of the audit by the IRS, there were no material adjustments made to the Company’s tax return.

The Inland Revenue Department of Hong Kong, a Special Administrative Region (the “IRD”), commenced an examination of the Company’s Hong Kong profits tax returns for 2009 through 2011 in the fourth quarter of 2012 , which was completed subsequent to December 31, 2017.

As a result of the audit, there were no material changes to the Company’s financial position.

During the next twelve months, it is reasonably possible that the amount of the Company’s unrecognized income tax benefits could change significantly.

These changes could be the result of our ongoing tax audits or the settlement of outstanding audit issues.

However, due to the issues being examined, at the current time, an estimate of the range of reasonably possible outcomes cannot be made, beyond amounts currently accrued.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Geographic Sales Information

16 unchanged sentences

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 9A. Controls and Procedures