CLEARONE INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements and related notes included in this report, as well as our other filings with the SEC. This discussion contains forward-looking statements based on current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions, as set forth under “Disclosure Regarding Forward-Looking Statements.” Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the following discussion and under the caption “Risk Factors” in Item 1A and elsewhere in this report. 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. 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. 28 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 29 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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 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 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. On September 1, 2020, the U.S. District Court of Northern Illinois held that "Shure has violated the preliminary injunction order and is found in contempt because it designed the MXA910-A in such a way that allows it to be easily installed flush in most ceiling grids”. The Court also opined that, “[t]he record is clear and convincing that Shure - through its design choices - violated the injunction order by allowing integrators to install the MXA910-A in the enjoined flush configuration.” Ultimately, the Court ordered that “Shure shall no longer manufacture, market, or sell the MXA910...” . 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. 30 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 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 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. 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 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 $123 thousand in 2020 to $54 thousand in 2021 due to a decline in new subscriptions to the video conferencing software. 31 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCUSSION OF RESULTS OF OPERATIONS The following table sets forth certain items from our consolidated statements of operations and comprehensive income (loss) for t he years ended December 31, 2021 and 2020 , together with the percentage change each item represents. Throughout this discussion, we compare results of operations for the year ended December 31, 2021 (“2021 ”) to the year ended December 31, 2020 (“2020 ” or “the comparable period”). (In thousands, except percentages) 2021 2020 Change Favorable (Adverse) in % Revenue $ 28,967 $ 29,069 - Cost of goods sold 17,051 16,510 (3 ) Gross profit 11,916 12,559 (5 ) Sales and marketing 6,736 6,728 - Research and product development 5,794 5,512 (5 ) General and administrative 6,881 5,886 (17 ) Total operating expenses 19,411 18,126 (7 ) Operating loss (7,495 ) (5,567 ) (35 ) Loss before income taxes (7,977 ) (5,924 ) (35 ) Provision for (benefit from) income taxes (283 ) (6,429 ) (96 ) Net income (loss) $ (7,694 ) $ 505 (1,624 ) Revenue 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 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. 32 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cost of Goods Sold and Gross Profit Cost of goods sold (“COGS”) includes expenses associated with finished goods purchased from outsourced manufacturers, the manufacture of our products (including material and direct labor), our manufacturing and operations organization, property and equipment depreciation, warranty expense, freight expense, and the allocation of overhead expenses. Our gross profit during 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 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 $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) Operating income (loss), or income ( loss) from operations, is the surplus or deficit after operating expenses are deducted from gross profits. Operating expenses include sales and marketing (“S&M”) expenses, research and product development (“R&D”) expenses and general and administrative (“G&A”) expenses. Total operating expenses were $19.4 million in 2021, compared to $18.1 million in 2020 . The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items. Sales and Marketing S&M expenses include sales, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses. S&M expenses in 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 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 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. 33 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provision for income taxes The effective tax benefit rate was 4% (benefit) in 2021 as comp ared to the effective tax rate of 110% during 2020 . 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. Since the Company had set up a full valuation allowance against net operating losses from earlier years, the carryback of these losses resulted in the recognition of a substantial tax benefits. We have been recording a valuation allowance against net deferred tax assets since 2018 and have not been claiming tax benefit for our losses as we have concluded that it is more likely than not that our deferred tax assets were not realizable, primarily due to our recent pre-tax losses. LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION As of December 31, 2021 , our cash and cash equivalents were approximately $1.1 million compared to $3.8 million as of December 31, 2020 . 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 $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 $1.1 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 . We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. When we capitalize patent defense costs we amortize the costs over the remaining estimated useful life of the patent, which is 15 to 17 y ears. During 2021 we spent $7.8 million of legal costs related to the defense of our patents and capitalized the entire amount. We are currently pursuing all available legal remedies to defend our strategic patents from infringement. We have already spent approximately $28.2 million from 2016 through 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. 34 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 April 15, 2023. 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. 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 . Contractual Obligations and Commitments The following table summarizes our contractual obligations as of December 31, 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 and short-term notes $ 4.6 $ 2.7 $ 1.9 $ — $ — Payroll Protection Program borrowing 0.8 0.8 — — — Operating lease obligations 1.8 0.6 1.1 0.1 — Purchase obligations 7.7 7.7 — — — Total $ 14.9 $ 11.8 $ 3.0 $ 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 consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. We believe that the estimates we use are reasonable; however, actual results could differ from those estimates. Our significant accounting policies are described in Note 1 - Business Description, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part IV of this report. We believe the following critical accounting policies identify our most critical accounting policies, which are the policies that are both important to the representation of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 35 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Revenue and Associated Allowances for Revenue Adjustments and Doubtful Accounts The Company recognizes revenue when it satisfies a performance obligation. The Company recognizes revenue from sales agreements upon transferring control of a product to the customer. This typically occurs when products are shipped or delivered, depending on the delivery terms, or when products that are consigned at customer locations are sold to dealers or end users. Revenue recognized during the twelv e months ended December 31, 2021 for audio and video conferencing equipment sales was $28.8 million, and for software, licenses, etc. was $0.2 million . Sales returns and allowances are estimated based on historical experience. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenues are recognized, and are netted against revenues. For returns, the Company recognizes a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. The Company reviews warranty and related claims activity and records provisions, as necessary. Frequently, the Company receives orders with multiple delivery dates that may extend across reporting periods. Since each delivery constitutes a performance obligation, the Company allocates the transaction price of the contract to each performance obligation based on the stand-alone selling price of the products. The Company invoices the customer for each delivery upon shipment and recognizes revenues in accordance with delivery terms. Although payment terms vary, distributors typically pay within 45 days of invoicing and dealers pay within 30 days of invoicing. As scheduled delivery dates are within one year, revenue allocated to future shipments of partially completed contracts are not disclosed. The Company has elected to record freight and handling costs associated with outbound freight after control over a product has transferred to a customer as a fulfillment cost and include it in cost of revenues. Taxes assessed by government authorities on revenue-producing transactions, including value-added and excise taxes, are presented on a net basis (excluded from revenues) in the Consolidated Statements of Operations and Comprehensive Income (Loss). The details of deferred revenue and associated cost of goods sold and gross profit are as follows (in thousands): As of December 31, 2021 2020 Deferred revenue $ 54 $ 123 Deferred cost of goods sold — — Deferred gross profit $ 54 $ 123 The Company offers rebates and market development funds to certain of its distributors, dealers/resellers, and end-users based upon the volume of product purchased by them. The Company records rebates as a reduction of revenue in accordance with GAAP. The Company provides, at its discretion, advance replacement units to end-users on defective units of certain products under warranty. Since the purpose of these units is not revenue generating, the Company tracks the units due from the end-user, until the defective unit has been returned. Any amount due from the customer upon failure to return the products is accounted as receivable only after establishing customer's failure to return the products. The inventory due from the customer is accounted at cost or market value whichever is lower. Impairment of Long-Lived Assets We assess the impairment of long-lived assets, such as property and equipment and definite-lived intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also change. Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. 36 Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Accounting for Income Taxes We are subject to income taxes in both the United States and in certain non-U.S. jurisdictions. We account for income taxes following ASC 740, Accounting for Income Taxes, recognizing deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between book and tax basis of recorded assets and liabilities. We estimate our current tax position together with our future tax consequences attributable to temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation, and other reserves for tax and accounting purposes. These temporary differences result in deferred tax assets and liabilities. We assess the likelihood that our deferred tax assets will be recovered from future taxable income, prior year carryback, or future reversals of existing taxable temporary differences. To the extent we believe that recovery is not more likely than not, we establish a valuation allowance against these deferred tax assets. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. To the extent we establish a valuation allowance in a period, we must include and expense the allowance within the tax provision in the consolidated statement of operations. In accordance with ASC Topic 740, “Accounting for Income Taxes”, we analyzed our valuation allowance at December 31, 2021 and determined that based upon available evidence it is more likely than not that certain of our net deferred tax assets will not be realized and, accordingly, we have recorded a full valuation allowance against these deferred tax assets in the amount of $13.2 million. Please refer to Note 13 - Income Taxes in the Notes to Consolidated Financial Statements for additional information. Share-Based Payments We estimate the fair value of stock options using the Black-Scholes option pricing model, which requires certain estimates, including an expected forfeiture rate and expected term of options granted. We also make decisions regarding the method of calculating expected volatilities and the risk-free interest rate used in the option-pricing model. The resulting calculated fair value of stock options is recognized as compensation expense over the requisite service period, which is generally the vesting period. When there are changes to the assumptions used in the option-pricing model, including fluctuations in the market price of our common stock, there will be variations in the calculated fair value of our future stock option awards, which results in variation in the compensation cost recognized. IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For descriptions of recently issued accounting standards, see Note 1. Business Description, Basis of Presentation and Significant Accounting Policies of our Notes to Consolidated Financial Statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable