CLEARONE INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Senior Vice President of Finance, as appropriate, to allow for timely decisions regarding required disclosure. As required by Rule 13a-15 under the Exchange Act, we have completed an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Senior Vice President of Finance, of the effectiveness and the design and operation of our disclosure controls and pr ocedures as of December 31, 2021 . Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based upon this evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective at a reasonable assuran ce level as of December 31, 2021 . The effectiveness of any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate improper conduct completely. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021 based on the framework set forth in Internal Control - Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using that criteria, management concluded that the design and operation of our internal control over financial reporting were effective as of December 31, 2021. Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. ITEM 9 C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not Applicable. 38 Table of Contents PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth certain information regarding our directors and executive officers as of April 15, 2022 . Name Age Position Director or Officer Since Zeynep “Zee” Hakimoglu 68 Chief Executive Officer, and President 2006 Larry R. Hendricks 78 Director * 2003 Lisa B. Higley 54 Director * 2020 Eric L. Robinson 55 Chairman, and Director * 2015 Bruce Whaley 71 Director * 2019 Narsi Narayanan 51 Senior Vice President of Finance and Corporate Secretary 2009 * Member of the Audit and Compliance Committee, Compensation Committee and Nominating Committee Zee Hakimoglu is our President and Chief Executive Officer. She joined our Company in December 2003 as Vice President of Product Line Management with additional responsibility for Research & Development and was appointed President and Chief Executive Officer in July 2004; she has served as a director of our Company since April 2006 and was named Chairman of the Board in July 2007. She served as Chairman of the Board till February 2022. Prior to joining ClearOne, Ms. Hakimoglu has held senior executive level positions for a variety of high-tech Silicon Valley firms in such areas as business development, product marketing, engineering and product-line management. She served as Vice President of Product Line Management for a publicly traded developer of fiber optic subsystems and components, from December 2001 to December 2002; and, President of a manufacturer of fiber optic test equipment and components, from August 2000 to November 2001. From October 1998 to August 2000, she was Vice President of Business Development for Kaifa Technology and was instrumental in its acquisition by E-Tek Dynamics and later by JDS Uniphase. Through these acquisitions, she held the role of Deputy General Manager of the Kaifa Technology business unit. From May 1982 until it was acquired in September 1996, Ms. Hakimoglu held various positions including Vice President of Wireless Engineering and Vice President of the Wireless Business Unit for Aydin Corp., a global telecommunications equipment company that formerly traded on the New York Stock Exchange. Ms. Hakimoglu earned a Bachelor of Science Degree in Physics from California State College, Sonoma, and a Master's Degree in Physics from Drexel University. Larry R. Hendricks has served as a director of our Company since June 2003. Mr. Hendricks is a Certified Public Accountant who retired in December 2002 after serving as Vice President of Finance and General Manager of Daily Foods, Inc., a national meat processing company. During his 30-year career in accounting, he served as a self-employed CPA and worked for the international accounting firm Peat Marwick & Mitchell. Mr. Hendricks has served on the boards of eight other organizations, including Tunex International, Habitat for Humanity, Daily Foods, Skin Care International, and the National Advisory Board of the Huntsman College of Business at Utah State University. He earned a Bachelor's Degree in Accounting from Utah State University and a Master of Business Administration Degree from the University of Utah. Lisa B. Higley was appointed a director of our Company effective July 20, 2020. Ms. Higley has been self-employed as a CPA since June 2009. Previously, she was the CFO for Daisy D’s Paper Company from March 2007 until January 2009, where she managed all aspects of the company’s financial and accounting responsibilities. Additionally, Ms. Higley was the CFO for Tunex International from April 2006 to March 2007 where she was accountable for all financial aspects of the corporation. Prior to that, Ms. Higley was a staff tax accountant at Wisen, Smith, Racker & Prescott LLP from February 2004 to April 2006. Ms. Higley earned her Bachelor of Science in Accounting from the University of Oregon and her MBA from Utah State University, and has been a Utah CPA since 2004. Ms. Higley is the daughter of Edward D. Bagley, our former Chairman of the Board. Mr. Edward D. Bagley beneficially owns 45% of our issued and outstanding common stock. Eric. L Robinson has served as a director of our Company since July 2015. He was appointed Chairman of the Board in February 2022. Mr. Robinson spent fourteen years in private practice as a corporate attorney, including eleven years as a partner in the Salt Lake City, Utah law firm of Blackburn & Stoll, LC. Mr. Robinson's law practice focused on securities, corporate and other business transactions. Since 2009, Mr. Robinson has been principally employed by MicroPower Global Limited, a company in the semiconductor business. At MicroPower, Mr. Robinson has acted as General Counsel, Chief Financial Officer and a director. Mr. Robinson also maintains a small law practice and serves as counsel to a number of companies in the fields of genetics, regenerative medicine, transportation and commercial construction. He also served as General Counsel, Chief Financial Officer and a director to a genetic research company from 2008 until 2015. Mr. Robinson previously acted as General Counsel and Chief Financial Officer to a commercial construction company from 2007 until 2008 which had revenues in excess of $100 million during his tenure. 39 Table of Contents Mr. Robinson previously served as chief financial officer, in-house counsel, secretary and treasurer of ActiveCare, Inc. from July 2016 until his voluntary resignation in June 2017, and subsequent to Mr. Robinson’s departure, ActiveCare filed a voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code on July 15, 2018. His legal practice includes working with companies in connection with public and private offerings of securities, corporate partnering, mergers and acquisitions, licensing technology transfer, contracts and construction. He graduated from the University of Utah with honors with a B.S. degree in accounting and he subsequently passed the CPA exam (unlicensed). He graduated from Vanderbilt University with a J.D. where he graduated Order of the Coif and acted as a Managing Editor of the Law Review. Mr. Robinson has previously served as corporate and securities legal counsel to the Company and the Company's largest shareholder, E. Dallin Bagley. Bruce Whaley was appointed a director of our Company effective April 16, 2019. Mr. Whaley has extensive experience as a stock broker for nearly five decades. Mr. Whaley is currently a broker trading at Wilson & Davis, a regional brokerage firm based in Salt Lake City, Utah. He has been with Wilson & Davis since 1988. Mr. Whaley also holds a real estate license and works as a real estate agent for Coldwell Banker. Mr. Whaley attended University of Utah between 1968 and 1971 and studied many subjects including business administration, accounting and finance. He did not graduate with a degree. Narsi Narayanan (now serving as Senior Vice President of Finance) has served as our Vice President of Finance since July 2009 and three decades of professional experience in the areas of accounting, finance and taxes. Prior to joining our Company, he managed the SEC reporting, US GAAP accounting research, Sarbanes-Oxley Act (“SOX”) compliance and other financial reporting functions from August 2007 through February 2009 at Solo Cup Company, a publicly-reporting international consumer products company. Prior to that, Mr. Narayanan managed the accounting and finance functions, including SEC Reporting, SOX compliance and US GAAP accounting research, from June 2004 through August 2007 at eCollege.com, a leading technology company serving private educational institutions, which was also a publicly-reporting company before being acquired by Pearson Education group. In addition to being a Chartered Accountant, Mr. Narayanan has extensive experience working in public accounting and in senior finance positions in India with a large conglomerate. He is a Certified Public Accountant with graduate degrees in accounting (University of Utah, M. Acc.) and business (University of Illinois, MBA-Finance). Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act, of 1934 as amended, requires our directors, executive officers and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership on Form 3 and reports of changes of ownership of our equity securities on Forms 4 and 5. Officers, directors, and greater than 10% shareholders are required to furnish us with copies of all Section 16(a) reports they file. Based solely on a review of the reports furnished to us for the year ended December 31, 2021, we believe that each person who, at any time during such fiscal year was a director, officer, or beneficial owner of more than 10% of our common stock complied with all Section 16(a) filing requirements during such period. Code of Ethics The Board of Directors adopted a code of ethics that applies to our Board of Directors, executive officers, and employees. The Company's Code of Ethics is posted on our website at www.clearone.com. Nomination Procedures No changes have been made to the procedures by which our shareholders may recommend nominees to our Board of Directors. Audit and Compliance Committee The Company has a separate Audit and Compliance Committee and its members are Eric L. Robinson (Chairman), Larry R. Hendricks and Bruce Whaley. The Board of Directors has determined that Eric L. Robinson is an “audit committee financial expert” and each member is independent in accordance with applicable rules and regulations of NASDAQ and the SEC. 40 Table of Contents ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth the compensation paid or earned by each named executive officer for the years ended December 31, 2021 and 2020. SUMMARY COMPENSATION TABLE Name and Principal Position Salary Option Awards ( 1 ) Non-Equity Incentive Plan Compensation All Other Compensation Total Zeynep Hakimoglu - Chief Executive Officer and President Year ended December 31, 2021 $ 388,750 $ — $ — $ 30,000 $ 418,750 Year ended December 31, 2020 $ 355,000 $ 68,500 $ — $ — $ 423,500 Narsi Narayanan - Senior Vice President of Finance Year ended December 31, 2021 $ 221,625 $ — $ — $ 30,000 $ 251,625 Year ended December 31, 2020 $ 196,500 $ 41,100 $ — $ — $ 237,600 (1) The amounts in the “Option Awards” column reflect the aggregate grant date fair value of awards of stock options granted pursuant to our long-term incentive plans during the periods reported above, computed in accordance with FASB ASC Topic 718, Compensation - Stock Compensation. The assumptions made in the valuation of our option awards and the material terms of option awards are disclosed in Note 10 - Share-Based Compensation in our Notes to Consolidated Financial Statements included in Part IV of this Form 10-K. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table provides information on the holdings of stock options by the named executive officers as of December 31, 2021. Name Number of Securities Underlying Unexercised Options Option Exercise Price ($) Option Grant Date Option Expiration Date Exercisable Unexercisable Zeynep Hakimoglu 25,000 — 3.920 05-11-2012 05-11-2022 25,000 — 8.220 08-22-2013 08-22-2023 40,000 — 8.340 09-12-2014 09-12-2024 50,000 — 11.960 03-11-2016 03-11-2026 10,000 — 11.000 12-14-2016 12-14-2026 40,000 — 9.900 06-1-2017 06-01-2027 16,666 33,334 2.500 12-14-2020 12-14-2026 Narsi Narayanan 20,000 — 3.920 05-11-2012 05-11-2022 15,000 — 8.220 08-22-2013 08-22-2023 20,000 — 8.340 09-12-2014 09-12-2024 25,000 — 11.960 03-11-2016 03-11-2026 2,500 — 11.000 12-14-2016 12-14-2026 20,000 — 9.900 06-01-2017 06-01-2027 10,000 20,000 2.500 12-14-2020 12-14-2030 (1) One-third of the shares underlying each stock option vest on the first anniversary of the grant date and the remaining shares vest equally over a period of 24 months following the first anniversary of the grant date. 41 Table of Contents OPTION EXERCISES AND STOCK VESTED There were no exercises of stock options by named executive officers during 2021. During 2021, 16,666 shares vested for Zeynep Hakimoglu and 10,000 shares vested for Narsi Narayanan. DIRECTOR COMPENSATION The following table summarizes the compensation paid by us to non-employee directors for the year ended December 31, 2021. Ms. Hakimoglu did not receive additional compensation for her service as a director. Name Fees Earned or Paid in Cash Option Awards Other Compensation Total Larry R. Hendricks $ 33,600 $ 13,200 $ — $ 46,800 Lisa B. Higley 30,000 13,200 — 43,200 Eric L. Robinson 40,800 13,200 — 54,000 Bruce Whaley 33,600 13,200 — 46,800 Historically, the Company's non-employee directors have received an annual grant of stock options to purchase 10,000 shares of the Company's common stock, of which one-third of the shares vest on the first anniversary of the grant date, and the remaining vest in equal monthly increments over the subsequent 24-month period. During 2021, each non-executive director named above received a grant of stock options to purchase 10,000 shares with 6-year expiry period. T he amounts in the “Option Awards” column reflect the aggregate grant date fair value of awards of stock options granted pursuant to our long-term incentive plans during the periods reported above, computed in accordance with FASB ASC Topic 718 , Compensation - Stock Compensation. All directors are reimbursed by the Company for their out-of-pocket travel and related expenses, if any, incurred in attending all Board of Directors and committee meetings. However, during 2021 no expenses were reimbursed to any director. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding ownership of our common stock as of April 15, 2022, except as otherwise stated, by ( i ) each director and nominee for director, (ii) the named executive officers, (iii) all of our named executive officers and directors as a group, and (iv) each person known to us to be the beneficial owner of more than 5% of our outstanding common stock. Shares Beneficially Owned Currently Owned Currently Owned Percent (2) Shares that could be acquired within 60 days Total ( 2 ) Percent ( 2 ) Name of Beneficial Owner (1) (A) (B) (C) (D) (E) Directors and Executive Officers: Zeynep Hakimoglu 875,341 3.91 % 218,626 1,093,967 4.42 % Larry R. Hendricks 4,048 0.02 % 50,000 54,048 0.22 % Lisa B. Higley (3) 14,501 0.06 % — 14,501 0.06 % Eric L. Robinson 65 — % 28,333 28,398 0.11 % Bruce Whaley 12,000 0.05 % — 12,000 0.05 % Narsi Narayanan — — % 116,666 116,666 0.47 % Total (Directors and Officers) 905,955 4.04 % 413,625 1,319,580 5.33 % 5% Shareholders: Edward D. Bagley 10,186,917 45.46 % 1,637,799 11,824,716 47.77 % E. Bryan Bagley 1,236,630 5.52 % 291,652 1,528,282 6.17 % 42 Table of Contents (1) Except as otherwise indicated, each person named in the table has sole voting and investment power, subject to applicable community property law. Except as otherwise indicated, each person may be reached at our corporate offices c/o ClearOne , Inc ., 5225 Wiley Post Way, Suite 500 , Salt Lake City, Utah 84116 . ( 2 ) The percentages shown in Column (B) are calculated based on 22,410,126 shares of common stock outstanding on April 15, 2022. The numbers shown in Column (D) and percentages shown in Column (E) include the shares of common stock actually owned as of April 15, 2022 and the shares of common stock that the identified person or group had the right to acquire within 60 days of such date. In calculating the percentage of ownership, all shares of common stock that each identified person or group had the right to acquire within 60 days of April 15, 2022 upon the exercise of the stock options , secured convertible notes and warrants shown in Column (C) are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by the persons or groups listed above. ( 3 ) This information is based upon the Form 3 filed with the SEC as of July 20, 2020. Lisa Higley, who was appointed a Director effective July 20, 2020, is the daughter of Edward D. Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other. The share amounts indicated for Ms. Higley do not include any shares held by Edward D. Bagley. The share amounts indicated for Ms. Higley do not include 6,546 shares owned by her spouse and 2,252,636 shares held by a trust in which she is a co-trustee. ( 4 ) Mr. Edward D. Bagley may be deemed to own an additional 2,252,636 shares of common stock that are deemed to be owned by his wife, Carolyn Bagley, as a result of her acting as one of four co-trustees of a trust. Mr. Bagley may be deemed to own an additional 355,257 shares of common stock that Carolyn Bagley owns individually. Mr. Bagley, however, disclaims beneficial ownership of these shares that may be indirectly beneficially owned by Mr. Bagley and they are excluded from the amounts reported in the table above. Mr. Edward D. Bagley has sole voting and dispositive power over 11,824716 shares (including the shares that may be acquired pursuant to exercise of options to purchase 28,333 shares of common stock, secured convertible notes to purchase 924,171 shares of common stock and warrants to purchase 685,295 shares of common stock) and shared voting and dispositive power over the 355,257 shares held by Mr. Edward D. Bagley’s spouse. This information is based upon Schedule 13D/A and Form 4 as filed by Mr. Bagley with the SEC in September 2020 and December 2020, respectively. E. Bryan Bagley, who resigned as Director effective November 6, 2012, is the son of Edward D. Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other. Lisa Higley, who was appointed a Director effective July 20, 2020, is the daughter of Edward D. Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other. The share amounts indicated for Mr. Edward D. Bagley do not include any shares held by E. Bryan Bagley or Lisa Higley. (5) Mr. E. Bryan Bagley has sole voting and dispositive power over 1,528,282 shares (including the shares that may be acquired pursuant to exercise of secured convertible notes to purchase 184,834 shares of common stock and warrants to purchase 106,818 shares of common stock ) This information is based upon Schedule 13D/A as filed by E. Bryan Bagley with the SEC in September 2020 . E. Bryan Bagley, who resigned as Director effective November 6, 2012, is the son of Edward D. Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other. The share amounts indicated for Mr. E. Bryan Bagley do not include any shares held by Edward D. Bagley. The share amounts indicated for Mr. E. Bryan Bagley do not include 2,252,636 shares held by a trust in which he is a co-trustee. 43 Table of Contents Equity Compensation Plan Information The f ollowing table sum marizes informatio n, as of December 31, 2021, relating to equity compensation plans of the Company (including individual compensation arrangements) pursuant to which equity securities of the Company are authorized for issuance. Plan Category (a) Number of securities to be issued upon e xercise of outstanding options a nd rights (b) Weighted‑Average Exercise Price of Outstanding Options and Rights (c) Number of securities remaining available for f uture issuance under e quity compensation plans (ex cluding securities reflected in column(a)) Equity Compensation Plans Approved by Stockholders 831,071 $6.47 633,783 Equity Compensation Plans Not Approved by Stockholders — — — Total 831,071 $6.47 633,783 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE We recognize that transactions between us and any of our directors, executives or other related persons can present potential or actual conflicts of interest and create the appearance that our decisions are based on considerations other than the best interests of our Company and shareholders. Therefore, as a general matter and in accordance with our Code of Ethics, it is our preference to avoid such transactions. Nevertheless, we recognize that there are situations where such transactions may be in, or may not be inconsistent with, the best interests of our Company. Under the terms of its charter, our Audit and Compliance Committee reviews and, if appropriate, approves or ratifies any such transactions. Pursuant to the charter, the Committee will review any transaction in which we are or will be a participant and the amount involved exceeds $120,000, and in which any of our directors or executives had, has or will have a direct or indirect material interest. After its review, the Committee will only approve or ratify those transactions that are in, or are not inconsistent with, the best interests of our Company and our shareholders, as the Committee determines in good faith. The Company’s Board of Directors adopted the Company's Related Party Transactions Policy on January 18, 2017. This policy is available on our website at http://investors.clearone.com/corporate-governance. Related Party Transactions: Consulting Agreement with Edward D. Bagley On June 3, 2015, the Company entered into a Consulting Agreement with Edward D. Bagley, former Chairman of the Board and greater than 10% shareholder (“Consulting Agreement”) which became effective on July 29, 2015 for an initial term of three years which was renewed in 2018 for an additional term of three years and renewed again in 2021 for an additional term of 3 years through 2024. Pursuant to the terms of the Consulting Agreement Mr. Bagley is paid a fee of $5,000 per month and is eligible to participate in our equity incentive programs and will be granted stock options commensurate with grants of stock options made to our directors. During 2021, he was paid $60,000 as consulting fees and was awarded a grant of stock option to purchase 10,000 shares. Director Independence Our Board of Directors has determined, after considering all the relevant facts and circumstances, that Larry Hendricks, Eric Robinson and Bruce Whaley are independent directors, in accordance with the definition of “independence” under the listing standards of NASDAQ, because they have no relationship with us that would interfere with their exercise of independent judgment. 44 Table of Contents ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES amounts: 2021 2020 Audit fees (1) $ 260,145 $ 210,500 Audit-related fees (2) 7,653 26,523 Tax fees (3) 35,000 52,900 All other fees — — Total $ 302,798 $ 289,923 (1) Represents fees billed for professional services rendered for the audit and reviews of our financial statements filed with the SEC on Forms 10-K and 10-Q. (2) Represents fees billed for consents provided with respect to registration statements and related amendments. (3) Represents fees billed for tax filing, preparation, and tax advisory services. Pre-Approval Policies and Procedures The Audit and Compliance Committee ensures that we engage our independent registered public accounting firm to provide only audit and non-audit services that are compatible with maintaining the independence of our public accountants. The Audit and Compliance Committee approves or pre-approves all services provided by our public accountants. Permitted services include audit and audit-related services, tax services and other non-audit related services. Certain services are identified as restricted. Restricted services are those services that may not be provided by our external public accountants, whether identified in statute or determined to be incompatible with the role of an independent auditor. All fees identified in the preceding table were approved by the Audit and Compliance Committee. During 2021, the Audit and Compliance Committee reviewed all non-audit services provided by our independent registered public accounting firm and concluded that the provision of such non-audit services was compatible with maintaining the independence of the external public accountants. 45 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 1. Financial Statements: Financial statements set forth under Part II, Item 8 of this Annual Report on Form 10-K are filed in a separate section of this Form 10-K. See the “Index to Consolidated Financial Statements”. 2. Financial Statement Schedules: All schedules are omitted since they either are not required, not applicable or the information is presented in the accompanying consolidated financial statements and notes thereto. 3. Exhibits: The exhibits listed under the Index of exhibits in the next page are filed or incorporated by reference as part of this Form 10-K. ITEM 16. FORM 10-K SUMMARY Not applicable. 46 Table of Contents INDEX TO EXHIBITS Exhibit Number Exhibit Description Form Exhibit Incorporated Herein by Reference Filing Date 3.1 Certificate of Incorporation of ClearOne, Inc. 8-K 3.1 10/29/18 3.2 Bylaws 8-K 3.2 10/29/18 4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 10-K 4.1 03/30/20 10.1# 1997 Employee Stock Purchase Plan S-8 4.9 10/06/06 10.2# 1998 Stock Option Plan S-8 4.8 10/06/06 10.3# 2007 Equity Incentive Plan S-8 4.7 01/22/08 10.4# ClearOne, Inc. Equity Incentive Plan S-8 4.8 01/26/16 10.5# Amendment No. 1 to the ClearOne, Inc. Equity Incentive Plan S-8 4.11 06/30/15 10.6# ClearOne, Inc. Employee Stock Purchase Plan S-8 4.3 06/30/15 10.7 Note Purchase Agreement by and among ClearOne, Inc., the guarantors a party thereto and Edward D. Bagley dated as of December 8, 2019 8-K 10.1 12/09/19 10.8 Form of Guaranty and Collateral Agreement 8-K 10.2 12/09/19 10.9 Form of Secured Convertible Note 8-K 10.3 12/09/19 10.10 Form of Securities Purchase Agreement 8-K 10.1 09/14/20 10.11 Form of Securities Purchase Agreement 8-K 10.1 09/13/21 10.12 Form of Registration Rights Agreement 8-K 10.2 09/13/21 10.13 Securities Purchase Agreement. 8-K 10.1 0104/22 10.14 Registration Rights Agreement. 8-K 10.2 01/04/22 14.1 Code of Ethics, approved by the Board of Directors on August 23, 2006 10-K 14.1 09/14/06 21.1† Subsidiaries of the registrant 23.1† Consent of Tanner LLC, Independent Registered Public Accounting Firm 31.1† Section 302 Certification of Chief Executive Officer 31.2† Section 302 Certification of Chief Financial Officer 32.1† Section 906 Certification of Chief Executive Officer 32.2† Section 906 Certification of Chief Financial Officer 101.INS‡ XBRL Instance Document 101.SCH‡ XBRL Taxonomy Extension Schema 101.CAL‡ XBRL Taxonomy Extension Calculation Linkbase 101.DEF‡ XBRL Taxonomy Extension Definitions Linkbase 101.LAB‡ XBRL Taxonomy Extension Label Linkbase 101.PRE‡ XBRL Taxonomy Extension Presentation Linkbase 104 The cover page from this Annual Report on Form 10-K formatted in Inline XBRL * Constitutes a management contract or compensatory plan or arrangement. † Filed herewith ‡ Information furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act #Management contract or compensatory plan or arrangement 47 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLEARONE, INC. Registrant /s/ Zeynep Hakimoglu Zeynep Hakimoglu President and Chief Executive Officer April 15, 2022 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Zeynep Hakimoglu /s/ Narsi Narayanan Zeynep Hakimoglu Narsi Narayanan President and Chief Executive Officer Senior Vice President of Finance (Principal Executive Officer) (Principal Accounting and Principal Financial Officer) April 15, 2022 April 15, 2022 /s/ Eric L. Robinson /s/ Larry R. Hendricks Eric L. Robinson Larry R. Hendricks Director and Chairman of the Board Director April 15, 2022 April 15, 2022 /s/ Bruce Whaley /s/ Lisa B. Higley Bruce Whaley Lisa B. Higley Director Director April 15, 2022 April 15, 2022 48 Table of Contents CLEARONE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ​ Page Report of Independent Registered Public Accounting Firm (Auditor ID: 270 ). F-1 Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020 F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021 and 2020 F-4 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021 and 2020 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020 F-6 Notes to Consolidated Financial Statements F-8 49 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of ClearOne, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of ClearOne, Inc. and subsidiaries (collectively, the Company) as of December 31, 2021 and 2020 , and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021 , and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material aspects, the financial position of ClearOne as of December 31, 2021 and 2020 , and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion T hese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Capitalized patent defense costs As described in Notes 3 and 8 to the consolidated financial statements, the Company is involved in litigation against a competitor related to intellectual property rights. The Company has capitalized legal expenses related to the defense of certain patents as intangible assets on the balance sheet based on the satisfaction of two conditions: (i) a determination being made that a successful defense is probable, and (ii) that the monetary benefits arising out of such a successful defense will be in excess of the costs for the defense. | F-1 | Table of Contents We identified the capitalization of patent defense costs as a critical audit matter because evaluating the likelihood of potential outcomes of the litigation as well as determining the expected monetary benefit involves significant judgment by management. This required a high degree of auditor judgement and subjectivity in performing procedures and evaluating audit evidence related to management’s assertions that a successful defense is probable and that the monetary benefits will be in excess of the costs. Addressing this critical audit matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others: (1) testing of legal expenses related to the litigation, (2) obtaining and evaluating a legal confirmation obtained from the Company’s lead counsel in the case (3) obtaining and evaluating a legal opinion letter from another third party intellectual property law firm related to their evaluation of the likelihood of potential outcomes of the litigation based on their review of the case, (4) reviewing and evaluating management’s cost analysis, (5) obtaining and evaluating an expert witness damages report and, (6) evaluating the reasonableness of management’s assumptions. Assessment of lower of cost or net realizable value of inventories As described in Notes 1 and 4 to the consolidated financial statements, inventories totaling $13.6 million as of December 31, 2021 are stated at the lower of cost or market. The Company performs analyses to identify and estimate the net realizable value of excess or slow-moving inventories based on forecasted future product demand. We identified the inventory valuation as a critical audit matter because of the significant balance of inventory held by the Company and because forecasting future product demand involves significant judgement by management. This required a high degree of auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence to evaluate management’s assumptions related to estimating the reserve of obsolete and slow-moving inventory. Addressing this critical audit matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others: (1) evaluating management’s process for estimating obsolete and slow moving inventory levels, (2) comparing historical sales trends and inventory consumption reports for selected products to quantities on hand in order to evaluate potential excess or obsolete inventory, (3) evaluating and discussing forecasts and expectations with management as well as assumptions regarding alternative uses, and (4) evaluating the reasonableness of management’s assumptions. We have served as the Company’s auditor since October 14, 2015. /s/ TANNER LLC Salt Lake City, Utah April 15, 2022 | F-2 | Table of Contents CLEARONE, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) December 31, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 1,071 $ 3,803 Marketable securities 1,790 1,117 Receivables, net of allowance for doubtful accounts of $ 326 and $ 506 , respectively 4,991 5,194 Inventories, net 10,033 10,463 Income tax receivable 7,535 7,169 Prepaid expenses and other assets 4,021 1,536 Total current assets 29,441 29,282 Long-term marketable securities 1,220 1,762 Long-term inventories, net 3,567 4,590 Property and equipment, net 744 906 Operating lease – right of use assets, net 1,537 1,936 Intangibles, net 25,086 19,248 Other assets 4,597 4,599 Total assets $ 66,192 $ 62,323 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 5,388 $ 3,950 Accrued liabilities 2,549 2,352 Deferred product revenue 54 123 Short-term debt 3,481 672 Total current liabilities 11,472 7,097 Long-term debt 1,535 3,245 Op erat ing lease liability, net of current 1,026 1,489 Other long-term liabilities 655 678 Total liabilities 14,688 12,509 Shareholders’ equity: Common stock, par value $ 0.001 , 50,000,000 shares authorized, 22,410,126 and 18,775,773 s hares issued and outstanding , respectively 22 19 Additional paid-in capital 72,795 63,359 Accumulated other comprehensive loss ( 241 ) ( 186 ) Accumulated deficit ( 21,072 ) ( 13,378 ) Total shareholders’ equity 51,504 49,814 Total liabilities and shareholders’ equity $ 66,192 $ 62,323 See accompanying notes | F-3 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Dollars in thousands, except per share amounts) Year ended December 31, 2021 2020 Revenue $ 28,967 $ 29,069 Cost of goods sold 17,051 16,510 Gross profit 11,916 12,559 Operating expenses: Sales and marketing 6,736 6,728 Research and product development 5,794 5,512 General and administrative 6,881 5,886 Total operating expenses 19,411 18,126 Operating loss ( 7,495 ) ( 5,567 ) Interest expense ( 514 ) ( 436 ) Other income, net 32 79 Loss before income taxes ( 7,977 ) ( 5,924 ) Provision for (benefit from) income taxes ( 283 ) ( 6,429 ) Net income (loss) $ ( 7,694 ) $ 505 Basic income (loss) per common share $ ( 0.39 ) $ 0.03 Diluted income (loss) per common share $ ( 0.39 ) $ 0.03 Basic weighted average shares outstanding 19,859,817 17,271,629 Diluted weighted average shares outstanding 19,859,817 17,325,351 Comprehensive income (loss): Net income (loss) $ ( 7,694 ) $ 505 Other comprehensive income (loss): Unrealized gain (loss) on available-for-sale securities, net of tax ( 28 ) 8 Change in foreign currency translation adjustment ( 27 ) ( 18 ) Comprehensive income (loss) $ ( 7,749 ) $ 495 See accompanying notes | F-4 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Dollars in thousands ) Year ended December 31, 2021 Year ended December 31, 2020 Common stock and paid-in capital Balance, beginning of period $ 63,378 $ 58,537 Issuance of common stock 9,288 4,764 Issuance of warrants and senior convertible notes — — Share-based compensation expense 136 63 Proceeds from employee stock purchase plan 15 14 Balance, end of period $ 72,817 $ 63,378 Accumulated other comprehensive loss Balance, beginning of period $ ( 186 ) $ ( 176 ) Unrealized gain (loss) on available-for-sale securities, net of tax ( 28 ) 8 Foreign currency translation adjustment ( 27 ) ( 18 ) Balance, end of period $ ( 241 ) $ ( 186 ) Accumulated deficit Balance, beginning of period $ ( 13,378 ) $ ( 13,883 ) Net income (loss) ( 7,694 ) 505 Balance, end of period $ ( 21,072 ) $ ( 13,378 ) Total shareholders' equity $ 51,504 $ 49,814 See accompanying notes | F-5 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2021 2020 Cash flows from operating activities: Net income (loss) $ ( 7,694 ) $ 505 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization expense 2,867 2,313 Amortization of right of use of assets 611 563 Share-based compensation expense 136 63 Provision for doubtful accounts, net — 82 Change of inventory to net realizable value 850 1,517 Changes in operating assets and liabilities: Receivables 203 192 Inventories 603 1,155 Prepaid expenses and other assets ( 2,485 ) ( 417 ) Accounts payable 1,438 1,079 Accrued liabilities 166 ( 865 ) Income taxes receivable ( 366 ) ( 7,087 ) Deferred product revenue ( 69 ) ( 50 ) Operating lease liabilities ( 631 ) ( 570 ) Other long-term liabilities ( 23 ) 538 Net cash used in operating activities ( 4,394 ) ( 982 ) Cash flows from investing activities: Capitalized patent defense costs ( 7,836 ) ( 6,728 ) Purchase of property and equipment ( 221 ) ( 284 ) Purchase of intangibles ( 290 ) ( 205 ) Proceeds from maturities and sales of marketable securities 4,004 4,605 Purchase of marketable securities ( 4,164 ) ( 2,932 ) Net cash used in investing activities ( 8,507 ) ( 5,544 ) Cash flows from financing activities: Gross proceeds from issuance of common stock and warrants 10,000 5,275 Costs of issuance of common stock and warrants ( 712 ) ( 511 ) Proceeds from issuance of short-term notes 2,000 — Proceeds from Pay check Protection Program loan — 1,499 Principal payments of long-term debt ( 1,098 ) — Proceeds from equity-based compensation programs 15 14 Net cash provided by financing activities 10,205 6,277 Effect of exchange rate changes on cash and cash equivalents ( 36 ) ( 12 ) Net increase (decrease) in cash and cash equivalents ( 2,732 ) ( 261 ) Cash and cash equivalents at the beginning of the year 3,803 4,064 Cash and cash equivalents at the end of the year $ 1,071 $ 3,803 | F-6 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2021 2020 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 107 $ 79 Cash paid for interest 296 244 See accompanying notes | F-7 | Table of Contents CLEARONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1. Business Description, Basis of Presentation and Significant Accounting Policies Business Description: ClearOne, Inc., together with its subsidiaries (collectively, “ClearOne” or the “Company”), 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. Basis of Presentation: Fiscal Year – This report on Form 10-K includes consolidated balance sheets for t he years ended December 31, 2021 and 2020 and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the years 2021 and 2020 . Consolidation – These consolidated financial statements include the financial statements of ClearOne, Inc. and its wholly owned subsidiaries. All inter-Company accounts and transactions have been eliminated in consolidation. Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management 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 sales and expenses during the reporting periods. Key estimates in the accompanying consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts receivable and product returns, provisions for obsolete inventory, potential impairment of long-lived assets, and deferred income tax asset valuation allowances. Actual results could differ materially from these estimates. Foreign Currency Translation – We are exposed to foreign currency exchange risk through our foreign subsidiaries. Other than our subsidiaries in India and Spain, all other foreign subsidiaries are U.S. dollar functional, for which gains and losses arising from remeasurement are included in earnings. Our Spanish subsidiary is Euro functional, for which gains and losses arising from translation are included in accumulated other comprehensive income or loss. Our Indian subsidiary is Indian Rupee functional, for which gains and losses arising from translation are included in accumulated other comprehensive income or loss. We translate and remeasure foreign assets and liabilities at exchange rates in effect at the balance sheet dates. We translate revenue and expenses using average rates during the year. Concentration Risk – We depend on an outsourced manufacturing strategy for our products. We outsource the manufacture of all of our products to third party manufacturers located in Asia. If any of these manufacturers experience difficulties in obtaining sufficient supplies of components, component prices significantly exceeding the anticipated costs, an interruption in their operations, or otherwise suffer capacity constraints, we would experience a delay in production and shipping of these products, which would have a negative impact on our revenues. Should there be any disruption in services due to natural disaster, economic or political difficulties, transportation restrictions, acts of terror, quarantine or other restrictions associated with infectious diseases, or other similar events, or any other reason, such disruption may have a material adverse effect on our business. Operating in the international environment exposes us to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, and potentially adverse tax consequences, which could materially affect our results of operations. Currently, we have no second source of manufacturing for most of our products. Significant Accounting Policies: Cash Equivalents – The Company considers all highly-liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. The Company places its temporary cash investments with high-quality financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limits. | F-8 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Marketable Securities - The Company has classified its marketable securities as available-for-sale securities. These debt securities are carried at estimated fair value with unrealized holding gains and losses included in other comprehensive income (loss) in shareholders’ equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and establishes a new cost basis for the security. Losses are charged against “Other income” when a decline in fair value is determined to be other than temporary. We review several factors to determine whether a loss is other than temporary. These factors include, but are not limited to: ( i ) the extent to which the fair value is less than cost and the cause for the fair value decline, (ii) the financial condition and near term prospects of the issuer, (iii) the length of time a security is in an unrealized loss position and (iv) our ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. There were no other-than-temporary impairments recognized during t he years ended December 31, 2021 and 2020 . Accounts Receivable – Accounts receivable are recorded at the invoiced amount, net of expected returns and allowance for doubtful accounts. Generally, credit is granted to customers on a short-term basis without requiring collateral, and as such, these accounts receivable, do not bear interest, although a finance charge may be applied to such receivables that are past due. The Company extends credit to customers who it believes have the financial strength to pay. The Company has in place credit policies and procedures, an approval process for sales returns and credit memos, and processes for managing and monitoring channel inventory levels. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Management regularly analyzes accounts receivable including current aging, historical write-off experience, customer concentrations, customer creditworthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. We review customer accounts quarterly by first assessing accounts with aging over a specific duration and balance over a specific amount. We review all other balances on a pooled basis based on past collection experience. Accounts identified in our customer-level review as exceeding certain thresholds are assessed for potential allowance adjustment if we conclude the financial condition of that customer has deteriorated, adversely affecting their ability to make payments. Delinquent account balances are written off if the Company determines that the likelihood of collection is not probable. If the assumptions that are used to determine the allowance for doubtful accounts change, the Company may have to provide for a greater level of expense in future periods or reverse amounts provided in prior periods. The Company’s allowance for doubtful accounts activity for the years ended December 31, 2021 and 2020 is as follows: Year Ended December 31, 2021 2020 Balance at beginning of the year $ 506 $ 424 Allowance increase (decrease) ( 180 ) 120 Write offs, net of recoveries — ( 38 ) Balance at end of the year $ 326 $ 506 Inventories – Inventories are valued at the lower of cost or market, with cost computed on a first-in, first-out (“FIFO”) basis. In addition to the price of the product purchased, the cost of inventory includes the Company’s internal manufacturing costs, including warehousing, engineering, material purchasing, quality and product planning expenses and applicable overhead, not in excess of estimated realizable value. Consideration is given to obsolescence, excessive levels, deterioration, direct selling expenses, and other factors in evaluating net realizable value. The inventory also includes advance replacement units (valued at cost) provided by the Company to end-users to service defective products under warranty. The value of advance replacement units included i n the inventory was $ 130 and $ 35 , as of December 31, 2021 and 2020 , respectively. The inventory consists of current inventory of $ 10,033 and long-term inventory of $ 3,567 . Long term inventory represents inventory held in excess of our current (next 12 months) requirements based on our recent sales and forecasted level of sales. | F-9 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Property and Equipment – Property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs, and renewal costs are expensed as incurred. Gains or losses from the sale, trade-in, or retirement of property and equipment are recorded in current operations and the related book value of the property is removed from property and equipment accounts and the related accumulated depreciation and amortization accounts. Estimated useful lives are generally two to ten years . Depreciation and amortization are calculated over the estimated useful lives of the respective assets using the straight-line method. Leasehold improvement amortization is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the related assets. Intangible Assets – Intangible assets acquired in a purchase business combination are amortized over their useful lives unless these lives are determined to be indefinite. Intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which are generally three to ten years . Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized. Impairment of Long-Lived Assets - Long-lived assets, such as property, equipment, and definite-lived intangible assets subject to depreciation and amortization, are reviewed for impairment 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. Recent accounting standard related to leases: In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, using the optional transition method. The Company elected to use certain practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases. There was an increase in assets of $ 2,966 and liabilities of $ 3,101 due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases with the difference of $ 135 related to existing deferred rent that reduced the ROU asset recorded. The standard did not have a material impact on our condensed consolidated statements of operations and comprehensive income (loss). Change in accounting policy related to leases: We determine if an arrangement is a lease at inception. Operating leases are included in operating lease - right of use (“ROU”) assets, accrued liabilities, and operating lease liability in our consolidated balance sheets. As of adoption of ASC 842 and as of December 31, 2021 and December 31, 2020, the Company was not party to finance lease arrangements. ROU assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Under the available practical expedient, we account for the lease and non-lease components as a single lease component. | F-10 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Revenue Recognition Policy: The Company generates revenue from sales of its audio and video conferencing equipment to distributors, system integrators and value-added resellers. The Company also generates revenue, to a much lesser extent, from sale of software and licenses to distributors, system integrators, value-added resellers and end-users. The Company recognizes revenue when it satisfies a performance obligation in an amount reflecting the consideration to which it expects to be entitled. For sales agreements, the Company has identified the promise to transfer products, each of which are distinct, to be the performance obligation. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer. Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty and supply, but typically do not require mandatory purchase commitments. In the absence of a sales agreement, the Company’s standard terms and conditions at the time of acceptance of purchase orders apply. The Company considers the customer purchase orders, governed by sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. The Company evaluates certain factors including the customer’s ability to pay (or credit risk). In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. Sales to distributors, are typically made pursuant to agreements that provide return rights with respect to discontinued or slow-moving products, referred to as stock rotation. Sales to distributors can also be subject to price adjustment on certain products, primarily for distributors with drop-shipping rights. Although payment terms vary, most distributor agreements require payment within 45 days of invoicing. 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 twelve months ended December 31, 2021 for equipment sales was $ 28,792 , and for software, licenses, etc. was $ 175 . 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: As of December 31, 2021 2020 Deferred revenue $ 54 $ 123 Deferred cost of goods sold — — Deferred gross profit $ 54 $ 123 | F-11 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 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. The following table disaggregates the Company’s revenue into primary product groups: Year Ended December 31 2021 2020 Audio Conferencing $ 11,568 $ 10,926 Microphones 10,963 9,149 Video products 6,436 8,994 $ 28,967 $ 29,069 The following table disaggregates the Company’s revenue into major regions: Year Ended December 31, 2021 2020 North and South America $ 14,042 $ 18,320 Asia (including Middle East) and Australia 8,197 5,998 Europe and Africa 6,728 4,751 $ 28,967 $ 29,069 Warranty Costs – The Company accrues for warranty costs based on estimated warranty return rates and estimated costs to repair. These reserve costs are classified as accrued liabilities on the consolidated balance sheets. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty returns, and repair cost. The Company reviews the adequacy of its recorded warranty accrual on a quarterly basis. The details of changes in the Company’s warranty accrual are as follows: Year Ended December 31, 2021 2020 Balance at the beginning of year $ 194 $ 194 Accruals/additions — 119 Usage/claims — ( 119 ) Balance at end of year $ 194 $ 194 | F-12 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Advertising – The Company expenses advertising costs as incurred. Advertising costs consist of trade shows, magazine advertisements, and other forms of media. Advertising expenses for t he years ended December 31, 2021 and 2020 totaled $ 508 and $ 440 , respectively, and are included in sales and marketing on the consolidated statements of operations and comprehensive income (loss). Income Taxes – The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. These temporary differences will result in deductible or taxable amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets may not be realized. On a quarterly basis, the Company tests the value of deferred tax assets for impairment at the taxpaying-component level within each tax jurisdiction. Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of such allowances. The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered. Our assessment of future taxable income is based on historical experience and current and anticipated market and economic conditions and trends. In 2018, as a result of negative evidence, principally three years of cumulative pre-tax operating losses, we concluded that it was more likely than not that net operating losses, tax credits and other deferred tax assets were not realizable and therefore, we recorded a full valuation allowance against those net deferred tax assets. Adjustments to the valuation allowance increase or decrease the Company’s income tax provision or benefit. As of December 31, 2021 the Company had no net deferred tax assets due to valuation allowances recorded to account for the consecutive quarters with losses before taxes. Recent changes: There were no changes that had a material impact on the Company's consolidated financial position, results of operations or cash flows. Earnings Per Share – The following table sets forth the computation of basic and diluted loss per common share: Year Ended December 31, 2021 2020 Numerator: Net income (loss) $ ( 7,694 ) $ 505 Denominator: Basic weighted average shares 19,859,817 17,271,629 Dilutive common stock equivalents using treasury stock method — 53,722 Diluted weighted average shares 19,859,817 17,325,351 Basic income (loss) per common share: $ ( 0.39 ) $ 0.03 Diluted income (loss) per common share: $ ( 0.39 ) $ 0.03 Weighted average options, warrants and convertible portion of senior convertible notes outstanding 4,654,601 2,611,574 Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation 4,654,601 3,323,272 | F-13 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Share-Based Payment – 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. Other recent accounting pronouncements: The Company has determined that other recently issued accounting standards will not have a material impact on its consolidated financial position, results of operations or cash flows. Liquidity: As of December 31, 2021 , cash and cash equivalents were approximately $ 1,071 compared to $ 3,803 as of December 31, 2020 . Our working capital was $ 17,969 as of December 31, 2021 compared to $ 22,185 as of December 31, 2020 . Net cash used in operating activities was $ 4,394 for the twelve months ended December 31, 2021, a decrease of cash used of $ 3,412 from $ 982 of cash used in operating activities in the twelve months ended December 31, 2020. The Company is currently pursuing all available legal remedies to defend its strategic patents from infringement. The Company has already spent approximately $ 28,156 from 2016 through 2021 towards this litigation and may be required to spend more to continue its legal defense. The Company has been actively engaged in preserving cash by suspending its dividend program, allowing the share repurchase program to expire in 2018 and implementing company-wide cost reduction measures. The Company has 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, the Company has been generating additional cash as the Company's inventory levels are brought down to historical levels. The Company also believes that the measures taken by it will continue to yield higher revenues in the future. The Company believes, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet the operating needs through at least April 15, 2023. The Company also believes that its strong portfolio of intellectual property and its solid brand equity in the market will enable it 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, the Company will be successful in obtaining the necessary funds through equity or debt financing. If the Company needs additional capital and is unable to secure financing, it may be required to further reduce expenses, delay product development and enhancement, or revise its strategy regarding ongoing litigation. | F- 14 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 2 . Marketable Securities The Company has classified its marketable securities as available-for-sale securities. These debt securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive income (loss) in shareholders’ equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned. The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of security at December 31, 2021 and 2020 were as follows: Amortized cost Gross unrealized holding gains Gross unrealized holding losses Estimated fair value December 31, 2021 Available-for-sale securities: Corporate bonds and notes $ 1,434 $ 8 $ ( 2 ) $ 1,440 Municipal bonds 1,573 — ( 3 ) 1,570 Total available-for-sale securities $ 3,007 8 ( 5 ) 3,010 December 31, 2020 Available-for-sale securities: Corporate bonds and notes $ 1,312 $ 26 $ — $ 1,338 Municipal bonds 1,536 5 — 1,541 Total available-for-sale securities $ 2,848 $ 31 $ — $ 2,879 Maturities of marketable securities classified as available-for-sale securities were as follows at December 31, 2021 : Amortized Estimated cost fair value Due within one year $ 1,785 $ 1,791 Due after one year through five years 1,222 1,219 Total available-for-sale securities $ 3,007 $ 3,010 There were no debt securities in an unrealized loss position as of December 31, 2021. | F-15 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 3 . Intangible Assets Intangibl e assets as of December 31, 2021 an d 2020 consisted of the following: Estimated useful lives As of December 31, (in years) 2021 2020 Tradename 5 to 7 $ 555 $ 555 Patents and techn ologic al know-ho w 10 33,553 25,427 Proprietary software 3 to 15 2,981 2,981 Other 3 to 5 323 323 Total intangible assets, gross 37,412 29,286 Accumulated amortization ( 12,326 ) ( 10,038 ) Total intangible assets, net $ 25,086 $ 19,248 P atents and technological know-how include capitalized legal expenses, net of amortizati o n of $ 22,637 rela ted to our defense of patents from infringement by our competitors. Legal expenses have been capitalized upon satisfaction of two conditions: (a) a determination being made that a successful defense of this litigation is probable, and (b) that the monetary benefits arising out of such successful defense will be in excess of the costs for the defense. Please refer to Note 8 - Commitments and Contingencies for additional information. During t he years ended December 31, 2021 and 2020 , amortization of these intangible assets were $ 2,288 and $ 1,694 respectively. The estimated future amortization expense of intangible assets is as follows: Years ending December 31, 2022 $ 2,683 2023 2,677 2024 2,413 2025 2,351 2026 2,351 Thereafter 12,611 Total $ 25,086 | F-16 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 4 . Inventories Inventories, net of reserves, consisted of the following: As of December 31, 2021 2020 Current: Raw materials $ 4,085 $ 1,182 Finished goods 5,948 9,281 Total $ 10,033 $ 10,463 Long-term: Raw materials $ 1,980 $ 1,977 Finished goods 1,587 2,613 Total $ 3,567 $ 4,590 Long-term inventory represents inventory held in excess of our current (next 12 months) requirements based on our recent sales and forecasted level of sales. We have developed programs to reduce the inventory to normal operating levels in the near future . We expect to sell the above inventory, net of reserves, at or above the stated cost and believe that no loss will be incurred on its sale. The losses incurred on valuation of inventory at the lower of cost or market value and write-off of obsolete inv entory amounted to $ 850 and $ 1,517 during t he years ended December 31, 2021 and 2020 , respectively. 5. Property and Equipment Major classifications of property and equipment and estimated useful lives were as follows: Estimated useful lives As of December 31, in years 2021 2020 Office furniture and equipment 3 to 10 $ 5,410 $ 5,219 Leasehold improvements 2 to 7 1,610 1,610 Vehicles 5 to 10 206 206 Manufacturing and test equipment 2 to 10 2,846 2,833 10,072 9,868 Accumulated depreciation and amortization ( 9,328 ) ( 8,962 ) Property and equipment, net $ 744 $ 906 Depreciation expense on property and equipment for t he years ended December 31, 2021 and 2020 was $ 378 and $ 422 , respectively. | F- 17 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 6 . Leases Rent expense is recognized on a straight-line basis over the period of the lease taking into account future rent escalation and holiday periods. Rent expense for the years ended December 31, 2021 and 2020 was as follows: Year ended December 31, 2021 2020 Rent expense $ 719 $ 719 W e occup y a 1,350 square-foot facility in Gainesville, Florida under the terms of an operating lease expiring in February 2023 . The Gainesville facility is used primarily to support our research and development activities. We occupy a 21,443 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in March 2024 , with an option to extend for additional five years . The facility supports our principal administrative, sales, marketing, customer support, and research and product development activities. We occupy a 950 square-foot facility in Austin, Texas under the terms of an operating lease expiring in October 20 22 . This facility support s our sales, marketing, customer support, and research and development activities. We occupy a 3,068 square-foot facility in Zaragoza, Spain under the terms of an operating lease that expired in March 2022. This office supported our research and development and customer support activities. We occupy a 6,175 square-foot facility in Chennai, India under the terms of an operating lease expiring in August 2023. This facility support s our administrative, marketing, customer support, and research and product development activities. We occupy a 40,000 square-foot warehouse in Salt Lake City, Utah under the terms of an operating lease expiring in April 2025, which serves as our primary inventory fulfillment center. Supplemental cash flow information related to leases was as follows: Year ended December 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 685 $ 718 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 212 $ 97 | F- 18 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Supplemental balance sheet information related to leases was as follows: December 31, 2021 December 31, 2020 Operating lease right-of-use assets $ 1,537 $ 1,936 Current portion of operating lease liabilities, included in accrued liabilities $ 623 $ 579 Operating lease liabilities, net of current portion 1,026 1,489 Total operating lease liabilities $ 1,649 $ 2,068 Weighted average remaining lease term for operating leases (in years) 2.64 3.54 Weighted average discount rate for operating leases 5.87 % 6.1 % The following represents maturities of operating lease liabilities as of December 31, 2021: Years ending December 31, 2022 $ 703 2023 671 2024 343 2025 69 2026 - Total lease payments 1,786 Less: Imputed interest ( 137 ) Total $ 1,649 7 . Accrued Liabilities Accrued liabilities consist of the following: As of December 31, 2021 2020 Accrued salaries and other compensation $ 733 $ 773 Sales and marketing programs and customer credit balances 869 575 Product warranty 194 194 Current portion of operating lease liabilities 623 579 Accrued legal fees and costs — 78 Other accrued liabilities 130 153 Total $ 2,549 $ 2,352 | F-19 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 8 . Commitments and Contingencies We establish contingent liabilities when a particular contingency is both probable and estimable. The Company is not aware of any pending claims or assessments, other than as described below, which may have a material adverse impact on the Company’s financial position or results of operations. Outsource Manufacturers. We have manufacturing agreements with electronics manufacturing service (“EMS”) providers related to the outsourced manufacturing of our products. Certain manufacturing agreements establish annual volume commitments. We are also obligated to repurchase Company-forecasted but unused materials. The Company has non-cancellable, non-returnable, and long-lead time commitments with its EMS providers and certain suppliers for inventory components that will be used in production. The Company’s purchase commitments under such agreements is approximately $ 7,670 as of December 31, 2021 . Uncertain Tax Positions. As further discussed in Note 13 - Income Taxes , we had $ 895 of uncertain tax positions as of December 31, 2021 . Due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability to any particular year. Legal Proceedings. Intellectual Property Litigation The Company is involved in litigation against Shure Incorporated (“Shure”). Shure, Incorporated v. ClearOne, Inc. , 17-cv-3078 (N.D. of Illinois) Shure filed the first lawsuit on April 24, 2017, by filing a complaint in the U.S. District Court for the Northern District of Illinois seeking a declaratory judgment of non-infringement and invalidity of the Company’s U.S. Patent No. 9,635,186 (“’186 Patent”) and Patent No. 9,264,553 (“’553 Patent”). The matter is Shure Inc. v. ClearOne, Inc. , Case No. 17-cv-03078 (the “2017 N.D. Illinois Matter”). In early 2018, Shure added a claim that the ’186 Patent is unenforceable. The Court dismissed Shure’s request for declaratory judgment relating to the ’553 Patent, which at the time in 2017, had not been threatened or asserted by the Company against Shure and had been submitted to the USPTO for reissue. The Company has filed counterclaims against Shure for willful infringement of the Company’s ’186 Patent and the Company’s U.S. Patent No. 9,813,806 (“’806 Patent”). On August 6, 2017, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’186 Patent. On March 16, 2018, the Court denied the Company’s motion for preliminary injunction regarding the ’186 Patent. On February 6, 2019, the Company filed a motion for reconsideration in light of the PTAB’s January 24, 2019, decision confirming the patentability of the related ’553 Patent. On August 25, 2019, the Court denied the Company’s motion for reconsideration. On April 17, 2018, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’806 Patent. On August 6, 2019, the Court granted the Company’s motion for preliminary injunction regarding the ’806 Patent preventing Shure from manufacturing, marketing, and selling the Shure MXA910 Ceiling Array Microphone for use in its “drop-ceiling mounting configuration.” The Court determined that such sales are likely to infringe the ’806 Patent and that Shure had not raised a substantial question of the ’806 Patent validity. The Court’s order also prevents Shure from encouraging others to use the Shure MXA910 beamforming microphone array in the “drop-ceiling mounting configuration” and “applies to Shure’s officers, agents, servants, employees, and attorneys, as well as anyone who is in active concert or participation with those listed persons.” On August 20, 2019, the Company deposited $ 4,452,149.60 with the Court to satisfy a bond securing the preliminary injunction. | F-20 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) On February 21, 2020, the Company asked for a Court order that Shure has been manufacturing, marketing, and selling its redesigned MXA910, the MXA910-A released in December 2019, in violation of a preliminary injunction issued on August 20, 2019. On September 1, 2020, the Court held Shure in contempt of court for violating the Court’s August 2019 preliminary injunction order. The Court 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’s order prohibited Shure from continuing to “manufacture, market, or sell the MXA910-A.” In addition, the Court held that “[t]he record is also clear as to the MXA910-60CM, but in an abundance of caution, the Court will refrain from granting that aspect of the contempt motion to allow for additional discovery” on that and the “possibility that Shure also violated the preliminary injunction order” by “pushing” sales of the MXA910 immediately after the issuance of the August 2019 preliminary injunction order. Shure and ClearOne completed supplemental briefing before the district court relating to the Court’s ruling holding Shure in contempt. The Court has not yet issued a ruling on the supplemental briefing. On July 21, 2021, the Federal Circuit dismissed Shure’s appeal of the Court’s ruling holding Shure in contempt. On July 9, 2020, the Company moved for summary judgment, or partial summary judgment, of infringement by Shure of the ’186 and ’806 patents, and Shure moved on the same day for summary judgment of invalidity of the ’186 and ’806 patents. On August 12, 2020, Shure also moved for summary judgment on various other aspects of the Company’s infringement claims, including arguing that the MXA910 after a recent firmware update does not infringe the ’186 Patent, that the MXA910-A and MXA910-US do not infringe the ’806 Patent, and that the Company is not entitled to lost profits or treble damages. The motions remain pending. Shure Incorporated v. ClearOne, Inc., No. IPR2017-01785 (PTAB) On July 14, 2017, Shure filed a petition with Patent Trial and Appeals Board (“PTAB”) for inter partes review against the ’553 Patent. The matter is Shure Incorporated v. ClearOne, Inc. , No. IPR2017-01785. On January 29, 2018, the PTAB instituted inter partes review of the ’553 Patent. On January 24, 2019, PTAB issued a final written decision confirming the patentability of all claims of the ‘553 Patent. Shure filed a request for a rehearing, which the PTAB denied on March 25, 2019. Shure appealed the PTAB’s decision to the U.S. Court of Appeals for the Federal Circuit, which issued a judgment affirming the PTAB’s decision on March 6, 2020. ClearOne, Inc. v. Shure Acquisition Holdings, Inc., IPR2019-00683 (PTAB) On February 15, 2019, the Company filed a petition for inter partes review of Shure’s U.S. Patent No. 9,565,493 (“’493 Patent”), arguing that all claims of the ’493 Patent should be cancelled in light of several prior art references, including the ’806 Patent. The matter is ClearOne, Inc. v. Shure Acquisition Holdings, Inc. , IPR2019-00683. Shure opposed the petition, but the PTAB instituted inter partes review on August 16, 2019. Shortly over a year later, on August 14, 2020, the PTAB issued its final written decision, holding that all but two of the original claims in the ’493 Patent, claims 6 and 34, are unpatentable in light of the ’806 and other prior art, and granting Shure’s request to amend 11 claims. On August 24, the Company filed a request for rehearing with the PTAB, arguing that the 11 amended claims are not patentable based upon the Company’s allegation that Shure withheld from the PTAB two allegedly material references that render those claims unpatentable. Also on August 24, the Company filed a request for sanctions with the PTAB, arguing that Shure’s failure to disclose two material references to the PTAB violated Shure’s duty of candor. PTAB denied both the request for hearing and request for sanctions. The Company has appealed the PTAB’s final written decision to the U.S Court of Appeal for the Federal Circuit. The parties completed briefing on this appeal in November 2021, and the hearing was held on April 7, 2022. The Federal Circuit has not yet issued any judgment. ClearOne, Inc. v. Shure, Incorporated, 19-cv-02421 (N.D. of Illinois) On April 10, 2019, the Company filed a lawsuit against Shure in the United States District Court for the Northern District of Illinois alleging that Shure’s MXA910 and MXA310 infringes the ’553 Patent and that Shure has misappropriated ClearOne’s trade secrets. The matter is ClearOne, Inc. v. Shure, Inc. , 19-cv-02421 (the “2019 N.D. Illinois Matter”), and has been coordinated with the initial matter filed in 2017 for trial purposes. On December 16, 2019, the Court granted the Company’s motion for leave to amend its complaint to add claims against Shure for intentional interference with prospective economic advantage and trade libel. On January 13, 2020, Shure moved to dismiss the Company’s new claims. On July 21, 2020, ClearOne informed the Court that it would proceed with its advertising-related claims in Delaware rather than Illinois. ClearOne thus filed a Second Amended Complaint removing the prospective economic advantage and trade libel claims. In July 2021, the parties completed briefing on Shure’s early motion to obtain summary judgment and dismissal of ClearOne’s trade secret misappropriation claims. Shure's motion is still pending. The parties’ claim construction briefing is also still pending. | F- 21 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Shure, Incorporated v. ClearOne, Inc., 19-cv-1343 (D. of Delaware) On July 18, 2019, Shure, Inc. filed a lawsuit against the Company in the U.S. Court for the District of Delaware alleging that ClearOne’s BMA CT product, launched in February of 2019, infringes Shure’s ’493 Patent and that ClearOne engaged in unfair competition, tortious interference, deceptive trade practices, and false advertising. The matter is Shure, Incorporated v. ClearOne, Inc. , 19-cv-1343 (D. of Delaware). Shure is seeking monetary damages and injunctive relief. ClearOne successfully moved to stay Shure’s infringement claim relating to the ’493 Patent because the PTAB instituted inter partes review of the ’493 Patent. On November 19, 2019, the Court granted Shure’s request for leave to amend its complaint to add a claim of infringement of Shure’s recently issued U.S. Patent No. D865723 (the “Design Patent”) and additional claims of trade libel. In July 2020, the Company filed counterclaims accusing Shure of business torts based on false advertising. Both parties’ claims are still pending. The Company believes that Shure’s lawsuit is without merit and intends to vigorously defend itself. On April 14, 2020, Shure moved for a temporary restraining order and preliminary injunction to prevent the Company from selling the BMA CT and BMA CTH, alleging that these products infringed Shure’s Design Patent. The Company opposed the motions, and on May 1, Magistrate Judge Burke issued a report and recommendation denying Shure’s request for a temporary restraining order, finding that Shure had failed to show that it would suffer irreparable harm in the absence of injunctive relief and that ClearOne had raised a “substantial question” as to the validity of the Design Patent. On September 21, 2020, the Court held a hearing on Shure’s motion for a preliminary injunction seeking to enjoin further sale of the BMA CT and Versa bundles that included the BMA CTH. On January 20, 2021, Magistrate Judge Burke issued a report and recommendation denying Shure’s motion for failure to show both a likelihood of success on the merits and irreparable harm. After Shure did not file an objection to the report and recommendation, Judge Andrews adopted it and denied Shure’s preliminary injunction motion. Shure did not file a notice of appeal. On July 28, 2020, Judge Burke held a claim construction hearing on the Design Patent and issued a report and recommendation on claim construction in October 2020. Since neither party objected, the district court judge adopted the report and recommendation in November 2020. On November 1, 2021, a jury trial commenced in the U.S. District Court for the District of Delaware on Shure’s claim of infringement and ClearOne's counterclaim of invalidity on the sole claim of U.S. Patent No. D865,723 (the “’723 patent”). On the third day of trial, November 3, 2021, a jury returned a verdict in favor of ClearOne on all issues. The jury found that ClearOne had not infringed the ’723 patent and that the ’723 patent was invalid. Shortly before trial, Shure dropped its business tort claims against ClearOne, and ClearOne has asked the Court to dismiss Shure’s now withdrawn business tort claims with prejudice. That request is still pending. The Court also severed ClearOne’s business tort claims from the trial of Shure’s ’723 patent infringement claims, and the parties are waiting for the Court to schedule a trial on ClearOne’s business tort claims. Shure’s claim of infringement of U.S Patent No. 9,565,493 is stayed pending ClearOne’s appeal to the U.S. Court of Appeals for the Federal Circuit of the U.S. Patent and Trademark Office’s decision regarding the patentability of several amended claims of that patent in an inter partes review proceeding. That appeal is fully briefed, with the hearing held on April 7, 2022. Shure, Incorporated v. ClearOne. Inc., PGR2020-00079 (PTAB) Also on July 28, 2020, Shure challenges the patentability of the Company’s U.S. Patent No. 10,728,653 in a post-grant review proceeding before the PTAB. The matter is Shure, Incorporated v. ClearOne. Inc. , PGR2020-00079 (PTAB). The Company filed a preliminary response on November 17, 2020, and the PTAB instituted trial by an institution decision dated February 16, 2021. The institution decision found that five of the seven challenges in the petition were not reasonably likely to prevail, but instituted trial under its all-or-nothing institution policy. On February 14, 2022, the PTAB issued a final written decision, finding that Shure had not proved that any claims of the ’653 patent were unpatentable. On February 24, 2022, Shure filed a notice of appeal, indicating that it would appeal the final written decision to the Federal Circuit. The Company intends to continue to vigorously enforce and defend its intellectual property rights in these proceedings. The Company capitalized $ 7,836 and $ 6,728 of litigation expenses related to this matter during the twelve months ended December 31, 2021 and 2020, respectively. In addition, the Company is also involved from time to time in various claims and legal proceedings which arise in the normal course of our business. Such matters are subject to many uncertainties and outcomes that are not predictable. However, based on the information available to us, we do not believe any such other proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Conclusion We believe there are no other items that will have a material adverse impact on the Company’s financial position or results of operations. Legal proceedings are subject to all of the risks and uncertainties of legal proceedings and there can be no assurance as to the probable result of any legal proceedings. The Company believes it has adequately accrued for the aforementioned contingent liabilities. If adverse outcomes were to occur, our financial position, results of operations and cash flows could be negatively affected materially for the period in which the adverse outcomes are known. | F- 22 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 9 . Debt Senior Convertible Notes and Warrants On December 17, 2019, the Company completed the issuance and sale of $ 3,000 aggregate principal amount of secured convertible notes of the Company (the “Notes”) and warrants (the “Warrants”) to purchase 340,909 shares of common stock, par value $ 0.001 per share of the Company (the “Common Stock”), in a private placement transaction. The Notes and Warrants were issued and sold to Edward D. Bagley, an affiliate of the Company, on the terms and conditions of a Note Purchase Agreement dated December 8, 2019 between the Company, certain subsidiary guarantors of the Company, and Mr. Bagley. Mr. Bagley is an affiliate of the Company and was the beneficial owner of approximately 46.6 % of the Company’s issued and outstanding shares of Common Stock. The Notes mature on December 17, 2023 (the “Maturity Date”) and accrue interest at a variable rate adjusted on a quarterly basis and equal to two and one -half percent ( 2.5 %) over the greater of (x) five and one -quarter percent ( 5.25 %) and (y) the Prime Rate as published in the Wall Street Journal (New York edition) as of the beginning of such calendar quarter. The Notes may be converted into shares of the Company’s Common Stock at any time at the election of Mr. Bagley at an initial conversion price of $ 2.11 per share (the “Conversion Price”), or 120 % of the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market. Also, the Company can cause a mandatory conversion of the Notes if the volume weighted average closing price of the Common Stock over 90 consecutive trading days exceeds 200 % of the Conversion Price. In addition, the Notes may be redeemed by the Company for cash at any time after December 17, 2020 upon payment of the outstanding principal balance of the Notes and any unpaid and accrued interest. The Company also is required to redeem the Notes upon the occurrence of a change in control of the Company. The Warrants have an initial exercise price equal to $ 1.76 , the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market, and are exercisable until December 17, 2026. The Warrants must be exercised for cash, unless at the time of exercise there is not a then effective registration statement for the resale of the shares of Common Stock issuable upon exercise of the Warrants, in which case the Warrants may be exercised via a cashless exercise feature that provides for net settlement of the shares of Common Stock issuable upon exercise. Concurrent with the issuance of the Notes and Warrants pursuant to the Note Purchase Agreement, the Company, the Guarantors and Mr. Bagley entered into a Guaranty and Collateral Agreement (the “Collateral Agreement”) pursuant to which the Company and the Guarantors granted Mr. Bagley a first priority lien interest in all of the Company’s assets as security for the Company’s performance of its obligations under the Notes and Warrants. The net proceeds after original issue discount and issuance costs of $ 346 were approximately $ 2,654 . The Company expects to use the proceeds from the sale of the Notes and Warrants for general corporate purposes and working capital. In accounting for the issuance of the Notes, the Company separated Notes and Warrants into liability and equity components. The carrying amount of Warrants, being an equity component, was first calculated using Black-Scholes method with the following assumptions: Risk-free interest rate 1.82 % Expected life of Warrants (years) 7 Expected price volatility 49.94 % Expected dividend yield 0 % | F- 23 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) The carrying amount of the Notes was then determined by deducting the fair value of the Warrants from the principal amount of the Notes. The carrying amount of the Notes was further separated into equity and liability components after separating the value of the conversion feature into an equity component and leaving the remaining value as liability. The equity component is not remeasured while the Notes and Warrants continue to meet the conditions for equity classification for equity components. The original issue discount and issuance costs are netted against the liability. The following table represents the carrying value of Notes and Warrants: December 31, 2021 December 31, 2020 Liability component: Principal $ 2,640 $ 3,000 Less: debt discount and issuance costs, net of amortization ( 385 ) ( 581 ) Net carrying amount $ 2,255 $ 2,419 Equity component ( 1 ) : Warrants $ 318 $ 318 Conversion feature 122 122 Net carrying amount $ 440 $ 440 Current portion of liability component included under short-term debt $ 720 $ 360 Long-term portion of liability component included under long-term debt 1,920 2,059 Liability component total $ 2,640 $ 2,419 (1) Recorded on the consolidated balance sheets as additional paid-in capital. Debt discount and issuance costs are amortized over the life of the note to interest expense using the effective interest method. During the twelve months December 31, 2021amortization of debt discount and issuance costs were $ 196 and $ 197 respectively. The following table represents schedule of maturities of principal amount contained in the Notes as of December 31, 2021: Year ending December 31, Principal Amount Maturing 2022 $ 720 2023 1,920 Net carrying amount $ 2,640 Short-term Bridge Loan On July 2, 2021, the Company obtained a bridge loan in the principal amount of $ 2,000 from Edward D. Bagley (the “Bridge Loan”), an affiliate of the C ompany. The Bridge Loan is evidenced by a promissory note dated July 2, 2021 (the “Note”) issued by the Company to Mr. Bagley. The Note bears interests at a rate of 8.0 % per annum, matures on the earlier to occur of (i) October 1 , 2021 or (ii) within two business days of the Company’s receipt of its expected U.S. federal income tax refund, and contains other customary covenants and even ts of default . On September 11, 2021, the Company amended and restated the terms of the Bridge Loan to extend the latest maturity date from October 1, 2021 to January 3, 2022 . All other terms and conditions of the Bridge Loan remained the same. This Bridge Loan of $ 2,000 is included under short-term debt. As further discussed in Note 16 - Subsequent Events , this Bridge Loan was cancelled on January 4, 2022. | F- 24 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Paycheck Protection Program Loan On April 18, 2020, the Company, entered into a loan agreement with U.S. Bank National Association Bank, which provided for a loan in the principal amount of $ 1,499 (“PPP Loan”) pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP Loan has a two -year term and bears interest at a rate of 1.0 % per annum. Monthly principal and interest payments are deferred for approximately sixteen months after the date of disbursement. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP Loan contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company used the entire PPP Loan amount for qualifying expenses and intends to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act. December 31, 2021 December 31, 2020 Current portion of the PPP Loan included under short-term debt $ 761 $ 312 Long-term portion of the PPP Loan included under long-term debt — 1,187 Total $ 761 $ 1,499 10 . Share-Based Payments Employee Stock Option Plans The Company’s share-based incentive plan offering stock options is primarily through 2007 Equity Incentive Plan (the “2007 Plan”). Under this plan, one new share is issued for each stock option exercised. The plan is described below. The 2007 Plan was restated and approved by the shareholders on December 12, 2016. Provisions of the restated 2007 Plan include the granting of up to 2,000,000 incentive and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Options may be granted to employees, officers, non-employee directors and other service providers and may be granted upon such terms as the Compensation Committee of the Board of Directors determines in their sole discretion. All vesting schedules for options granted are based on 3 or 4 -year vesting schedules, with either one-third or one-fourth vesting on the first anniversary and the remaining options vesting ratably over the remainder of the vesting term. Generally, directors and officers have 3 -year vesting schedules and all other employees have 4 -year vesting schedules. Additionally, in the event of a change in control or the occurrence of a corporate transaction, the Company’s Board of Directors has the authority to elect that all unvested options shall vest and become exercisable immediately prior to the event or closing of the transaction. As of December 31, 2021 , the Company had 471,071 options with contractual lives of ten years and 360,000 options with contractual lives of 6 years . As of December 31, 2021, there were 831,071 options outstanding under the 2007 Plan. As of December 31, 2021, the 2007 Plan had 633,783 authorized unissued options. The Company uses judgment in determining the fair value of the share-based payments on the date of grant using an option-pricing model with assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the risk-free interest rate of the awards, the expected life of the awards, the expected volatility over the term of the awards, and the expected dividends of the awards. The Company uses the Black-Scholes option pricing model to determine the fair value of share-based payments granted under the guidelines of ASC Topic 718 . | F-25 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) The Company granted 50,000 options during the year ended December 31, 2021. In applying the Black-Scholes methodology to the options granted during the year ended December 31, 2021, the Company used the following assumptions: Risk free interest rate, average 0.84 % Expected option life, average 5 years Expected price volatility, average 69.74 % Expected dividend yield 0 % The risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of the grant, based on the expected life of the stock option. The expected life of the stock option is determined using historical data. The expected price volatility is determined using a weighted average of daily historical volatility of the Company’s stock price over the corresponding expected option life. Under guidelines of ASC Topic 718, the Company recognizes the associated compensation cost for only those awards expected to vest on a straight-line basis over the underlying requisite service period. The Company estimated the forfeiture rates based on its historical experience and expectations about future forfeitures. The following table shows the stock option activity: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value As of December 31, 2019 544,647 $ 9.01 4.93 $ — Granted 337,500 2.50 Expired and canceled ( 38,701 ) 4.81 Forfeited prior to vesting — — Exercised — — As of December 31, 2020 843,446 $ 6.60 4.91 $ — Granted 50,000 2.30 Expired and canceled ( 34,875 ) 6.70 Forfeited prior to vesting ( 27,500 ) 2.50 Exercised — — As of December 31, 2021 831,071 $ 6.47 4.10 $ — Vested and Expected to Vest at December 31, 2020 843,446 $ 6.60 4.91 $ — Vested at December 31, 2020 505,946 $ 9.33 4.21 $ — Vested and Expected to Vest at December 31, 2021 831,071 $ 6.47 4.10 $ — Vested at December 31, 2021 555,237 $ 8.46 3.64 $ — | F-26 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) The total pre-tax compensation cost related to stock options recognized during the years ended December 31, 2021 and 2020 was $ 131 and $ 58 , respectively. Tax benefit from compensation cost related to stock options during the years ended December 31, 2021 and 2020 was $ 0 . As of December 31, 2021, the total compensation cost related to stock options not yet recognized and before the effect of any forfeitures was $ 356 , which is expected to be recognized over approximately the next 2.65 years on a straight-line basis. Employee Stock Purchase Plan During the years ended December 31, 2021 and 202 0 , the Company issued shares to employees under the Company’s 2016 Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s shareholders on December 12, 2016. As of December 31, 2021, and December 31, 2020 , 402,704 and 413,868 , respectively of the originally approved 500,000 shares were available for offerings under the ESPP. Offering periods under the ESPP commence on each Jan 1 and July 1 and continue for a duration of six months. The ESPP is available to all employees who do not own, or are deemed to own, shares of stock making up an excess of 5 % of the combined voting power of the Company, its parent or subsidiary. During each offering period, each eligible employee may purchase shares under the ESPP after authorizing payroll deductions. Under the ESPP, each employee may purchase up to the lesser of 2500 shares or $ 25 of fair market value (based on the established purchase price) of the Company’s stock for each offering period. Unless the employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase common stock on the last business day of the period at a price equal to 85 % (or a 15 % discount) of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Shares purchased and compensation expense associated with Employee Stock Purchase Plans were as follows: 2021 2020 Shares purchased under ESPP plan 11,164 8,998 Plan compensation expense $ 5 $ 5 Issuance of Common Stock and Warrants O n September 13 , 2020, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”), pursuant to which the Company issued and sold, in a registered direct offering 2,116,050 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share (the “Common Stock”) at an offering price of $ 2.4925 per share, (the “Registered Offering”). The Company received gross proceeds of approximately $ 5,275 ( 4,764 net of issuance costs) in connection with the Registered Offering, before deducting placement agent fees and related offering expenses. In a concurrent private placement, the Company issued to the Purchasers who participated in the Registered Offering warrants exercisable for an aggregate of 1,058,025 shares of common stock at an exercise price of $ 2.43 per share. Each warrant became immediately exercisable and had an expiry term of five years from the issuance date. On September 12, 2021, the Company entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued 3,623,189 shares of the Company's common stock, par value $ 0.001 per share at an offering price of $ 2.76 per share. The Company received gross proceeds of approximately $ 10,000 and net proceeds of $ 9,288 after deducting placement agent fees and related offering expenses. In a concurring private placement the Company also issued to the same purchasers warrants exercisable for an aggregate of 3,623,189 shares of common stock at an exercise price of $ 2.76 per share. Each warrant became immediately exercisable and will expire on March 15, 2027. | F-27 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 11 . Significant Customers There were no sales to significant customers that represented more than 10 percent of total revenues during the years ended December 2021 and 2020. The following table summarizes the percentage of total gross accounts receivable from significant customers that represented more than 10 percent of total gross accounts receivable: As December 31, 2021 2020 Customer A 10.9 % * Customer B 10.6 % * * Sales and accounts receivable from Customer A and Customer B in 2020 did not exceed 10% of revenue and total gross accounts receivable. 12 . Fair Value Measurements The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels: Level 1 - Quoted prices in active markets for identical assets and liabilities. Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. This category generally includes U.S. Government and agency securities; municipal securities; mutual funds and securities sold and not yet settled. Level 3 - Unobservable inputs. The substantial majority of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs. The following tables set forth the fair value of the financial instruments re-measured by the Company as of December 31, 2021 and 2020 : Level 1 Level 2 Level 3 Total December 31, 2021 Corporate bonds and notes $ — $ 1,440 $ — $ 1,440 Municipal bonds — 1,570 — 1,570 Total $ — $ 3,010 $ — $ 3,010 December 31, 2020 Corporate bonds and notes $ — $ 1,338 $ — $ 1,338 Municipal bonds — 1,541 — 1,541 Total $ — $ 2,879 $ — $ 2,879 | F- 28 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 13 . Income Taxes Consolidated loss before taxes for domestic and foreign operations consisted of the following: Year ended December 31, 2021 2020 Domestic $ ( 6,201 ) $ ( 4,574 ) Foreign ( 1,776 ) ( 1,350 ) Total $ ( 7,977 ) $ ( 5,924 ) The Company’s benefit from (provision for) income taxes consisted of the following: Year ended December 31, 2021 2020 Current: Federal $ 373 $ 6,543 State ( 9 ) ( 36 ) Foreign ( 81 ) ( 78 ) Total current 283 6,429 Deferred: Federal 1,326 ( 3,104 ) State 398 286 Foreign 302 216 Total 2,026 ( 2,602 ) Change in valuation allowance ( 2,026 ) 2,602 Total deferred — — Tax benefit (provision) $ 283 $ 6,429 The income tax (provision) differs from that computed at the federal statutory corporate income tax rate as follows: Year ended December 31, 2021 2020 Tax benefit at federal statutory rate $ 1,674 $ 1,244 State income tax benefit (provision), net of federal benefit 335 244 Research and development tax credits 361 272 Foreign earnings or losses taxed at different rates ( 28 ) ( 38 ) Tax rate change, due primarily to loss carryback ( 2 ) 2,720 Other ( 31 ) ( 615 ) Change in valuation allowance ( 2,026 ) 2,602 Tax provision $ 283 $ 6,429 | F- 29 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following: 2021 2020 Deferred revenue $ 9 $ 21 Basis difference in intangible assets 1,319 2,994 Inventory reserve 2,377 2,434 Net operating loss carryforwards 7,121 3,605 Research and development tax credits 1,579 1,272 Accrued expenses 43 61 Stock-based compensation 308 309 Allowance for sales returns and doubtful accounts 83 128 Difference in property and equipment basis ( 124 ) ( 145 ) Other 469 479 Total net deferred income tax asset 13,184 11,158 Less: Valuation allowance ( 13,184 ) ( 11,158 ) Net deferred income tax asset (liability) $ — $ — T he C oronavir u s Aid, Relief, and Eco nomic Security Act (the “CARES Act”) was enacted on March 27, 2020. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side payroll tax, Paycheck Protection Program, net operating loss carryback periods, and modifications to the net interest deduction limitations. The most significant impact to the Company from the CARES Act relates to the Paycheck Protection Program and modifications to the net operating loss car ryback periods. In November 2020, the Company completed its assessment of the impact of the carryb ack provisions from the CARES Act and elected to carry back its net operating losses to previous years. The Company has not provided for foreig n withholding taxes on undistributed earnings of its non-U.S. subsidiaries since these earnings are intended to be reinvested indefinitely, in accordance with guidelines contained in ASC Topic 740 , Accounting for Income Taxes . It is not practical to estimate the amount of additional taxes that might be payable on such undistributed earnings. The Company routinely evaluates the likelihood of realizing the benefit of its deferred tax assets and may record a valuation allowance if, based on all available evidence, it determines that it is more likely than not some portion of the tax benefit will not be realized. As of December 31, 2021 , the Company had an aggregate of approximately $ 13.2 million in deferred tax assets primarily related to intangible assets, net operating losses, tax credit carryforwards, and inventory basis differences. On a quarterly basis, the Company tests the value of deferred tax assets for impairment at the taxpaying-component level within each tax jurisdiction. Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following: ● sufficient taxable income within the allowed carryback or carryforward periods; ● future reversals of existing taxable temporary differences, including any tax planning strategies that could be utilized; ● nature or character (e.g., ordinary vs. capital) of the deferred tax assets and liabilities; and ● future taxable income exclusive of reversing temporary differences and carryforwards. Based on the foregoing criteria, the Company determined that it no longer meets the “more likely than not” threshold that net operating losses, tax credits and other deferred tax assets will be realized. Accordingly, the Company recorded a full valuation allowance at September 30, 2018, and continues to be in a full valuation allowance position at December 31, 2021 . Under the five-year carryback provision of the CARES Act, the Company carried back its taxable losses from 2018 through 2020 to years from 2013 through 2015. As no tax benefit was previously recorded for the years from 2018 through 2021 for the losses, due to the full valuation allowance, the carryback of these losses resulted in a tax benefit of $ 0.4 and $ 7.1 M in 2021 and 2020, respectively. | F-30 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) As of December 31, 2021 the Company has federal net operating loss (“NOL”) carryforwards of approximately $ 13.2 million (pre-tax), state NOL carryforwards of approximately $ 34.9 million (pre-tax) and Spain NOL carryforwards of approximately $ 11.0 million (pre-tax). The federal NOL carryforward begins to expire in 2029. T he Spain NOL carryforward does not expire. The state NOL carryforwards expire over various periods. Effective July 1, 2007, the Company adopted the accounting standards related to uncertain tax positions. This standard requires that tax positions be assessed using a two-step process. A tax position is recognized if it meets a “more likely than not” threshold, and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized. Uncertain tax positions must be reviewed at each balance sheet date. Liabilities recorded as a result of this analysis must generally be recorded separately from any current or deferred income tax accounts. The total amount of unrecognized tax benefits at December 31, 2021 and 2020 , that would favorably impact our effective tax rate if recognized was $ 895 and $ 861 , respectively. As of December 31, 2021 and 2020 , we accrued $ 16 and $ 23 , respectively, in interest and penalties related to unrecognized tax benefits. We account for interest expense and penalties for unrecognized tax benefits as part of our income tax provision. Although we believe our estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such difference could have a material impact on our income tax provision and operating results in the period in which we make such determination. A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows: Year ended December 31, 2021 2020 Balance - beginning of year $ 861 $ 298 Additions based on tax positions related to the current year 61 661 Additions for tax positions of prior years — — Reductions for tax positions of prior years — — Settlements ( 20 ) ( 43 ) Lapse in statutes of limitations ( 7 ) ( 55 ) Uncertain tax positions, ending balance $ 895 $ 861 The Company’s U.S. federal income tax returns for 2018 through 2020 are subject to examination. The Company's U.S. 2018 federal income tax return is currently under examination. The Company also files in various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state, or non-U.S. income tax examinations by tax authorities for years prior to 2017. | F-31 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 14 . Geographic Sales Information The United States was the only country to contribute more than 10 percent of total revenues in each fiscal year. The Company’s revenues are substantially denominated in U.S. dollars and are summarized geographically as follows: Year ended December 31, 2021 2020 Un ited States $ 14,230 $ 17,983 All other countries 14,737 11,086 Total $ 28,967 $ 29,069 15 . The Impact of Covid-19 As of the time of this filing the Company’s operating activities have been curtailed by the impact of Covid-19. Government directives have suspended manufacturing and limited workplace activities beginning March 23, 2020. The Company has empowered its employees to work remotely wherever possible to minimize the disruption to Company operations. The Company has received no communications from customers that indicate cancellations or substantial change in delivery schedules. Public health directives from governments around the world are advising or prohibiting large gatherings to inhibit the spread of Covid-19. This has suspended the use of our products for much of our installed customer base. Continued restrictions and the positional behavioral changes resulting from the impact of Covid-19 may continue to influence the demand for our products which typically attract a large audience. Also, the ongoing impact of Covid-19 on the world’s economy could ultimately have material adverse consequences to the Company; however, as of now, the Company is unable to determine the likelihood or degree of such adverse consequences. 16 . Subsequent events On January 4, 2022, the Company entered into a Securities Purchase Agreement with Edward D. Bagley, pursuant to which the Company agreed to issue and sell, in a private placement 1,538,461 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share, at a purchase price of $ 1.30 per share of Common Stock. The consideration for the Shares is the cancellation and termination of Mr. Bagley’s outstanding bridge loan to the Company in the principal amount of $ 2,000,000 originally issued on July 2, 2021 and amended and restated on September 11, 2021. Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder. | F-32 |