CLEARONE INC 10-Q

Item 2 . MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are based upon reasonable assumptions at the time made, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not anticipate, including, without limitation, product recalls and product liability claims; infringement of our technology or assertion that our technology infringes the rights of other parties; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth; delays in obtaining regulatory approvals or the failure to maintain such approvals; concentration of our revenue among a few customers, products or procedures; development of new products and technology that could render our products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition, availability of labor and materials, cost increases, and fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; integration of business acquisitions; and other factors referred to in our reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2020. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are discussed in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020. BUSINESS OVERVIEW ClearOne is a global Company that designs, develops and sells conferencing, collaboration, and AV networking solutions for voice and visual communications. The performance and simplicity of our advanced, comprehensive solutions offer a high level of functionality, reliability and scalability. We derive a major portion of our revenue from audio conferencing products and microphones by promoting our products in the professional audio-visual channel. We have extended our total addressable market from the installed audio conferencing market to adjacent complementary markets – microphones, video collaboration and AV networking. We have achieved this through strategic technological acquisitions as well as by internal product development. During the first quarter of 2021, we announced two new powerful cameras that enhance the ease and visual quality of online collaboration beyond the capabilities of integrated laptop and PC cameras. With the new ClearOne UNITE® 10, the company’s most affordable camera ever, and the feature-rich ClearOne UNITE 50 4K AF that includes Auto-Framing technology for automatic single- or multi-person capture, everyone can take on the new year with the confidence provided by stunning video that puts them in the best possible light. We recognized that millions of people were expected to use video collaboration tools, for the first time, and the rapid societal shift to home-based and remote work left a lot of people desiring higher quality video solutions to ensure they make a good impression and enjoy reliable, clear and efficient communication. For users who want to upgrade from the basic camera included in their laptop or PC, ClearOne has lowered the barrier of entry with its most affordable webcam ever, the UNITE 10. The small, powerful webcam supports up to 1080p video quality and offers autofocus. The UNITE 10 can capture five-megapixel images with a field of view up to 87 degrees, while major competitors at this price point only achieve 78-degree field of view. The UNITE 10 attaches to any PC or laptop with a simple mounting bracket, and a 1.5m USB-A cable ensures simple connection to most modern computers. The UNITE 10 is also available to dealers and distributors in 20 packs for commercial sale. The new UNITE 50 4K AF camera is a major upgrade over traditional webcams and introduces ClearOne’s new Auto-Framing technology that automatically frames meeting participants to maximize screen use through intelligent image algorithms and ePTZ automation (electronic pan, tilt and zoom). With 4K video quality at 30 Hz, auto-focus capability, 4x digital zoom, more than 8 megapixels of total resolution and an ultra-wide 110-degree field of view, the UNITE 50 4K AF ePTZ is equally capable of delivering incredible image quality from a home office as it is at capturing all participants in an office boardroom. 18 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The camera can be controlled through an IR remote, further simplifying use and enabling real-time control of pan, tilt and zoom to provide greater control when capturing multi-person meeting environments. A standard damping mount ensures fast, easy installation, while an included USB 3.0 cable provides both power and video. Both new ClearOne cameras enable life-like video quality to web-based conferencing applications including ClearOne’s COLLABORATE® Space, WebEx™, Google Meet, Zoom™, GoToMeeting™, and Microsoft® Teams. During February 2021, we expanded the applications for our BMA 360, Beamforming Microphone Array Ceiling Tile with the addition of a new Voice Lift feature that allows its impeccable audio to be locally amplified and heard throughout classrooms, lecture halls, and large meeting rooms. ClearOne’s powerful breakthrough technologies, FiBeam™ and DsBeam™, already found on the BMA 360, enable exceptional new levels of Voice Lift performance. FiBeam technology makes the BMA 360 the world’s first truly wideband, frequency-invariant beamforming mic array that provides the ultimate in natural and full-fidelity sound. DsBeam provides unparalleled sidelobe depth below -40 dB, resulting in superior rejection of reverb and noise and providing superb clarity and intelligibility. With the addition of the new Voice Lift feature, the BMA 360 offers everything desired in a beamforming microphone array ceiling tile—superior beamformed audio, echo cancellation, noise cancellation, auto-mixing, power amplifiers, and camera-tracking functions. The ClearOne architecture offers easy setup and configuration for foolproof installation which benefits AV practitioners. End-users also benefit from the BMA 360’s reduced overall system cost for maximum return on investment. Each BMA 360 can have up to four Voice Lift zones to provide a simple and intuitive way to drive multiple speaker groups, allowing everyone to easily hear and be heard. Built-in 4 channel power amplifiers make wiring simple, convenient, and provide a large cost savings. ClearOne’s innovative combination of built-in power amplifiers and mix-minus zones makes the Voice Lift feature extremely simple to create and deploy. The BMA 360, now with Voice Lift, sets another industry standard for exceptional mic pickup distance and system gain. During May 2021, we 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 July 2021 we introduced UNITE 180 ePTZ professional camera that provides a full 180-degree panoramic field-of-view with “real-time stitching” to achieve a variety of useful viewing modes for any application and environment. Designed for professional-quality visual collaboration, conferencing, UC applications, distance learning, and more, the new UNITE 180 camera provides six viewing mode options as well as panoramic view for the ultimate in camera flexibility. Real-time stitching creates a seamless 180-degree panoramic view of wide spaces by bringing the views of multiple lenses together as one complete image. Large classroom settings, training centers, or any wide conferencing area are all captured and presented with perfect clarity in any of the viewing mode options. A 4x zoom further enhances the UNITE 180 feature set. The UNITE 180 is compatible with all popular cloud-based video collaboration applications including Microsoft Teams, Zoom, WebEx, Google Meet, ClearOne’s COLLABORATE Space and others. 19 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During July 2021 we also announced the market introduction of Versa Mediabar, the company’s first professional quality all-in-one audio and video capture device that combines the elegance and simplicity of a soundbar with the power of ClearOne’s intelligent audio capture and 4K camera technologies. Versa Mediabar provides high-quality visual collaboration, audio conferencing, and UC applications from a single integrated device, offering the simplest solution available for offices, conference rooms and home offices with virtually no setup required. With a compact design that can be mounted on a wall or attached to a video display, the Versa Mediabar connects via a single USB cable to elevate the soundbar concept into a powerful tool for virtual collaboration that includes AI-enabled auto-framing and people tracking. The Versa All-In-One Mediabar features a built-in 4K Ultra HD camera with a 110-degree ultra wide-angle field of view and a four-element microphone array with 360-degree voice pickup and intelligent DSP that provides acoustic echo cancellation (AEC) and automatic noise reduction to ensure crystal clear audio capture. The camera combines electronic pan, tilt and zoom functions (ePTZ) with artificial intelligence to enable auto-framing and people tracking that keeps the speaker in view even if they move around the room. From huddle spaces and small meeting rooms to executive offices and home offices, the compact Versa Mediabar delivers all the power and clarity needed for daily virtual communications. In addition to its professional-quality audio and video capture, the Versa Mediabar also features a powerful built-in speaker with Bluetooth connectivity that allows it to serve double duty as a fully-featured conferencing solution or a Bluetooth speaker for impromptu calls using any Bluetooth device. These attributes make the Versa Mediabar perfect for popular cloud-based collaboration applications such as Microsoft Teams, Zoom, WebEx, Google Meet, and ClearOne’s COLLABORATE® Space. The Versa Mediabar supports standard UVC commands for control, making it a great addition to existing systems, while dual wall and display mounting options deliver freedom of placement and movement. During the first nine months of 2021, we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents. We believe the decision by the U.S. District Court in August 2019 granting our request for a preliminary injunction to prevent Shure from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. The decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops Shure from further infringing the Graham patent pending a full trial. Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave the way for ClearOne’s recovery from the immense harm inflicted by Shure's infringement of our valuable patents. However, we are not getting the full benefits of the Court’s extraordinary remedy in the form of the preliminary injunction granted against Shure with respect to infringement of our ’806 Patent as we believe that Shure is still infringing ClearOne’s patent. We also continued our programs to cut costs and to speed up product development that we believe will enable us to get back to a growth path. Overall revenue decreased by 17% in the third quarter of 2021 when compared to the third quarter of 2020, primarily due to a sharp decline in revenues from video products partially offset by increase in revenues from microphones and audio conferencing products. Overall revenue increased by 6% during the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to increase in revenue from microphones, especially the BMA based solutions and audio conferencing products partially offset by a decline in revenues from video products. Revenue from video products was impacted negatively during 2021-Q3 when compared to 2020-Q3 due to lack of demand for video products and personal audio conferencing products at the same level as it was in latter half of 2020 when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act. Our revenue performance in 2021-Q3 was also impacted negatively due to the raw material supply shortages that have affected the global manufacturing of high tech products as well as due to logistics bottlenecks. Despite the negative impact of COVID-19 and the infringement of our patents by Shure on all professional installed products, our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") continued to result in overall Beamforming Microphone Array ("BMA") revenue to be significantly higher than last year. However, revenue from BMA products as well as from our pro audio products are still far below the levels prior to infringement of our patents. Our revenue is negatively impacted due to on-going harm of infringement of ClearOne’s patents despite the preliminary injunction granted against Shure as we believe Shure continues to infringe certain of our patents and violates the preliminary injunction. The patent infringement also has negatively impacted directly the revenue from ClearOne’s other products not related to the infringed patents. Our gross profit margin decreased to 40.8% during the third quarter of 2021 from 41.8% during the third quarter of 2020. Net loss increased from $1.3 million in the third quarter of 2020 to $2.2 million in the third quarter of 2021 . The increase in net loss was mainly due to (a) decrease in absolute gross profit dollars as a result of lower revenue (b) increased amortization costs relating to our capitalized patent defense costs, and (c) increase in trade show related marketing expenses. During the nine months ended September 30, 2021, our absolute gross profit dollars increased to $9.3 million from $9.0 million in the same period in 2020 despite gross profit margin declining to 42.6% from 43.8% due to increase in revenues. During the nine months ended September 30, 2021, net loss increased to $5.4 million compared to $5.0 million during the same period in 2020 mainly due to increased amortization costs relating to our capitalized patent defense costs, partially offset by higher gross profit dollars from higher revenue. 20 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Industry conditions We operate in a very dynamic and highly competitive industry which is dominated on 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 curated audio solutions with our high quality professional cameras, and our high-end audio conferencing technology will generate high growth in the near future. We derive a major 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 outside 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 Product Revenue Deferred product revenue decreased to $57 thousand on September 30, 2021 compared to $123 thousand on December 31, 2020. A detailed discussion of our results of operations follows below. 21 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations for the three and nine months ended September 30, 2021 The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021 (“ 2021 - Q3 ”) (" 2021 -YTD") and 2020 (" 2020 - Q3 ") (" 2020 -YTD") , respectively, together with the percentage of total revenue which each such item represents: Three months ended September 30, Nine months ended September 30, (dollars in thousands) 2021 2020 Percentage Change 2021 vs 2020 2021 2020 Percentage Change 2021 vs 2020 Revenue $ 6,992 $ 8,412 -17 % $ 21,765 $ 20,503 6 % Cost of goods sold 4,141 4,892 -15 % 12,487 11,527 8 % Gross profit 2,851 3,520 -19 % 9,278 8,976 3 % Sales and marketing 1,692 1,736 -3 % 5,020 4,932 2 % Research and product development 1,492 1,501 -1 % 4,253 4,319 -2 % General and administrative 1,676 1,443 16 % 5,024 4,475 12 % Total operating expenses 4,860 4,680 4 % 14,297 13,726 4 % Operating loss (2,009 ) (1,160 ) 73 % (5,019 ) (4,750 ) 6 % Interest expense net of other income (143 ) (89 ) 61 % (352 ) (255 ) 38 % Loss before income taxes (2,152 ) (1,249 ) 72 % (5,371 ) (5,005 ) 7 % Provision for income taxes 17 11 55 % 39 39 0 % Net loss $ (2,169 ) $ (1,260 ) 72 % $ (5,410 ) $ (5,044 ) 7 % Revenue Our revenue decreased to $7.0 million in 2021-Q3 compared to $8.4 million in 2020-Q3 primarily due to a 55% decrease in video products partially offset by increases in microphones revenue by 9% and audio conferencing revenue by 4%. Video products suffered declines in 2021-Q3 compared to 2020-Q3 due to lack of demand for video products and personal audio conferencing products at the same level as it was in 2020-YTD when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act. Microphones growth continued to be led by our new solutions incorporating BMA-CT and BMA 360 while our traditional ceiling mics suffered a decline in revenues. Audio Conferencing category as a whole increased mainly due to a strong revenue performance of our professional mixers despite significant decline in revenues from personal audio conferencing products. During the third quarter of 2021, revenues from Americas declined by 45% primarily due to decline in revenues from USA and Canada despite significant revenue growth from Latin America, while revenues from Asia Pacific, including the Middle East, India and Australia grew by 88% primarily due to overall increase in revenues from all regions except Korea, and revenues from Europe and Africa increased by 34% primarily due to significant revenue increases from Northern Europe followed by overall revenue growth in all other regions of Europe and Africa. During the nine months ended September 30, 2021 our revenues increased from $20.5 million to $21.8 million compared to same period in 2020 due to increases in microphones revenue increasing by 27%, and audio conferencing revenue by 7%, partially offset by a decrease in video products revenue by 19%. 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-YTD when compared to 2020-YTD. Video products suffered declines in 2021-YTD compared to 2020-YTD due to lack of demand for video products and personal audio conferencing products at the same level as it was in latter half of 2020 when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act. During 2021-YTD revenues from Americas declined by 22%, Asia Pacific, including the Middle East, India and Australia increased by 49% and Europe and Africa increased by 78%. Revenues increased from all major regions except USA and Canada during 2021-YTD compared to 2020-YTD with rate of revenue growth from Southern Europe and Latin America far exceeding rate of revenue 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. Costs of Goods Sold and Gross Profit 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 decreased from 41.8% during 2020-Q3 to 40.8 % during 2021 -Q3 . The gross profit margin was negatively impacted due to increased freight and tariff costs, and inventory obsolescence and scrap costs as a percentage of revenue, partially offset by decrease in material costs and inventory adjustment costs as a percentage of revenue. 22 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our gross profit margin decreased from 43.8% during 2020-YTD to 42.6% during 2021-YTD. The gross profit margin decreased primarily due to increased material costs, freight and tariff costs, and inventory obsolescence and scrap costs as a percentage of revenue, partially offset by decrease inventory adjustment costs as a percentage of revenue . Our profitability in the near-term continues to depend significantly on our revenues from professional installed audio-conferencing products. We hold long-term inventory and if we are unable to sell our long-term inventory, our profitability might be affected by inventory write-offs and price mark-downs. Our long-term inventory includes approximately $0.6 million of wireless microphone-related finished goods and assemblies, $0.5 million of Converge Pro and Beamforming microphone array products, $0.2 million of network media streaming products, $0.3 million of tabletop conferencing products and about $1.0 million of raw materials that will be used primarily for manufacturing professional audio conferencing products. Any business changes that are adverse to these product lines could potentially impact our ability to sell our long-term inventory in addition to our current inventory. Operating Expenses Operating 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 $4.9 million for 2021-Q3 compared to $4.7 million for 2020-Q3. Total operating expenses were $14.3 million for 2021-YTD compared to $13.7 million for 2020-YTD. The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items. Sales and Marketing - S&M expenses include 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-Q3 remained almost unchanged at $1.7 when compared to 2020-Q3. The i ncreases in marketing expenses including trade-show expenses were more than offset by a decline in sales commissions. S&M expenses for 2021-YTD increased to $5.0 million from $4.9 million for 2020-YTD. The increases in employee sales commissions and marketing expenses were partially offset by decreases in commissions paid to independent reps, travel expenses and shipping costs. Research and Product Development - R&D expenses include research and development, product line management, engineering services, and test and application expenses, including employee-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. The increase in R&D project expenses were offset by decreases in legal expenses and employee related expenses. R&D expenses remained almost the same at $4.3 million for 2021-YTD, as compared to 2020-YTD. The decreases in employee related expenses and legal expenses were offset by increases in R&D project expenses and one-time employment termination expenses. General and Administrative - G&A expenses include employee-related costs, professional service fees, allocations of overhead expenses, litigation costs, and corporate administrative costs, including costs related to finance and human resources teams. G&A expenses increased from $1.4 million in 2020-Q3 to $1.7 million in 2021- Q3 . The increase was primarily due to increased amortization costs relating to our capitalized patent defense costs and an increase in insurance expenses partially offset by a decrease in legal expenses. G&A expenses increased from $4.5 million in 2020-YTD to $5.0 million in 2021-YTD. The increase was primarily due to increased amortization costs relating to our capitalized patent defense costs and increase in insurance expenses partially offset by a decrease in legal expenses. Other income (expense), net Other income (expense), net includes interest income and foreign currency changes. Other income remained immaterial during the third quarter of 2021 and 2020 and between 2021-YTD and 2020-YTD. I nterest expense increased from $0.1 million in 2020-Q3 to $0.15 million in 2021-Q3 due to increased debt during 2021-Q3 compared to 2020-Q3. Interest expense increased to $0.4 million in 2021 -YTD compared to $ 0.3 million in 2020 -YTD due to increased debt during 2021-YTD compared to 2020-YTD. Provision for income taxes During 2021 -YTD, we did not recognize any benefit from the losses incurred due to setting up of a full valuation allowance. Provision for income taxes recognized for 2021 - Q3 and 2021 -YTD relates to foreign jurisdictions . 23 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2021, our cash and cash equivalents were approximately $9.2 million compared to $3.8 million as of December 31, 2020. Our working capital was $ 23.7 million and $22.2 million as of September 30, 2021 and December 31, 2020, respectively. Net cash used in opera ting activities was approximately $1.5 million in 2021 -YTD , an inc rease of cash used of approximately $1.2 million from $0.3 million of cash used in operating activities in 2020-YTD. The increase in cash outflow was due to a negative change in operating assets and liabilities of $1.0 million, increase in non-cash charges by $0.2 million and an increase in net loss by $0.4 million. Net cash used in investing activities was $4.2 million in 2021-YTD compared to $4.4 million in 2020-YTD, a decrease in cash used of $ 0.3 million. The decrease in cash used in investing activities was primarily due to a decrease in capitalized patent defense costs by $0.2 million and a decrease in purchase of property and equipment by $0.2 million, offset partially by a decrease in net cash realized from marketable securities of approximately $ 0.1 million. Net cash provided by financing activities in 2021-YTD was $11.0 million consisting primarily of net proceeds from issue of common stock and warrants for $9.3 million and proceeds from short-term bridge loan of $2.0 million offset by repayment of principal amounts due on senior convertible notes of $0.3 million compared to cash provided by financing activities of $6.3 million in 2020-YTD, which consisted of net proceeds from issue of common stock and warrants for $4.8 million and proceeds of $1.5 million from Paycheck Protection Program. 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 patents, which is 15 to 17 years. During 2021- Q3 we spent $2.1 million on 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 $25.7 million from 2016 through September 30, 2021 towards this litigation and may be required to spend more to continue our legal defense. We believe the decision by the U.S. District Court in August 2019 granting our request for a preliminary injunction to prevent our competitor from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. We believe that the decision validates the strength and importance of 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. We have been actively engaged in preserving cash by suspending our dividend program and allowing our share repurchase program to expire in 2018 and implementing company-wide cost reduction measures. We have also raised additional capital of $9.9 million (net of issuance costs) in 2018 by issuing common stock, $2.7 million (net of issuances costs) in 2019 by issuing senior convertible notes, $1.5 million in April 2020 by borrowing through Paycheck Protection Program, $4.8 million (net of issuances costs) in September 2020 by issuing common stock and warrants, $2.0 million in July 2021 by issuing short-term debt and $9.3 million (net of issuances costs) in September 2021 by issuing common stock and warrants. In addition, we are generating additional cash as our inventory levels are brought down to historical levels. We also believe that the measures taken by us will yield higher revenues in the future. We believe, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet our operating needs through at least through November 12, 2022. We also believe that our strong portfolio of intellectual property and our solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs; however, there can be no assurance that, if needed, we will be 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 September 30, 2021, we had open purchase orders of approximately $6.0 million mostly for purchase of inventory. At September 30, 2021, we had inventory totaling $12.5 million, of which non-current inventory accounted for $3.3 million. This compares to total inventories of $15.1 million and non-current inventory of $4.6 million as of December 31, 2020. 24 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Contractual Obligations and Commitments The following table summarizes our contractual obligations as of September 30, 2021 (in millions): Payment Due by Period Total Less Than 1 Year 1-3 Years 3-5 Years More than 5 years Senior convertible notes $ 2.7 $ 0.6 $ 2.1 $ — $ — Short-term bridge loan 2.0 2.0 — — — Payroll Protection Plan loan 1.5 0.9 0.6 — — Operating lease obligations 2.0 0.7 1.2 0.1 — Purchase obligations 6.0 6.0 — — — Total $ 14.2 $ 10.2 $ 3.9 $ 0.1 $ — OFF-BALANCE SHEET ARRANGEMENTS We have no off-balance-sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, results of operations or liquidity. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our results of operations and financial position are based upon our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q, which have been prepared in conformity with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. There have been no changes to the critical accounting policies as explained in our Annual Report on Form 10-K for the year ended December 31, 2020. RECENT ACCOUNTING PRONOUNCEMENTS For a discussion of recent accounting pronouncements, see Note 1: “Business Description, Basis of Presentation and Significant Accounting Policies” in the notes to our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.