What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-19 compared with 2021-11-12 · 81 added, 119 removed, 136 unchanged (60% of the section changed)

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We have achieved this through strategic technological acquisitions as well as by internal product development.

During the first quarter of 2021, we announced two new powerful cameras that enhance the ease and visual quality of online collaboration beyond the capabilities of integrated laptop and PC cameras.

With the new ClearOne UNITE® 10, the company’s most affordable camera ever, and the feature-rich ClearOne UNITE 50 4K AF that includes Auto-Framing technology for automatic single- or multi-person capture, everyone can take on the new year with the confidence provided by stunning video that puts them in the best possible light.

We recognized that millions of people were expected to use video collaboration tools, for the first time, and the rapid societal shift to home-based and remote work left a lot of people desiring higher quality video solutions to ensure they make a good impression and enjoy reliable, clear and efficient communication.

For users who want to upgrade from the basic camera included in their laptop or PC, ClearOne has lowered the barrier of entry with its most affordable webcam ever, the UNITE 10.

The small, powerful webcam supports up to 1080p video quality and offers autofocus.

The UNITE 10 can capture five-megapixel images with a field of view up to 87 degrees, while major competitors at this price point only achieve 78-degree field of view.

The UNITE 10 attaches to any PC or laptop with a simple mounting bracket, and a 1.5m USB-A cable ensures simple connection to most modern computers.

The UNITE 10 is also available to dealers and distributors in 20 packs for commercial sale.

The new UNITE 50 4K AF camera is a major upgrade over traditional webcams and introduces ClearOne’s new Auto-Framing technology that automatically frames meeting participants to maximize screen use through intelligent image algorithms and ePTZ automation (electronic pan, tilt and zoom).

With 4K video quality at 30 Hz, auto-focus capability, 4x digital zoom, more than 8 megapixels of total resolution and an ultra-wide 110-degree field of view, the UNITE 50 4K AF ePTZ is equally capable of delivering incredible image quality from a home office as it is at capturing all participants in an office boardroom.

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

The camera can be controlled through an IR remote, further simplifying use and enabling real-time control of pan, tilt and zoom to provide greater control when capturing multi-person meeting environments.

A standard damping mount ensures fast, easy installation, while an included USB 3.0 cable provides both power and video.

Both new ClearOne cameras enable life-like video quality to web-based conferencing applications including ClearOne’s COLLABORATE® Space, WebEx™, Google Meet, Zoom™, GoToMeeting™, and Microsoft® Teams.

During February 2021, we expanded the applications for our BMA 360, Beamforming Microphone Array Ceiling Tile with the addition of a new Voice Lift feature that allows its impeccable audio to be locally amplified and heard throughout classrooms, lecture halls, and large meeting rooms.

ClearOne’s powerful breakthrough technologies, FiBeam™ and DsBeam™, already found on the BMA 360, enable exceptional new levels of Voice Lift performance.

FiBeam technology makes the BMA 360 the world’s first truly wideband, frequency-invariant beamforming mic array that provides the ultimate in natural and full-fidelity sound.

DsBeam provides unparalleled sidelobe depth below -40 dB, resulting in superior rejection of reverb and noise and providing superb clarity and intelligibility.

With the addition of the new Voice Lift feature, the BMA 360 offers everything desired in a beamforming microphone array ceiling tile—superior beamformed audio, echo cancellation, noise cancellation, auto-mixing, power amplifiers, and camera-tracking functions.

The ClearOne architecture offers easy setup and configuration for foolproof installation which benefits AV practitioners.

End-users also benefit from the BMA 360’s reduced overall system cost for maximum return on investment.

Each BMA 360 can have up to four Voice Lift zones to provide a simple and intuitive way to drive multiple speaker groups, allowing everyone to easily hear and be heard.

Built-in 4 channel power amplifiers make wiring simple, convenient, and provide a large cost savings.

ClearOne’s innovative combination of built-in power amplifiers and mix-minus zones makes the Voice Lift feature extremely simple to create and deploy.

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

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

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

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

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

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

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

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

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

all housed on encrypted secure cloud servers.

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

During July 2021 we introduced UNITE 180 ePTZ professional camera that provides a full 180-degree panoramic field-of-view with “real-time stitching” to achieve a variety of useful viewing modes for any application and environment.

Designed for professional-quality visual collaboration, conferencing, UC applications, distance learning, and more, the new UNITE 180 camera provides six viewing mode options as well as panoramic view for the ultimate in camera flexibility.

Real-time stitching creates a seamless 180-degree panoramic view of wide spaces by bringing the views of multiple lenses together as one complete image.

Large classroom settings, training centers, or any wide conferencing area are all captured and presented with perfect clarity in any of the viewing mode options.

A 4x zoom further enhances the UNITE 180 feature set.

The UNITE 180 is compatible with all popular cloud-based video collaboration applications including Microsoft Teams, Zoom, WebEx, Google Meet, ClearOne’s COLLABORATE Space and others.

In early January 2022, we introduced DIALOG ® 10 USB, the industry's only pro-quality, single-channel wireless USB microphone system offering professional-quality audio with USB connectivity for webcasting and cloud-based collaboration.

In March 2022, this new USB wireless mic system won the 2022 NSCA Excellence in Product Innovation Award.

One of only seven winners in this prestigious award program, the DIALOG® 10 USB is the industry’s only pro-quality single-channel wireless microphone system with USB connectivity for webcasting and cloud-based collaboration such as Microsoft Teams, Zoom, WebEx, and GotoMeeting.

During January, at the Las Vegas Customer Electronics Show, CES 2022, the world’s most influential annual tech event, our home office Aura™ Xceed™ BMA was singled out for exceptional innovation with a CES Picks Award, presented by Residential Systems magazine.

In early February 2022, our Versa Lite CT, a USB audio-enabled Beamforming Ceiling Tile Microphone that brings cost-effective and superb professional conferencing audio to small- and mid-sized spaces received Google Meet certification.

Google Meet ranks among the top 5 for growth in the cloud meetings and team collaboration market according to Frost & Sullivan.

In early February 2022, we were awarded a new patent for a beamforming microphone array system with distributed processing.

This patent claims a ceiling tile microphone array that can be physically separated from the processors running the beamforming algorithm.

It enables a single computing engine to run multiple beamforming algorithms for multiple microphone arrays, which can lower the overall system cost compared to an integrated design that is limited to a single computing engine with a single microphone array.

Later in the same month another ClearOne patent was granted which is related to beamforming microphone arrays with acoustic echo cancellation.

The patent, titled “Band-Limited Beamforming Microphone Array with Acoustic Echo Cancellation," describes, among other things, a microphone array with one set of microphones used for beamforming, and one or more additional microphones that are not used for beamforming, but instead are used to enhance the audio performance of the microphone array.

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

During July 2021 we also announced the market introduction of Versa Mediabar, the company’s first professional quality all-in-one audio and video capture device that combines the elegance and simplicity of a soundbar with the power of ClearOne’s intelligent audio capture and 4K camera technologies.

Versa Mediabar provides high-quality visual collaboration, audio conferencing, and UC applications from a single integrated device, offering the simplest solution available for offices, conference rooms and home offices with virtually no setup required.

With a compact design that can be mounted on a wall or attached to a video display, the Versa Mediabar connects via a single USB cable to elevate the soundbar concept into a powerful tool for virtual collaboration that includes AI-enabled auto-framing and people tracking.

The Versa All-In-One Mediabar features a built-in 4K Ultra HD camera with a 110-degree ultra wide-angle field of view and a four-element microphone array with 360-degree voice pickup and intelligent DSP that provides acoustic echo cancellation (AEC) and automatic noise reduction to ensure crystal clear audio capture.

The camera combines electronic pan, tilt and zoom functions (ePTZ) with artificial intelligence to enable auto-framing and people tracking that keeps the speaker in view even if they move around the room.

From huddle spaces and small meeting rooms to executive offices and home offices, the compact Versa Mediabar delivers all the power and clarity needed for daily virtual communications.

In addition to its professional-quality audio and video capture, the Versa Mediabar also features a powerful built-in speaker with Bluetooth connectivity that allows it to serve double duty as a fully-featured conferencing solution or a Bluetooth speaker for impromptu calls using any Bluetooth device.

These attributes make the Versa Mediabar perfect for popular cloud-based collaboration applications such as Microsoft Teams, Zoom, WebEx, Google Meet, and ClearOne’s COLLABORATE® Space.

The Versa Mediabar supports standard UVC commands for control, making it a great addition to existing systems, while dual wall and display mounting options deliver freedom of placement and movement.

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

During the first three months of 2022, we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents.

We believe the decision by the U.S.

District Court in August 2019 granting our request for a preliminary injunction to prevent Shure from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business.

The decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops Shure from further infringing the Graham patent pending a full trial.

9,813,806) pending a full trial.

Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave the way for ClearOne’s recovery from the immense harm inflicted by Shure's infringement of our valuable patents.

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

On September 1, 2020, the U.S.

District Court of Northern Illinois held that "Shure has violated the preliminary injunction order and is found in contempt because it designed the MXA910-A in such a way that allows it to be easily installed flush in most ceiling grids”.

The Court also opined that, “[t]he record is clear and convincing that Shure - through its design choices - violated the injunction order by allowing integrators to install the MXA910-A in the enjoined flush configuration.” Ultimately, the Court ordered that “Shure shall no longer manufacture, market, or sell the MXA910...”.

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

Shure expanded the original litigation in the U.S.

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

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

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

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

In February 2022 we claimed another legal victory over Shure.

The Patent Trial and Appeal Board (PTAB) of the United States Patent and Trademark Office (PTO) issued a final written decision confirming the patentability of all claims of ClearOne’s important U.S.

10,728,653 (the “’653 Patent”).

The ’653 Patent covers aspects of ClearOne’s revolutionary innovations in BMAs and relates to “a ceiling tile combined with [a] beamforming microphone array” that includes acoustic echo cancellation and “adaptive acoustic processing that automatically adjusts to a room configuration.” Shortly after the ’653 patent was issued in mid-2020, Shure initiated the case in yet another attempt to disrupt ClearOne’s patent rights, but the PTAB rejected each and every one of Shure’s seven challenges and is the latest in a long string of defeats for Shure.

In 2019, the U.S.

District Court for the Northern District of Illinois preliminarily enjoined Shure from infringing a different ClearOne patent, U.S.

9,813,806, and then in 2020 held Shure in contempt of that injunction in case no.

In November 2021, a jury in a different court, the U.S.

District Court for the District of Delaware, found a Shure design patent asserted against ClearOne to be invalid and not infringed.

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

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

Overall revenue decreased by 17% in the third quarter of 2021 when compared to the third quarter of 2020, primarily due to a sharp decline in revenues from video products partially offset by increase in revenues from microphones and audio conferencing products.

Overall revenue increased by 6% during the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to increase in revenue from microphones, especially the BMA based solutions and audio conferencing products partially offset by a decline in revenues from video products.

Revenue from video products was impacted negatively during 2021-Q3 when compared to 2020-Q3 due to lack of demand for video products and personal audio conferencing products at the same level as it was in latter half of 2020 when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act.

Overall revenue increased by 7% in the first quarter of 2022 when compared to the first quarter of 2021, primarily due to a significant increase in revenues from microphones followed by an increase in revenues from audio conferencing products and partially offset by a decrease in revenues from video products.

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

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

Our revenue is negatively impacted due to on-going harm of infringement of ClearOne’s patents despite the preliminary injunction granted against Shure as we believe Shure continues to infringe certain of our patents and violates the preliminary injunction.

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

Our revenue performance in 2022-Q1 was also impacted negatively due to the raw material supply shortages that have affected the global manufacturing of high tech products as well as due to logistics bottlenecks.

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

Our gross profit margin decreased to 40.8% during the third quarter of 2021 from 41.8% during the third quarter of 2020.

Net loss increased from $1.3 million in the third quarter of 2020 to $2.2 million in the third quarter of 2021 .

The increase in net loss was mainly due to (a) decrease in absolute gross profit dollars as a result of lower revenue (b) increased amortization costs relating to our capitalized patent defense costs, and (c) increase in trade show related marketing expenses.

During the nine months ended September 30, 2021, our absolute gross profit dollars increased to $9.3 million from $9.0 million in the same period in 2020 despite gross profit margin declining to 42.6% from 43.8% due to increase in revenues.

During the nine months ended September 30, 2021, net loss increased to $5.4 million compared to $5.0 million during the same period in 2020 mainly due to increased amortization costs relating to our capitalized patent defense costs, partially offset by higher gross profit dollars from higher revenue.

Our gross profit margin decreased to 37.3% during the first quarter of 2022 from 42.7% during the first quarter of 2021.

Net loss increased from $1.7 million in the first quarter of 2021 to $2.0 million in the first quarter of 2022 .

The increase in net loss was mainly due to (a) decrease in absolute gross profit dollars as a result of reduced gross margin, and (b) increased amortization costs relating to our capitalized patent defense costs.

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

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On the other hand, COVID-19 generated higher than normal demand for our video products and personal conferencing products due to the significant expansion of work-from-home market.

The extent of COVID-19’s effect on our operational and financial performance will depend on future developments, including the vaccination rate, effectiveness of vaccines especially on novel strains of COVID-19, government regulations, etc., all of which are uncertain and difficult to predict considering the rapidly evolving landscape.

The extent of COVID-19’s effect on our operational and financial performance keeps evolving and depends on multiple factors including the severity and infectiousness of current and future virus strains, effectiveness of vaccines especially on novel strains of COVID-19, government regulations, etc., all of which are uncertain and difficult to predict considering the rapidly evolving landscape.

Supply chain disruptions resulting from COVID-19 have caused significant fluctuations in our costs of goods resulting in a reduction of our gross margins in 2021 and in the first quarter of 2022.

We expect for these fluctuations to continue in 2022.

If the pandemic continues to be a severe worldwide health crisis, the disease could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.

Deferred Product Revenue

Deferred product revenue decreased to $57 thousand on September 30, 2021 compared to $123 thousand on December 31, 2020.

Deferred product revenue decreased to $46 thousand on March 31, 2022 compared to $54 thousand on December 31, 2021.

A detailed discussion of our results of operations follows below.

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

Results of Operations for the three and nine months ended September 30, 2021

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2021 (“ 2021 - Q3 ”) (" 2021 -YTD") and 2020 (" 2020 - Q3 ") (" 2020 -YTD") , respectively, together with the percentage of total revenue which each such item represents:

Three months ended September 30,

Nine months ended September 30,

Results of Operations for the three months ended March 31, 2022

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three months ended March 31, 2022 (“ 2022 - Q1 ”) and 2021 (" 2021 - Q1 ") , respectively, together with the percentage of total revenue which each such item represents:

Three months ended March 31,

(dollars in thousands)

Percentage Change 2021 vs 2020

Change Favorable (Adverse) in %

Cost of goods sold

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Provision for income taxes

Our revenue decreased to $7.0 million in 2021-Q3 compared to $8.4 million in 2020-Q3 primarily due to a 55% decrease in video products partially offset by increases in microphones revenue by 9% and audio conferencing revenue by 4%.

Video products suffered declines in 2021-Q3 compared to 2020-Q3 due to lack of demand for video products and personal audio conferencing products at the same level as it was in 2020-YTD when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act.

Microphones growth continued to be led by our new solutions incorporating BMA-CT and BMA 360 while our traditional ceiling mics suffered a decline in revenues.

Audio Conferencing category as a whole increased mainly due to a strong revenue performance of our professional mixers despite significant decline in revenues from personal audio conferencing products.

During the third quarter of 2021, revenues from Americas declined by 45% primarily due to decline in revenues from USA and Canada despite significant revenue growth from Latin America, while revenues from Asia Pacific, including the Middle East, India and Australia grew by 88% primarily due to overall increase in revenues from all regions except Korea, and revenues from Europe and Africa increased by 34% primarily due to significant revenue increases from Northern Europe followed by overall revenue growth in all other regions of Europe and Africa.

During the nine months ended September 30, 2021 our revenues increased from $20.5 million to $21.8 million compared to same period in 2020 due to increases in microphones revenue increasing by 27%, and audio conferencing revenue by 7%, partially offset by a decrease in video products revenue by 19%.

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

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

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

Video products suffered declines in 2021-YTD compared to 2020-YTD due to lack of demand for video products and personal audio conferencing products at the same level as it was in latter half of 2020 when the demand from work from home and learn from home markets was boosted by stimulus funding through CARES Act.

During 2021-YTD revenues from Americas declined by 22%, Asia Pacific, including the Middle East, India and Australia increased by 49% and Europe and Africa increased by 78%.

Revenues increased from all major regions except USA and Canada during 2021-YTD compared to 2020-YTD with rate of revenue growth from Southern Europe and Latin America far exceeding rate of revenue from other regions.

Our revenue increased to $7.5 million in 2022-Q1 compared to $7.0 million in 2021-Q1 primarily due to a 23% increase in microphones and a 13% increase in audio conferencing products partially offset by a 22% decrease in video products.

Microphones growth continued to be led by our new solutions incorporating BMA-CT and BMA 360 while our traditional ceiling mics also enjoyed a significant revenue increase.

Audio Conferencing category as a whole increased mainly due to a strong revenue performance of our professional mixers and personal audio conferencing products.

Video products suffered declines in 2022-Q1 compared to 2021-Q1 due to lack of demand for video products.

During the first quarter of 2022, revenues from Americas increased by 6% primarily due to increased revenues from USA despite significant revenue decreases from Latin America and Canada, while revenues from Asia Pacific, including the Middle East, India and Australia decreased by 6% primarily due to overall decrease in revenues from all regions except India and China, and revenues from Europe and Africa increased by 33% primarily due to significant revenue increases from all parts of Europe except central Europe.

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

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Our gross profit margin decreased from 42.7% during 2021-Q1 to 37.3 % during 2022 -Q1 .

The gross profit margin was negatively impacted due to increased freight and tariff costs, and inventory obsolescence and scrap costs as a percentage of revenue, partially offset by decrease in material costs and inventory adjustment costs as a percentage of revenue.

The gross profit margin was negatively impacted due to increase in material costs due to continuing supply chain constraints, and increased freight and tariff costs, which were partially offset by the absence of inventory obsolescence costs in 2022-Q1.

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

Our gross profit margin decreased from 43.8% during 2020-YTD to 42.6% during 2021-YTD.

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

Our profitability in the near-term continues to depend significantly on our revenues from professional installed audio-conferencing products.

We hold long-term inventory and if we are unable to sell our long-term inventory, our profitability might be affected by inventory write-offs and price mark-downs.

Our long-term inventory includes approximately $0.6 million of wireless microphone-related finished goods and assemblies, $0.5 million of Converge Pro and Beamforming microphone array products, $0.2 million of network media streaming products, $0.3 million of tabletop conferencing products and about $1.0 million of raw materials that will be used primarily for manufacturing professional audio conferencing products.

Our long-term inventory includes approximately $0.6 million of wireless microphone-related finished goods and assemblies, $0.3 million of Converge Pro and Beamforming microphone array products, $0.1 million of network media streaming products, $0.6 million of video products, and about $1.7 million of raw materials that will be used primarily for manufacturing professional audio conferencing products.

Any business changes that are adverse to these product lines could potentially impact our ability to sell our long-term inventory in addition to our current inventory.

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Operating expenses include sales and marketing (“S&M”) expenses, research and product development (“R&D”) expenses and general and administrative (“G&A”) expenses.

Total operating expenses were $4.9 million for 2021-Q3 compared to $4.7 million for 2020-Q3.

Total operating expenses were $14.3 million for 2021-YTD compared to $13.7 million for 2020-YTD.

Total operating expenses were $4.7 million in 2022 Q1 compared to $4.5 million in 2021-Q1.

The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items.

Sales and Marketing - S&M expenses include selling, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses.

S&M expenses for 2021-Q3 remained almost unchanged at $1.7 when compared to 2020-Q3.

The i ncreases in marketing expenses including trade-show expenses were more than offset by a decline in sales commissions.

S&M expenses for 2021-YTD increased to $5.0 million from $4.9 million for 2020-YTD.

The increases in employee sales commissions and marketing expenses were partially offset by decreases in commissions paid to independent reps, travel expenses and shipping costs.

S&M expenses in 2022-Q1 remained almost unchanged at $1.6 million when compared to 2021-Q1.

The decrease in employment expenses and consultant expenses due to a reduction in the headcount were offset by an increase in employee travel and benefits expenses and increase in advertising expenses.

Research and Product Development - R&D expenses include research and development, product line management, engineering services, and test and application expenses, including employee-related costs, outside services, expensed materials, depreciation, and an allocation of overhead expenses.

R&D expenses remained almost the same at $1.5 million for both quarters compared.

The increase in R&D project expenses were offset by decreases in legal expenses and employee related expenses.

R&D expenses remained almost the same at $4.3 million for 2021-YTD, as compared to 2020-YTD.

The decreases in employee related expenses and legal expenses were offset by increases in R&D project expenses and one-time employment termination expenses.

R&D expenses increased marginally to $1.4 million in 2022-Q1 compared to $1.3 million for 2021-Q1.

The increase was primarily due to increases in R&D project expenses, legal expenses, and employee benefits, which were partially offset by reduction in employment expenses due to reduction in the headcount.

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

G&A expenses increased from $1.4 million in 2020-Q3 to $1.7 million in 2021- Q3 .

The increase was primarily due to increased amortization costs relating to our capitalized patent defense costs and an increase in insurance expenses partially offset by a decrease in legal expenses.

G&A expenses increased from $4.5 million in 2020-YTD to $5.0 million in 2021-YTD.

The increase was primarily due to increased amortization costs relating to our capitalized patent defense costs and increase in insurance expenses partially offset by a decrease in legal expenses.

G&A expenses increased marginally from $1.7 million in 2021-Q1 to $1.8 million in 2022- Q1 .

The increase was primarily due to increased amortization costs relating to our capitalized patent defense costs, which were partially offset by a reduction in legal expenses and consulting expenses.

Other income (expense), net

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

Other income remained immaterial during the third quarter of 2021 and 2020 and between 2021-YTD and 2020-YTD.

I nterest expense increased from $0.1 million in 2020-Q3 to $0.15 million in 2021-Q3 due to increased debt during 2021-Q3 compared to 2020-Q3.

Interest expense increased to $0.4 million in 2021 -YTD compared to $ 0.3 million in 2020 -YTD due to increased debt during 2021-YTD compared to 2020-YTD.

Other income remained immaterial during the first quarter of 2022 and 2021.

I nterest expense almost remained unchanged at $0.1 million in 2022-Q1 when compared to 2021-Q1.

Provision for income taxes

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

Provision for income taxes recognized for 2021 - Q3 and 2021 -YTD relates to foreign jurisdictions .

During the first quarters of 2022 and 2021, we did not recognize any benefit from the losses incurred due to setting up of a full valuation allowance.

Provision for income taxes recognized in the first quarter of 2022 relates to foreign jurisdictions .

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

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2021, our cash and cash equivalents were approximately $9.2 million compared to $3.8 million as of December 31, 2020.

Our working capital was $ 23.7 million and $22.2 million as of September 30, 2021 and December 31, 2020, respectively.

Net cash used in opera ting activities was approximately $1.5 million in 2021 -YTD , an inc rease of cash used of approximately $1.2 million from $0.3 million of cash used in operating activities in 2020-YTD.

The increase in cash outflow was due to a negative change in operating assets and liabilities of $1.0 million, increase in non-cash charges by $0.2 million and an increase in net loss by $0.4 million.

Net cash used in investing activities was $4.2 million in 2021-YTD compared to $4.4 million in 2020-YTD, a decrease in cash used of $ 0.3 million.

The decrease in cash used in investing activities was primarily due to a decrease in capitalized patent defense costs by $0.2 million and a decrease in purchase of property and equipment by $0.2 million, offset partially by a decrease in net cash realized from marketable securities of approximately $ 0.1 million.

Net cash provided by financing activities in 2021-YTD was $11.0 million consisting primarily of net proceeds from issue of common stock and warrants for $9.3 million and proceeds from short-term bridge loan of $2.0 million offset by repayment of principal amounts due on senior convertible notes of $0.3 million compared to cash provided by financing activities of $6.3 million in 2020-YTD, which consisted of net proceeds from issue of common stock and warrants for $4.8 million and proceeds of $1.5 million from Paycheck Protection Program.

As of March 31, 2022, our cash and cash equivalents were approximately $1.4 million compared to $1.1 million as of December 31, 2021.

Our working capital was $ 19.3 million and $18.0 million as of March 31, 2022 and December 31, 2021, respectively.

Net cash used in opera ting activities was approximately $1.0 million in 2022 -Q1 , an inc rease of cash used in operating activities of approximately $1.0 million compared to 2021-Q1.

The increase in cash outflow was due to (a) a negative change in operating assets and liabilities of $0.5 million, (b) a decrease in non-cash charges by $0.2 million and (c) an increase in net loss by $0.3 million.

Net cash provided by investing activities was $1.8 million in 2022-Q1 compared to net cash used in investing activities of $1.7 million in 2021-Q1, a change in cash flow of $ 3.4 million.

The change in cash flow was primarily due to (a) an increase in proceeds from sale of marketable securities net of any purchases from $0.1 million in 2021-Q1 to $2.0 million in 2022-Q1, and (b) a decrease in capitalized patent defense costs by $1.5 million .

Net cash used in financing activities in 2022-Q1 was $0.4 million consisting primarily of repayment of principal amounts due on senior convertible notes and Paycheck Protection Program Loans compared to cash used in financing activities of $86 thousand in 2021-Q1, which consisted primarily of repayment of principal amounts due on senior convertible notes.

Capitalization of patent defense costs .

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

We have already spent approximately $25.7 million from 2016 through September 30, 2021 towards this litigation and may be required to spend more to continue our legal defense.

We have already spent approximately $28.3 million from 2016 through March 31, 2022 towards this litigation and may be required to spend more to continue our legal defense.

We believe the decision by the U.S.

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

We have also raised additional capital of $9.9 million (net of issuance costs) in 2018 by issuing common stock, $2.7 million (net of issuances costs) in 2019 by issuing senior convertible notes, $1.5 million in April 2020 by borrowing through Paycheck Protection Program, $4.8 million (net of issuances costs) in September 2020 by issuing common stock and warrants, $2.0 million in July 2021 by issuing short-term debt and $9.3 million (net of issuances costs) in September 2021 by issuing common stock and warrants.

In addition, we are generating additional cash as our inventory levels are brought down to historical levels.

We also believe that the measures taken by us will yield higher revenues in the future.

We believe, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet our operating needs through at least through November 12, 2022.

We have also raised additional capital of $9.9 million (net of issuance costs) in 2018 by issuing common stock, $2.7 million (net of issuances costs) in 2019 by issuing senior convertible notes, $1.5 million in April 2020 by borrowing through Paycheck Protection Program, $4.8 million (net of issuances costs) in September 2020 by issuing common stock and warrants, $2.0 million in July 2021 by issuing short-term debt which repaid through issue of common stock in January 2022, and $9.3 million (net of issuances costs) in September 2021 by issuing common stock and warrants.

We also believe that our core strategies of product innovation and prudent cost management will bring us back to profitability in the future.

We also believe that our strong portfolio of intellectual property and our solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs;

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If we need additional capital and are unable to secure financing, we may be required to further reduce expenses, delay product development and enhancement, or revise our strategy regarding ongoing litigation.

At September 30, 2021, we had open purchase orders of approximately $6.0 million mostly for purchase of inventory.

At September 30, 2021, we had inventory totaling $12.5 million, of which non-current inventory accounted for $3.3 million.

As of March 31, 2022, we had open purchase orders of approximately $4.8 million mostly for purchase of inventory.

As of March 31, 2022, we had inventory totaling $13.1 million, of which non-current inventory accounted for $3.2 million.

This compares to total inventories of $13.6 million and non-current inventory of $3.6 million as of December 31, 2021.

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Contractual Obligations and Commitments

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

The following table summarizes our contractual obligations as of March 31, 2022 (in millions):

Payment Due by Period

Senior convertible notes

Short-term bridge loan

Payroll Protection Plan loan

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis