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Item 7. Management’s Discussion and Analysis

2022-04-15 compared with 2021-03-31 · 117 added, 126 removed, 177 unchanged (58% of the section changed)

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

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.

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 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.

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.

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.

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.

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.

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.

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.

During September 2021 we announced a new professional-grade camera featuring a 20x optical zoom lens plus a 16x digital zoom for extra distance if needed, the UNITE® 200 Pro.

Delivering 1080p quality at 60 frames per second with full pan, tilt and extended zoom functions, the UNITE 200 Pro is optimally suited for use in large spaces where close up, high resolution video capture is desired.

The 20x zoom on the new UNITE 200 Pro camera enables close-up HD video capture, making even the largest meeting spaces perfect for remote group collaboration or webinar recording.

With the ability to capture 1080p quality video of all meeting room participants, or to focus on a single speaker, the UNITE 200 Pro is designed to impress every conference participant.

Whether a meeting is held on ClearOne’s COLLABORATE® Space platform or on other leading services including Microsoft Teams, Zoom, WebEx or GoToMeeting, the camera’s remote-controlled operation combines ease of use with innovative features to offer an unrivaled conferencing experience for large rooms.

Presenters and meeting hosts gain an incredible degree of control through the camera’s combined 20x optical zoom and 16x digital zoom, ensuring precise focus on the most important visuals and providing close-up views in even the largest meeting spaces.

The UNITE 200 Pro provides flexibility and enhances ease of use through support of multiple protocols used to integrate with third-party components.

Featuring USB, HDMI and IP connection options, the camera is ideally suited to use with streaming applications through RTSP, RTMP and Multicast.

It also supports industry-standard protocols including UVC 1.1, TCP-IP, HTTP and DHCP.

UNITE 200 Pro can be installed using a wall mount, ceiling mount or display mount.

During 2021, our overall revenue of $29 million was almost the same when compared to revenue during 2020.

The increase in revenues from audio conferencing products and microphones were offset by a decline in revenues from video products.

D espite 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") and BMA 360 resulted in overall Beamforming Microphone Array ("BMA") revenue being significantly higher than last year and also helped increase revenues from audio conferencing products, especially revenue from professional installed products.

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.

The patent infringement also has negatively impacted revenue from ClearOne’s other products not related to the infringed patents.

Video products suffered declines in 2021 compared to 2020 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 gross profit margin decreased to 41% during 2021 from 43% during 2020 .

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.

Net income of $ 0.5 million in 2020 changed to net loss of $7.7 million in 2021.

The change from net income to net loss was primarily due to the recognition of income tax refund receivable of approximately $7.1 million in 2020 arising out of the carryback of net operating losses that became possible due to the enactment of the CARES Act, as well as due to a decrease in gross profit due to a decrease in revenues and profitability and an increase in operating costs, including the amortization of capitalized patent defense costs.

During 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 '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.

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ClearOne’s motion to accuse Shure’s MXA910-US of infringing the ’806 Patent is still pending with the Court.

Shure expanded the original litigation in the U.S.

District Court of North Illinois to the District of Delaware, where Shure filed claims for patent infringement, including of a design patent, and trade libel against ClearOne.

In May 2020 and January 2021, we secured an important pair of wins, defeating Shure’s requests first for a temporary restraining order and then a preliminary injunction, allowing us to continue selling our ground-breaking audio-conferencing products.

In addition to defeating Shure’s requests for preliminary injunctive relief, we also obtained a stay of the proceedings with respect to the only other asserted patent.

During November 2021, after a three-day jury trial, ClearOne obtained a complete victory against claims asserted by Shure, when the jury returned a verdict of no infringement and invalidated the asserted patent.

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

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Despite our strong leadership position in the installed professional audio conferencing market, we face challenges to revenue growth due to the limited size of the market and pricing pressures from new competitors attracted to the commercial market due to higher margins.

Our video products and beamforming microphone arrays, especially BMA-CT and the newly introduced BMA 360 are critical to our long term growth.

Our video products and beamforming microphone arrays, especially highly advanced BMA 360 and BMA-CT 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.

We derive a significant portion of our revenue (approximately 51 % in 2021 ) from international operations and expect this trend to continue in the future.

Most of our revenue from ou tside the U.S.

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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.

On the other hand, COVID- 19 generated higher than normal demand in 2020 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 keeps evolving and depends on multiple factors including the severity and infectiousness of current and future virus strains, 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.

Supply chain disruptions resulting from COVID-19 have caused significant fluctuations in our costs of goods resulting in a reduction of our gross margins in 2021.

We expect for these fluctuations to continue in 2022.

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 .

De ferred revenue decreased from $123 thousand in 2020 to $54 thousand in 2021 due to a decline in new subscriptions to the video conferencing software.

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

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Net income (loss)

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

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

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

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

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

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

Our revenue was almost the same at $29.0 million in 2021 compared to revenues in 2020 .

The highest increase in revenue was seen in microphones with a 20 % increase, followed by an increase in audio conferencing products of 6%.

These increases were fully offset by a 28 % decline in revenues from video products.

Video products suffered decline in revenues in 2021 compared to 2020 due to lack of demand for video 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.

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

Except installed professional audio conferencing products, which had a significant increase in revenues due to the success of BMA based solutions, all other categories under audio conferencing declined in revenue during 2021.

Personal conferencing products declined heavily as CARES Act stimulus induced growth in 2021 could not be replicated in 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.

The share of audio conferencing products in our product mix increased from 38% in 2020 to 40% in 2021.

The share of microphones in the revenue mix sharply increased from 31% in 2020 to 38% in 2021 .

Share of video products in the revenue mix declined significantly from 31% in 2020 to 22% in 2021.

During 2021 , revenue increased significantly in all regions of the world except North America.

Asia Pacific inclu ding the Middle East increased by 37 %, Europe and Africa increased by 42 % a nd the Americas decreased by approximately 23 %.

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

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

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Our gross profit during 2021 was approximately $11.9 million or 41 % compared to approximately $12.6 mill ion or 43% in 2020 .

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.

The gross profit margin was negatively impacted due to increase in material costs due to supply chain constraints and increased administration costs as a percentage of revenue partially offset by reduction in inventory obsolescence and freight and tariff costs.

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.

Our long-term inventory includes approximately $0.5 million of wireless microphone-related finished goods and assemblies, $0.4 million of Converge Pro and Beamforming microphone array products , $0.5 million of video products and about $1.7 million of raw materials that will be used primarily for manufacturing installed professional audio conferencing products.

Operating Expenses and Profits (Losses)

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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.

S&M expenses in 2021 and 2020 remained almost the same at $6.7 million.

During 2021, increases in advertising costs, commission paid to sales associates and costs incurred on termination of an employment agreement was offset by reduction in tradeshow related expenses and commissions paid to independent reps.

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 .

R& D expenses increased from $5.5 million in 2020 to $5.8 million in 2021 .

The increase was primarily due to increases in project related expenses and costs incurred on termination of employment agreements which was partially offset by decreases in regular employee-related costs and certain consulting expenses .

General and Administrative G&A expenses include employee-related costs, professional service fees, allocations of overhead expenses, litigation costs, and corporate administrative costs, including costs related to finance and human resources.

G&A expenses were approximately $6.9 million in 2021 compared with approximately $5.9 million in 2020.

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.

The increase in 2021 primarily due to higher amortization of capitalized legal costs related to patents litigation, increase in insurance expenses and executive bonuses was partially offset by reduction in legal expenses.

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

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The effective tax benefit rate was 4% (benefit) in 2021 as comp ared to the effective tax rate of 110% during 2020 .

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

Income tax benefit for 2021 was $0.3 million as compared to an income tax benefit of $6.4 million in 2020.

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.

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Our working capital was $18.0 million and $22.2 million as of December 31, 2021 and 2020 , 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 flows used in operating activities were approximately $4.4 million during 2021 , an increase of ap proximately $3.4 million from $1.0 million used in opera ting activities in 2020 .

The increase in cash used was primarily due to change in net income of $0.5 million in 2020 to $7.7 million in net loss in 2021, an increase in non-cash charges of $0.1 million, partially offset by an increase in cash outflows due to change in operating assets and liabilities of $ 4.9 million which includes among other things a decrease of change in income tax receivable from $7.1 million in 2020 to $0.4 million in 2021 , and an increase of change in prepaid expenses from $0.4 million in 2020 to $2.5 million in 2021.

Net cash used in investing activities was $8.5 million in 2021 compared to $5.5 million in 2020, an increase in cash used of $3.0 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.

The increase in cash used in investing activities was primarily due to increase of about $1.1 million in the capitalization of our legal costs related to our patent defense partially offset by decrease in net cash inflows from marketable securities of approximately $1.8 million.

Net cash provided by financing activities was $10.2 million during 2021 compared to net cash provided by financing activities of $6.3 million during 2020, an increase in cash provided of $3.9 million.

The increase was primarily to cash inflows from issuance of common stock and borrowing through issuance of short-term notes partially offset by repayment of a portion of senior convertible debt.

Capitalization of patent defense costs .

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During September 2020, the U.S District Court of Northern Illinois held Shure in contempt for marketing and selling their new design in violation of the preliminary injunction.

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

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

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

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 have also raised additional capital in 2019 by issuing senior convertible notes, in 2020 by borrowing through the CARES Act Paycheck Protection Program and issuing common stock and warrants and in 2021 by issuing common stock and warrants and short-term notes.

In addition, we have been 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 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;

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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 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.

As of December 31, 2021 , we had open purchase orders of approximately $ 7.7 million mostly for purchase of inventory.

As of December 31, 2021 , we had inventory totaling $ 13.6 million, of which non-current inventory accounted for $ 3.6 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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Payment Due by Period

Senior Convertible Notes

Senior Convertible Notes and short-term notes

Payroll Protection Program borrowing

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

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

Revenue recognized during the twelv e months ended December 31, 2021 for audio and video conferencing equipment sales was $28.8 million, and for software, licenses, etc.

was $0.2 million .

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

What changed 10-K

Item 7. Management’s Discussion and Analysis