What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-10 compared with 2021-05-13 · 71 added, 45 removed, 169 unchanged (41% of the section changed)

59 unchanged sentences

The BMA 360, now with Voice Lift, sets another industry standard for exceptional mic pickup distance and system gain.

During the first three months of 2021 , we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents.

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

Overall revenue increased by 23 % in the first quarter of 2021 when compared to the first quarter of 2020 , primarily due to an increase in revenue from all major product categories with video products generating the highest revenue growth.

Video products continue to enjoy high revenue growth primarily due to significant demand from work from home and learn from home market.

Despite the negative impact of COVID- 19 and the infringement of our patents by Shure on all professional installed products, our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") continued to result in overall Beamforming Microphone Array ("BMA") revenue to be significantly higher than last year.

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

Our revenue is negatively impacted due to on-going harm of infringement of ClearOne’s patents despite the preliminary injunction granted against Shure as we believe Shure continues to infringe 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 not withstanding a significant growth in revenue from video products this quarter.

Our gross profit margin decreased to 42.7 % during the first quarter of 2021 from 49.5 % during the first quarter of 2020 .

Net loss decreased from $ 1.8 million in the first quarter of 2020 to $ 1.7 million in the first quarter of 2021 .

The decrease was mainly due to reduction in operating costs and increase in absolute gross profit dollars through higher revenue.

During May 2021, we announce d the immediate availability of CONVERGENCE AV Cloud, which significantly expands AV Practitioner recurring revenue opportunities for remote, real-time Management as a Service (MaaS).

CONVERGENCE Cloud software is a unified AV network management platform to monitor, control, and audit ClearOne Pro Audio and Video products and services.

Remote real-time system access provides at-a-glance and all-inclusive dashboard views with auto-discovery of Pro Audio devices and unlimited scalability designed to support organizations of any size.

With the new Cloud option, AV Practitioners can profit on value-added MaaS opportunities to easily support multiple clients and multiple networks with fully secure, real-time remote system access on a single multi-tenant platform.

The powerful and elegant user interface, in twelve languages, works on any browser and will allow full support of the AV Network with built-in video, audio, and chat tools for real-time communications as well as email and immediate SMS text alerts.

Relevant information is quickly found with search, sort, and filter options.

CONVERGENCE AV Cloud can be virtually partitioned for AV management by location such as building, floor, room, or any desired global topology.

Practitioners can easily manage accounts, assigning three levels of access with Owner, Administrator, and Monitor roles;

all housed on encrypted secure cloud servers.

Client tenant usage can be conveniently tracked for invoicing and optional auto-payment reminders.

During the first six months of 2021, we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents.

We believe the decision by the U.S.

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However, we are not getting the full benefits of the Court’s extraordinary remedy in the form of the preliminary injunction granted against Shure with respect to infringement of our ’806 Patent as we believe that Shure is still infringing ClearOne’s patent.

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

Overall revenue increased by 22% in the second quarter of 2021 when compared to the second quarter of 2020, primarily due to an increase in revenue from microphones and audio conferencing products with BMA based solutions generating the highest revenue growth.

Overall revenue increased by 22% during the six months ended June 30, 2021 compared to the same period in 2020, primarily due to increase in revenue from microphones, especially the BMA based solutions and video 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") continued to result in overall Beamforming Microphone Array ("BMA") revenue to be significantly higher than last year.

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

Our gross profit margin increased to 44.3% during the second quarter of 2021 from 41.2% during the second quarter of 2020.

Net loss decreased from $1.9 million in the second quarter of 2020 to $1.6 million in the second quarter of 2021 .

The decrease was mainly due to increase in absolute gross profit dollars through higher revenue partially offset by an increase in operating costs.

During the six months ended June 30, 2021, our absolute gross profit dollars increased to $6.4 million from $5.5 million in the same period in 2020 despite gross profit margin declining to 43.5% from 45.1% due to increase in revenues.

During the six months ended June 30, 2021, net loss decreased to $3.2 million compared to $3.8 million during the same period in 2020 mainly due to higher gross profit dollars from higher revenue partially offset by an increase in operating expenses in the six months ended June 30, 2021 compared to six months ended June 30, 2020.

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

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Deferred Revenue

Deferred revenue decreased to $ 78 thousand at March 31, 2021 compared to $ 123 thousand at December 31, 2020 .

Deferred revenue decreased to $56 thousand at June 30, 2021 compared to $123 thousand at December 31, 2020.

A detailed discussion of our results of operations follows below.

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

Results of Operations for the three months ended March 31, 2021

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three months ended March 31, 2021 (“ 2021 - Q1 ”) and 2020 (" 2020 - Q1 "), respectively, together with the percentage of total revenue which each such item represents:

Three months ended March 31,

Results of Operations for the three and six months ended June 30, 2021

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2021 (“ 2021 - Q2 ”) (" 2021 -H1") and 2020 (" 2020 - Q2 ") (" 2020 -H1") , respectively, together with the percentage of total revenue which each such item represents:

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

Percentage Change 2021 vs 2020

Cost of goods sold

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Provision for income taxes

Our revenue increased to $ 7.0 million in 2021 -Q1 compared to $ 5.7 million in 2020 -Q1 primarily due to a 130% increase in video products revenue, followed by a 10% increase in microphones revenue and a 2% increase in audio conferencing products revenue.

Video products continue to enjoy successes primarily due to growth in demand from work from home and learn from home markets.

Our revenue increased to $7.7 million in 2021-Q2 compared to $6.4 million in 2020-Q2 primarily due to a 70% increase in microphones revenue, followed by a 17 % increase in audio conferencing revenue, partially offset by a 22% decline in video products.

Microphones growth continued to be led by our new solutions incorporating BMA-CT and BMA 360 with our traditional ceiling mics also enjoying revenue growth.

Audio Conferencing category as a whole increased mainly due to a strong revenue performance of our professional mixers despite decreases in other product groups within audio conferencing category.

Microphones growth continued to be led by our new solutions incorporating BMA-CT and BMA 360 even though our traditional ceiling mics suffered a revenue decline.

During the first quarter of 2021 , all major region groups enjoyed revenue growth.

Revenues from North America, Europe and Africa and Asia Pacific, including the Middle East increased by 5%, 57% and 33%, respectively.

Korea, Japan, the Middle East, South Asia, parts of Southern Europe and Latin America registered impressive revenue growth, while Canada and China saw revenue declines.

USA registered modest growth.

During the second quarter of 2021, revenues from Americas declined by 9% primarily due to decline in revenues from USA, while revenues from Asia Pacific, including the Middle East and India grew by 14% primarily due to increase in revenues from China, Australia and Korea, and revenues from Europe and Africa increased by 197% primarily due to significant revenue increases from Southern Europe followed by overall revenue growth in all other regions of Europe and Africa.

During the six months ended June 30, 2021 our revenues increased from $12.1 million to $14.8 million compared to same period in 2020 due to increase in all product categories with revenues from microphones increasing by 38%, video products increasing by 25% and audio conferencing increasing by 9%.

The increase in revenue from m icrophones continued to be led by our new solutions incorporating BMA-CT and BMA 360 with wireless microphones also enjoying revenue growth.

Audio Conferencing category as a whole increased mainly due to a strong revenue performance by our professional mixers.

However other product categories within audio conferencing category suffered revenue declines during 2021-H1 when compared to 2020-H1.

Video products enjoyed revenue growth primarily due to growth in demand from work from home and learn from home markets.

During 2021-H1 Americas declined by 3%, Asia Pacific, including the Middle East and India increased by 34% and Europe and Africa increased by 106%.

Revenues increased from all major regions except USA and Canada during 2021-H1 compared to 2020-H1 with revenue growth from Korea and Southern Europe far exceeding revenue growth from other regions.

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.

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Cost of goods sold includes expenses associated with finished goods purchased from outsourced manufacturers, the repackaging of our products, our manufacturing and operations organization, property and equipment depreciation, warranty expense, freight expense, royalty payments, and the allocation of overhead expens es.

Our gross profit margin declined from 49.5 % during 2020 - Q1 to 42.7 % during 2021 - Q1 .

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 a decrease in overhead costs as a percentage of revenue.

Our gross profit margin increased from 41.2% during 2020-Q2 to 44.3 % during 2021 -Q2 .

The gross profit margin was positively impacted due to decreased freight and tariff costs and inventory obsolescence costs as a percentage of revenue, partially offset by increase in material costs and overhead costs as a percentage of revenue.

Our gross profit margin decreased from 45.1% during 2020-H1 to 43.5% during 2021-H1.

The gross profit margin decreased primarily due to increase in material costs and freight and tariff costs a percentage of revenue, partially offset by decrease in inventory obsolescence costs as a percentage of revenue.

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

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Total operating expenses were $4.9 million for 2021-Q2 compared to $4.5 million for 2020-Q2.

Total operating expenses were $9.4 million for 2021-H1 compared to $9.0 million for 2020-H1.

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 selling, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses.

S&M expenses for 2021 - Q1 decreased to $ 1.6 million from $ 1.7 million for 2020 - Q1 .

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

S&M expenses for 2021-Q2 increased to $1.8 million from $1.5 million for 2020-Q2.

The increase was mainly due to increase in sales commissions and due to one-time employment termination costs.

S&M expenses for 2021-H1 increased to $3.3 million from $3.2 million for 2020-H1.

The increase was mainly due to increase in sales commissions and due one time employment termination costs partially offset by decreases in trade-show related expenses and travel expenses.

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 remained almost the same at $1.5 million for both quarters compared.

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 financing and human resources.

R&D expenses remained fairly consistent with approximately $2.8 million for 2021-H1, as compared to $2.8 million for 2020-H1.

G&A expenses increased slightly from $1.5 million in 2020-Q2 to $1.7 million in 2021- Q2 .

The increase was primarily due to increases in depreciation and amortization expenses.

The increase was primarily due to increases in depreciation and amortization expenses and insurance expenses.

G&A expenses increased from $3.0 million in 2020-H1 to $3.3 million in 2021-H1.

The increase was primarily due to increases in depreciation and amortization expenses and insurance expenses.

Other income (expense), net

Other income (expense), net includes interest income and foreign currency changes.

Other income remained immaterial during the first quarter of 2021 and 2020 .

Interest expense remained almost the same at $0.1 million for both periods compared.

Other income remained immaterial during the second quarter of 2021 and 2020 and between 2021-H1 and 2020-H1.

I nterest expense remained almost the same at $0.1 million for both quarters compared.

Interest expense remained consistent at $0.2 million in 2021 - H1 compared to $ 0.2 million in 2020 - H1 .

Provision for income taxes

During the first quarters of 2021 and 2020 , we did not recognize any benefit from the losses incurred due to setting up of full valuation allowance.

Provision for income taxes recognized in the first quarter of 2021 relates to foreign jurisdictions .

During 2021 -H1, we did not recognize any benefit from the losses incurred due to setting up of full valuation allowance.

Provision for income taxes recognized for 2021 - Q2 and 2021 - H1 relates to foreign jurisdictions .

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

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2021 , our cash and cash equivalents were approximately $ 2.0 million compared to $ 3.8 million as of December 31, 2020 .

Our working capital was $ 19.5 million and $ 22.2 million as of March 31, 2021 and December 31, 2020 , respectively.

Net cash used by opera ting activities was approximately $ 13 thousand in 2021 - Q1 , a decrease of cash provided of approximately $ 544 thousand from $ 531 thousand of cash provided by operating activities in 2020 - Q1 .

The decrease in cash inflow was due to a negative change in operating assets and liabilities of $1,034 thousand, partially offset by an increase in non-cash charges by $298 thousand and a decrease in net loss by $192 thousand.

Net cash used in investing activities was almost the same at $ 1.7 million for 2021 - Q1 and 2021-Q1.

Net cash used in financing activities was in 2021-Q1 was $86 thousand compared to cash provided of $3 thousand in 2020-Q1.

The decrease in cash flow of $89 thousand is due to repayment of principal amounts due on senior convertible notes.

As of June 30, 2021, our cash and cash equivalents were approximately $2.1 million compared to $3.8 million as of December 31, 2020.

Our working capital was $ 17.6 million and $22.2 million as of June 30, 2021 and December 31, 2020, respectively.

Net cash provided by opera ting activities was approximately $1.0 million in 2021 - H1 , an inc rease of cash provided of approximately $0.9 million from $0.1 million of cash provided by operating activities in 2020-H1.

The increase in cash inflow was due to a positive change in operating assets and liabilities of $0.1 million, increase in non-cash charges by $0.3 million and a decrease in net loss by $0.5 million.

Net cash used in investing activities was $2.5 million in 2021-H1 compared to $3.5 million in 2020-H1, a decrease in cash used of $ 1.0 million.

The decrease in cash used in investing activities was primarily due to an increase in net cash realized from marketable securities of approximately $ 0.3 million and a decrease in capitalized patent defense costs by $0.6 million.

Net cash used in financing activities in 2021-H1 was $0.2 million consisting of repayment of principal amounts due on senior convertible notes compared to cash provided by financing activities of $1.5 million in 2020-H1, which consisted of net proceeds from Paycheck Protection Program.

Capitalization of patent defense costs .

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

We have already spent approximately $22.0 million from 2016 through March 31, 2021 towards this litigation and may be required to spend more to continue our legal defense.

We have already spent approximately $23.6 million from 2016 through June 30, 2021 towards this litigation and may be required to spend more to continue our legal defense.

We believe the decision by the U.S.

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We have been actively engaged in preserving cash by suspending our dividend program and allowing our share repurchase program to expire in 2018 and implementing company-wide cost reduction measures.

We have also raised additional capital of - $9.9 million (net of issuance costs) in 2018 by issuing common stock, $2.7 million (net of issuances costs) in 2019 by issuing senior convertible notes, $1.5 million in April 2020 by borrowing through Paycheck Protection Program and $4.8 million in September 2020 by issuing common stock and warrants.

We have also raised additional capital of $9.9 million (net of issuance costs) in 2018 by issuing common stock, $2.7 million (net of issuances costs) in 2019 by issuing senior convertible notes, $1.5 million in April 2020 by borrowing through Paycheck Protection Program, $4.8 million in September 2020 by issuing common stock and warrants, and $2.0 million in July 2021 by issuing short-term debt.

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 May 14, 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;

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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 March 31, 2021 , we had open purchase orders of approximately $4.5 million mostly for purchase of inventory.

At March 31, 2021 , we had inventory totaling $ 13.9 million, of which non-current inventory accounted for $ 4.1 million.

At June 30, 2021, we had open purchase orders of approximately $1.8 million mostly for purchase of inventory.

At June 30, 2021, we had inventory totaling $13.2 million, of which non-current inventory accounted for $4.0 million.

This compares to total inventories of $15.1 million and non-current inventory of $4.6 million as of December 31, 2020.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of March 31, 2021 (in millions):

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

Payment Due by Period

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis