CLEARONE INC 10-K

ITEM 7 . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and related notes included in this report, as well as our other filings with the SEC. 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. OVERVIEW 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 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. 26 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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”) . 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. 27 Table of Contents 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. 28 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Industry conditions We operate in a very dynamic and highly competitive industry which is dominated on the one hand by a few players with respect to certain products like traditional video conferencing appliances while on the other influenced heavily by a fragmented reseller market consisting of numerous regional and local players. The industry is also characterized by 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. Economic conditions, challenges and risks The audio-visual products market is characterized by intense competition and rapidly evolving technology. Our competitors vary within each product category. Our installed professional audio conferencing products, which is our flagship product category, continue to be ahead of the competition despite the reduction in revenues. Our strength in this space is largely due to our fully integrated suite of products consisting of DSP mixers, wide range of professional microphone products and video collaboration products. 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. 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 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. is billed in U.S. dollars and is not exposed to any significant currency risk. However, we are exposed to foreign exchange risk if the U.S. dollar is strong against other currencies as it will make U.S. Dollar denominated prices of our products less competitive. 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 $ 173 thousand in 2019 to $ 123 thousand in 2020 . 29 Table of Contents 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 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) 2020 2019 Change% Favorable (Adverse) Revenue $ 29,069 $ 25,042 16 % Cost of goods sold 16,510 13,849 19 % Gross profit 12,559 11,193 12 % Sales and marketing 6,728 7,935 15 % Research and product development 5,512 5,775 5 % General and administrative 5,886 6,045 3 % Total operating expenses 18,126 19,755 8 % Operating loss ( 5,567 ) ( 8,562 ) 35 % Loss before income taxes ( 5,924 ) ( 8,352 ) 29 % Provision for (benefit from) income taxes ( 6,429 ) 56 11580 % Net income (loss) $ 505 $ ( 8,408 ) 106 % Revenue 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. 30 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 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 . 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 $ 1.1 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) Operating income (loss), or income ( loss) from operations, is the surplus or deficit after operating expenses are deducted from gross profits. Operating expenses include sales and marketing (“S&M”) expenses, research and product development (“R&D”) expenses and general and administrative (“G&A”) expenses. Total operating expenses were $ 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. Sales and Marketing S&M expenses include sales, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses. S&M expenses 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 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 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 $ 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. 31 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provision for income taxes 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 As of December 31, 2020 , our cash and cash equivalents were approximately $ 3.8 million compared to $ 4.1 million as of December 31, 2019 . Our working capital was $ 22.2 million and $ 18.9 million as of December 31, 2020 and 2019 , respectively. 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 $ 8.9 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 . We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. When we capitalize patent defense costs we amortize the costs over the remaining estimated useful life of the patent, which is 15 to 17 y ears. During 2020 we spent $ 6.7 million of legal costs related to the defense of our patents and capitalized the entire amount. We are currently pursuing all available legal remedies to defend our strategic patents from infringement. 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. Patent No. 9,813,806 ) pending a full trial. Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave way for ClearOne’s recovery from the immense harm inflicted by our competitor's infringement of our valuable patents. However, we are not getting the full benefits of the Court’s extraordinary remedy in the form of the preliminary injunction granted against Shure with respect to infringement of our ’ 806 Patent as we believe that Shure is still infringing ClearOne’s patent. During September 2020, the U.S District Court of Northern Illinois held Shure in contempt for marketing and selling their new design in violation of the preliminary injunction. 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. 32 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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; 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 The following table summarizes our contractual obligations as of December 31, 2020 (in millions): Payment Due by Period Total Less Than 1 Year 1 - 3 Years 3 - 5 Years More than 5 years Senior Convertible Notes $ 3.0 $ 0.4 $ 2.6 $ — $ — Payroll Protection Program borrowing 1.5 0.3 1.2 — — Operating lease obligations 2.3 0.7 1.2 0.4 — Purchase obligations 3.4 3.4 — — — Total $ 10.2 $ 4.8 $ 5.0 $ 0.4 $ — Off-Balance Sheet Arrangements We have no off-balance-sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, results of operations or liquidity. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our results of operations and financial position are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. We believe that the estimates we use are reasonable; however, actual results could differ from those estimates. Our significant accounting policies are described in Note 1 - Business Description, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part IV of this report. 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. 33 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue and Associated Allowances for Revenue Adjustments and Doubtful Accounts The Company recognizes revenue when it satisfies a performance obligation. The Company recognizes revenue from sales agreements upon transferring control of a product to the customer. 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, 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. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenues are recognized, and are netted against revenues. For returns, the Company recognizes a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. The Company reviews warranty and related claims activity and records provisions, as necessary. Frequently, the Company receives orders with multiple delivery dates that may extend across reporting periods. Since each delivery constitutes a performance obligation, the Company allocates the transaction price of the contract to each performance obligation based on the stand-alone selling price of the products. The Company invoices the customer for each delivery upon shipment and recognizes revenues in accordance with delivery terms. Although payment terms vary, distributors typically pay within 45 days of invoicing and dealers pay within 30 days of invoicing. As scheduled delivery dates are within one year, revenue allocated to future shipments of partially completed contracts are not disclosed. 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 (Loss). The details of deferred revenue and associated cost of goods sold and gross profit are as follows (in thousands): As of December 31, 2020 2019 Deferred revenue $ 123 $ 173 Deferred cost of goods sold — — Deferred gross profit $ 123 $ 173 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. The Company records rebates as a reduction of revenue in accordance with GAAP. The Company provides, at its discretion, advance replacement units to end-users on defective units of certain products under warranty. Since the purpose of these units is not revenue generating, the Company tracks the units due from the end-user, until the defective unit has been returned. Any amount due from the customer upon failure to return the products is accounted as receivable only after establishing customer's failure to return the products. The inventory due from the customer is accounted at cost or market value whichever is lower. Impairment of Long-Lived Assets We assess the impairment of long-lived assets, such as property and equipment and definite-lived intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also change. Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. 34 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Accounting for Income Taxes We are subject to income taxes in both the United States and in certain non-U.S. jurisdictions. We account for income taxes following ASC 740 , Accounting for Income Taxes, recognizing deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. We estimate our current tax position together with our future tax consequences attributable to temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation, and other reserves for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, prior year carryback, or future reversals of existing taxable temporary differences. To the extent we believe that recovery is not more likely than not, we establish a valuation allowance against these deferred tax assets. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. To the extent we establish a valuation allowance in a period, we must include and expense the allowance within the tax provision in the consolidated statement of operations. In accordance with ASC Topic 740 , “Accounting for Income Taxes”, we analyzed our valuation allowance at December 31, 2020 and determined that based upon available evidence it is more likely than not that certain of our net deferred tax assets will not be realized and, accordingly, we have recorded a full valuation allowance against these deferred tax assets in the amount of $ 11.2 million. Please refer to Note 13 - Income Taxes in the Notes to Consolidated Financial Statements for additional information. Share-Based Payments We estimate the fair value of stock options using the Black-Scholes option pricing model, which requires certain estimates, including an expected forfeiture rate and expected term of options granted. We also make decisions regarding the method of calculating expected volatilities and the risk-free interest rate used in the option-pricing model. The resulting calculated fair value of stock options is recognized as compensation expense over the requisite service period, which is generally the vesting period. When there are changes to the assumptions used in the option-pricing model, including fluctuations in the market price of our common stock, there will be variations in the calculated fair value of our future stock option awards, which results in variation in the compensation cost recognized. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For descriptions of recently issued accounting standards, see Note 1 . Business Description, Basis of Presentation and Significant Accounting Policies of our Notes to Consolidated Financial Statements. ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable