What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-31 compared with 2022-04-15 · 106 added, 140 removed, 154 unchanged (62% of the section changed)

7 unchanged sentences

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

all housed on encrypted secure cloud servers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

DIALOG 10 USB won its second award in May 2022 by winning the 2022 Top New Technology (TNT) Award in the Microphone category.

In June 2022, at Infocomm 2022 in Las Vegas, Nevada, DIALOG 10 USB won two additional awards - Commercial Integrator 2022 BEST Award in the Microphones category and 2022 Sound & Video Contractor Magazine Infocomm Best in Market Award.

In January 2022, 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.

In March 2022, we were awarded a new patent titled “Conferencing Apparatus”, that describes, among other things, a beamforming microphone array with acoustic echo cancellation and a set of configurable fixed beams.

The patent goes on to describe performing a direction of arrival determination, and in response to that determination, selecting one or more of those fixed beams for audio transmission.

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

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

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

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

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

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

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

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

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

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

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

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

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

D espite the negative impact of COVID- 19 and the infringement of our patents by Shure on all professional installed products, our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") and BMA 360 resulted in overall Beamforming Microphone Array ("BMA") revenue being significantly higher than last year and also helped increase revenues from audio conferencing products, especially revenue from professional installed products.

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

Our revenue performance reflects an impact of the on-going harm of infringement of ClearOne’s patents despite the preliminary injunction granted against Shure as we believe Shure continues to infringe our patents and violates the preliminary injunction.

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

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

Our gross profit margin decreased to 41% during 2021 from 43% during 2020 .

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

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

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

We believe the decision by the U.S.

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

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

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

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

On September 1, 2020, the U.S.

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

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

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

Shure expanded the original litigation in the U.S.

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

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

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

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

In April 2022, a ClearOne patent issued titled “Ceiling Tile Microphone,” that claims, among other things, a ceiling tile beamforming microphone that is powered through Power over Ethernet (PoE).

Later in the same month another ClearOne patent was granted, also titled “Ceiling Tile Microphone,” that claims, among other things, a ceiling tile microphone that includes beamforming, acoustic echo cancellation, and auto voice tracking.

In May 2022, for the sixth time since its groundbreaking debut in 2020, the ClearOne BMA 360 microphone has been recognized by the world’s most discerning AV buyers with the prestigious Best in Market Award at ISE 2022.

The microphone was one of only three winners in this year’s award program.

The Best in Market Award program is presented by leading industry publication Sound & Video Contractor at Integrated Systems Europe (ISE), the world’s largest AV and systems integration show.

The program recognizes the most innovative technology within the AV industry, and the judges include respected AV and IT managers, directors, engineers, industry consultants and integrators.

In July 2022, we introduced the CONVERGENCE® InSite server network hardware that enables remote device management by facilitating bi-directional communications between its Cloud or Enterprise AV Manager and on-site ClearOne Pro Audio products.

At the end of October 2022, we announced the introduction of UNITE 60, a new wide angle 4K USB camera featuring AI-powered smart face and voice tracking, along with electronic PTZ (pan/tilt/zoom) capabilities.

With a 120-degree field of view, and a plug-and-play USB 3.0 connection for video, control, and power, the new UNITE® 60 camera is ideally suited for rooms such as executive offices, huddle rooms, or smaller conference rooms.

The UNITE 60 camera leverages a wide dynamic range and super-high SNR with advanced 2D and 3D noise reduction to deliver excellent visuals across varied lighting conditions.

In addition to the AI auto-tracking feature, the camera can also be controlled via IR remote or UVC protocol.

The camera can be paired with a wide variety of microphones and speakers.

In November 2022, we announced the introduction of UNITE 160, a new camera that offers cutting-edge 4K UHD performance with 12x optical zoom capabilities, remote-controlled mechanical pan and tilt as well as AI-powered smart face tracking and auto framing.

This camera is designed to capture all participants in large rooms while enabling automated focus on a moving presenter, making it ideal for larger spaces including board rooms, training centers, conference rooms and classrooms.

This new camera offers an integrated AI-based camera tracking solution for rooms that are a fit for ClearOne's single Versa Lite CT and a single camera.

This new lower-cost camera tracking configuration eliminates the need for a DSP mixer and a control system.

T hroughout 2022, we continued our efforts to protect our intellectual property rights, including through litigation.

On December 9, 2022 we entered into a confidential settlement and license agreement under which we received a one-time settlement payment of $55 million in January 2023.

Under the terms of this agreement, both parties dismissed with prejudice all the litigations between the parties and released all claims against each other in connection with the litigations.

The parties also agreed to cross-license certain patents to each other and certain covenants not to sue.

See also Part II, Item 1.

Legal Proceedings.

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.

During 2022 , our overall revenue of $ 25.2 million decreased by 13 % when compared to revenue during 2021 .

The decrease in revenues from video products and microphones were partially offset by an increase in revenues from audio conferencing.

The revenue decline was primarily due to the decline in demand for video products and due to our inability in the second half of 2022 to source adequate inventory to meet the demand for professional audio products and BMA due to the ongoing transition of manufacturing of our products from China to Singapore by our EMS provider and the increased costs associated with the electronic raw material supply shortages that have affected the global manufacturing of high tech products.

We expect these supply shortages and associated increased costs to continue through at least the first half of 2023.

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

Our gross profit margin decreased to 38 % during 2022 from 41% in 2021 .

Net loss of $7 .7 million in 2021 changed to net income of $21.6 million in 2022 .

The change from net loss to net income was primarily due to the recognition of a gain of $33.6 million and included under other income related to the one-time legal settlement receivable of $55 million net of unamortized capitalized legal expenses of $21.4 million.

This gain was partially offset by operating loss of $7.2 million and a tax provision of $6.9 million.

Industry conditions

We operate in a very dynamic and highly competitive industry which is dominated on the one hand by a few players with respect to certain products like traditional video conferencing appliances while on the other influenced heavily by a fragmented reseller market consisting of numerous regional and local players.

We operate in a very dynamic and highly competitive industry which is dominated on the one hand by a few players with respect to certain products like traditional video conferencing appliances while on the other hand influenced heavily by a fragmented reseller market consisting of numerous regional and local players.

The industry is also characterized by venture capitalist funded start-ups and private companies willing to fund cumulative cash losses in order to gain market share and achieve certain non-financial goals.

It has become increasingly important to have higher interoperability with other products in the audio visual market as well as with leading video conferencing service providers like Microsoft and Zoom.

Economic conditions, challenges and risks

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Our strength in this space is largely due to our fully integrated suite of products consisting of DSP mixers, wide range of professional microphone products and video collaboration products.

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

Despite our strong leadership position in the installed professional audio conferencing market, we face challenges to revenue growth due to the limited size of the market, pricing pressures from new competitors attracted to the commercial market due to higher margins, our limited ability to be interoperable with other audio visual products in the market, and the lack of certifications from Microsoft.

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

We face intense competition in this market from well-established market leaders as well as emerging players rich with marketing funds.

We expect our strategy of combining Collaborate Space , our cloud-based video conferencing product, Collaborate Live , our appliance-based media collaboration product, our high quality professional cameras, and our high-end audio conferencing technology will generate high growth in the near future.

We expect our strategy of making our products more interoperable with other audio-visual products, continuing to improve the quality of our high-end audio conferencing products and microphones, and offering a wide range of innovative professional cameras will generate high growth in the near future.

We derive a significant portion of our revenue (approximately 52% in 2022 ) from international operations and expect this trend to continue in the future.

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

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

We expect for these fluctuations to continue in 2022.

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 2022.

We expect these fluctuations to continue in 2023.

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

Deferred Revenue

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

De ferred revenue increased from $54 thousand in 2021 to $63 thousand in 2022 due to a small increase in new subscriptions to the video conferencing software.

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

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Operating loss

Loss before income taxes

Income (loss) before income taxes

Provision for (benefit from) income taxes

Net income (loss)

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

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

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

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

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

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

Personal conferencing products declined heavily as CARES Act stimulus induced growth in 2021 could not be replicated in 2020.

We believe t he on-going infringement of ClearOne’s patents is the major cause of our revenue decline in certain categories of audio conferencing and microphones.

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

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

Our revenue decreased by 13% to $25.2 million in 2022 compared to $29.0 million of revenue in 2021 .

The highest decline in revenue was seen in video products with a 45 % decrease, followed by a decrease in microphones of 10%.

These decreases were partially offset by a 2% increase in revenues from audio conferencing.

Video products suffered a decline in revenues in 2022 compared to 2021 due to a lack of demand for video products due to bottoming of demand for the work from home and learn from home markets and due to extreme pricing pressures.

Except for professional audio conferencing category under audio conferencing products every other category suffered revenue decreases during 2022.

Cameras as a category declined the most followed by video conferencing equipment and personal audio conferencing categories.

Revenue from these categories declined due to reduced demand for these products.

Revenue from beamforming microphone arrays reduced mainly due to our inability to procure adequate supply of inventory due to the ongoing transition of manufacturing from China to Singapore.

We expect our revenues for professional audio conferencing and beamforming microphone arrays to be adversely impacted at least through the first half of 2023 due to the delay in the completion of transition of outsourced manufacturing from China to Singapore.

We believe our revenues in the second half of 2023 will be positively impacted by new product introductions, which would leverage our advanced beamforming microphone array technology and our recent initiative to improve the interoperability of our products with audiovisual products made by other manufacturers.

Despite the introduction of new cameras in 2022, we expect the challenging market conditions for our video products to continue through 2023.

The share of audio conferencing products in our product mix increased significantly from 40% in 2021 to 47 % in 2022 .

The share of microphones in the revenue mix increased slightly from 38% in 2021 to 39 % in 2022 .

Share of video products in the revenue mix declined significantly from 22% in 2021 to 14% in 2022 .

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

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

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

During 2022 , revenue decreased significantly in all regions of the world.

Asia Pacific inclu ding the Middle East decreased by 5 %, Europe and Africa decreased by 24 % a nd the Americas decreased by approximately 12 %.

We believe, although there can be no assurance, that we can return to revenue growth and generating operating profits through our strategic initiatives namely product innovation, focus on core products and cost reduction.

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

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

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

Our long-term inventory includes approximately $0.5 million of wireless microphone-related finished goods and assemblies, $ 1 million of video products and about $1 million of raw materials that will be used primarily for manufacturing installed professional audio conferencing products.

Operating Expenses and Profits (Losses)

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

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

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

S&M expenses in 2022 decreased to $5.5 million, compared to $6.7 million in 2021.

The decrease was primarily due to (a) decreases in employment expenses and consultant expenses, (b) a decrease in commissions paid to employees and full-time consultants (c) a decrease in employee benefits costs, and (d) a decrease in costs of inventory used for sales demonstrations.

This overall decrease was partially offset by (a) an increase in trade-show-related costs, (b) an increase in travel expenses, and (c) an increase in commissions paid to independent manufacturer representatives.

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

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

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

R& D expenses decreased from $5.8 million in 2021 to $4.4 million in 2022 .

The decrease was primarily due to (a) a decrease in project-related expenses and (b) a decrease in employment expenses including salaries and benefits.

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

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

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

G&A expenses decreased marginally to $6.8 million in 2022, compared to $6.9 million in 2021.

The decrease was primarily due to (a) a decrease in legal expenses (b) a decrease in consulting expenses, and (c) a decrease in regular employment expenses including salaries and benefits.

This decrease was mostly offset by (a) increases in bonuses paid to employees and executives, and (b) an increase in amortization of capitalized legal costs related to patents litigation.

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

Other income (expense), net

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

Other income during 2022 includes (a) $1.5 million recognized on the gain arising from the CARES Act Paycheck Protection Program loan forgiveness, and (b) a gain recognized of $33.6 million related to the one-time legal settlement receivable of $55 million, net of unamortized capitalized legal expenses of $21.4 million.

Other items remained immaterial in 2022 and 2021.

I nterest expense decreased to $0.4 million in 2022 compared to $0.5 million in 2021.

Provision for income taxes

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

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

The significant change in income taxes was primarily due to recognition of income tax refunds receivable of approximately $7.1 million arising out of the carryback of net operating losses that became possible due to the enactment of the CARES Act.

Since the Company had set up a full valuation allowance against net operating losses from earlier years, the carryback of these losses resulted in the recognition of a substantial tax benefits.

The effective tax provision rate was 25 % in 2022, comp ared to 4% effective tax benefit rate during 2021 .

Income tax provision for 2022 was $6.9 million as compared to an income tax benefit of $0.3 million in 2021.

The significant change in income taxes was primarily due to an increase in net income due to the recognition of a one-time settlement payment.

We have been recording a valuation allowance against net deferred tax assets since 2018 and have not been claiming tax benefit for our losses as we have concluded that it is more likely than not that our deferred tax assets were not realizable, primarily due to our recent pre-tax losses.

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Our working capital was $ 69.3 million and $18.0 million as of December 31, 2022 and 2021 , respectively.

Net cash flows used in operating activities were approximately $4.4 million during 2021 , an increase of ap proximately $3.4 million from $1.0 million used in opera ting activities in 2020 .

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

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

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

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

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

Net cash flows used in operating activities were approximately $4.2 million during 2022 , a decrease of ap proximately $0.2 million from $4.4 million used in opera ting activities in 2021 .

The decrease in cash used was due to (a) a change in net income by $28.3 million from a net loss of $7.7 million in 2021 to a net income of $20.6 million in 2022 , (b) a decrease of $35.7 million in non-cash charges primarily due to the recognition of a gain from the one-time settlement payment which was not received before the end of the year, and (c) a decrease in cash outflows due to change in operating assets and liabilities of $7.6 million which included among other things cash inflows due to (i) a $6.8 million change in income tax receivable and (ii) a $5.5 million change in accounts payable, partially offset by (iii) a $3.2 million change in prepaid expenses.

Net cash provided by investing activities was $2.1 million in 2022 compared to $8.5 million used in investing activities in 2022 , a decrease in cash used of $10.6 million.

The decrease in cash used in investing activities in 2022 was primarily due to (a) a decrease of $7.1 million in capitalized legal spending, and (b) an increase in net cash inflows from sale of marketable securities of approximately $3.2 million.

Net cash provided by financing activities was $2.1 million during 2022 compared to net cash provided by financing activities of $10.2 million during 2021, a decrease in cash provided of $8.2 million.

The decrease was primarily due to a decrease in cash raised through equity and debt issuances of $11.3 million in 2021 to $2.0 million in 2022.

This decrease was partially offset by $0.8 million refund of CARES Act Paycheck Protection Program Loan.

Capitalization of patent defense costs .

We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable.

We capitalized external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable.

When we capitalize patent defense costs we amortize the costs over the remaining estimated useful life of the patent, which is 15 to 17 y ears.

During 2022 we spent $ 0.7 million of legal costs related to the defense of our patents and capitalized the entire amount.

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

We have already spent approximately $28.2 million from 2016 through 2021 towards this litigation and may be required to spend more to continue our legal defense.

We believe the decision by the U.S.

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

We believe that the decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from further infringing our Graham patent (U.S.

9,813,806 ) pending a full trial.

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

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

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

As of December 31, 2022, the unamortized balance of capitalized legal expenses of $21.4 million was fully netted against the one-time settlement amount of $55 million and a gain of $33.6 million was recognized.

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

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

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

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

We believe, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet our operating needs through at least through April 15, 2023.

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

however, there can be no assurance that, if needed, we will be successful in obtaining the necessary funds through equity or debt financing.

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

In order to maintain liquidity, the Company has been actively engaged in preserving cash by implementing company-wide cost reduction measures and raising additional capital.

The company 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 short-term notes and issuing common stock and warrants.

In January 2022, the Company issued $2,000 in common stock as consideration for the cancellation and termination of the short-term notes.

In October 2022, the Company issued short term notes to raise $2,000.

In addition, the Company has been generating additional cash as our inventory levels are brought down to historical levels.

The Company also believes that the Company's core strategies of product innovation and prudent cost management will bring the company back to profitability in the future.

The Company believes, although there can be no assurance, that all of these measures and effective management of working capital, along with the current cash balance after the receipt of proceeds from legal settlement, will provide the liquidity needed to meet our operating needs through at least March 31, 2024.

As of December 31, 2022 , we had open purchase orders of approximately $2.0 million mostly for purchase of inventory.

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Senior Convertible Notes and short-term notes

Payroll Protection Program borrowing

Operating lease obligations

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Not Applicable

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements and supplementary data required by this are included herein as a separate section of this Form 10-K, beginning on page F-1, and are incorporated in this Item 8 by reference.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 7. Management’s Discussion and Analysis