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Item 9A. Controls and Procedures

2023-03-31 compared with 2022-04-15 · 172 added, 322 removed, 955 unchanged (34% of the section changed)

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Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Senior Vice President of Finance, as appropriate, to allow for timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, we have completed an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Senior Vice President of Finance, of the effectiveness and the design and operation of our disclosure controls and pr ocedures as of December 31, 2021 .

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, we have completed an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness and the design and operation of our disclosure controls and pr ocedures as of December 31, 2022 .

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

Based upon this evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective at a reasonable assuran ce level as of December 31, 2021 .

Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective at a reasonable assuran ce level as of December 31, 2022 .

The effectiveness of any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing, and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate improper conduct completely.

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Not Applicable.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth certain information regarding our directors and executive officers as of April 15, 2022 .

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth certain information regarding our directors and executive officers as of March 31, 2022.

Director or Officer Since

Zeynep “Zee” Hakimoglu

Chief Executive Officer, and President

Chief Executive Officer

Chairman, and Director *

Narsi Narayanan

Senior Vice President of Finance and Corporate Secretary

Chief Financial Officer and Corporate Secretary

Member of the Audit and Compliance Committee, Compensation Committee and Nominating Committee

Zee Hakimoglu is our President and Chief Executive Officer.

She joined our Company in December 2003 as Vice President of Product Line Management with additional responsibility for Research & Development and was appointed President and Chief Executive Officer in July 2004;

she has served as a director of our Company since April 2006 and was named Chairman of the Board in July 2007.

She served as Chairman of the Board till February 2022.

Prior to joining ClearOne, Ms.

Hakimoglu has held senior executive level positions for a variety of high-tech Silicon Valley firms in such areas as business development, product marketing, engineering and product-line management.

She served as Vice President of Product Line Management for a publicly traded developer of fiber optic subsystems and components, from December 2001 to December 2002;

and, President of a manufacturer of fiber optic test equipment and components, from August 2000 to November 2001.

From October 1998 to August 2000, she was Vice President of Business Development for Kaifa Technology and was instrumental in its acquisition by E-Tek Dynamics and later by JDS Uniphase.

Through these acquisitions, she held the role of Deputy General Manager of the Kaifa Technology business unit.

From May 1982 until it was acquired in September 1996, Ms.

Hakimoglu held various positions including Vice President of Wireless Engineering and Vice President of the Wireless Business Unit for Aydin Corp., a global telecommunications equipment company that formerly traded on the New York Stock Exchange.

Hakimoglu earned a Bachelor of Science Degree in Physics from California State College, Sonoma, and a Master's Degree in Physics from Drexel University.

Derek Graham is our Chief Executive Officer.

He was appointed as Interim CEO in May 2022 and was confirmed as the permanent CEO in January 2023.

He joined our company in July 2003 as Lead Engineer for Conferencing Cameras.

In 2004, he was promoted to Engineering Operations Manager.

In 2006, he was promoted to Director of Research and Development.

In 2007, he was promoted to Sr.

Director of Research and Development.

In 2009, he was promoted to Vice President of Research and Development.

In 2011, he was promoted to Sr.

Vice President of Research and Development.

In those prior roles, Derek was responsible for funding, staffing, and execution of parallel engineering programs that resulted in successful development of professionally installed audio and video conferencing, video streaming, wireless microphone, digital signage, and camera products.

Derek is a named inventor on 13 patents.

Prior to joining ClearOne, Derek held engineering and management positions at Intel Corporation in the areas of audio conferencing and telephony technologies.

Graham earned a Bachelor of Science in Electrical Engineering, with highest honors, and a Master’s Degree in Electrical Engineering from the Georgia Institute of Technology.

Hendricks has served as a director of our Company since June 2003.

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Bagley beneficially owns 45% of our issued and outstanding common stock.

L Robinson has served as a director of our Company since July 2015.

He was appointed Chairman of the Board in February 2022.

L Robinson has served as a director of our company since July 2015 and was named Chairman of the Board in February 2022.

Robinson spent fourteen years in private practice as a corporate attorney, including eleven years as a partner in the Salt Lake City, Utah law firm of Blackburn & Stoll, LC.

Robinson's law practice focused on securities, corporate and other business transactions.

Since 2009, Mr.

Robinson has been principally employed by MicroPower Global Limited, a company in the semiconductor business.

For the past five years, Mr.

Robinson has been principally employed by MicroPower Global Limited, a company in the semiconductor business and as a private attorney.

At MicroPower, Mr.

Robinson has acted as General Counsel, Chief Financial Officer and a director.

Robinson also maintains a small law practice and serves as counsel to a number of companies in the fields of genetics, regenerative medicine, transportation and commercial construction.

He also served as General Counsel, Chief Financial Officer and a director to a genetic research company from 2008 until 2015.

Robinson previously acted as General Counsel and Chief Financial Officer to a commercial construction company from 2007 until 2008 which had revenues in excess of $100 million during his tenure.

Robinson has acted as General Counsel, Chief Financial Officer and director.

Robinson also maintains a law practice and serves as counsel to a number of companies in the fields of regenerative medicine, transportation, commercial construction and nonprofit.

Robinson previously served as chief financial officer, in-house counsel, secretary and treasurer of ActiveCare, Inc.

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Bankruptcy Code on July 15, 2018.

His legal practice includes working with companies in connection with public and private offerings of securities, corporate partnering, mergers and acquisitions, licensing technology transfer, contracts and construction.

His legal practice included working with companies in connection with public and private offerings of securities, corporate partnering, mergers and acquisitions, licensing technology transfer, contracts and construction.

He graduated from the University of Utah with honors with a B.S.

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Bruce Whaley was appointed a director of our Company effective April 16, 2019.

Whaley has extensive experience as a stock broker for nearly five decades.

Whaley has extensive experience as a stockbroker for nearly five decades.

Whaley is currently a broker trading at Wilson & Davis, a regional brokerage firm based in Salt Lake City, Utah.

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Whaley also holds a real estate license and works as a real estate agent for Coldwell Banker.

Whaley attended University of Utah between 1968 and 1971 and studied many subjects including business administration, accounting and finance.

Whaley attended the University of Utah between 1968 and 1971 and studied many subjects including business administration, accounting and finance.

He did not graduate with a degree.

Narsi Narayanan (now serving as Senior Vice President of Finance) has served as our Vice President of Finance since July 2009 and three decades of professional experience in the areas of accounting, finance and taxes.

Narsi Narayanan has served in the roles of Vice President of Finance and Senior Vice President of Finance since July 2009.

He has over three decades of professional experience in the areas of accounting, finance and taxes.

Prior to joining our Company, he managed the SEC reporting, US GAAP accounting research, Sarbanes-Oxley Act (“SOX”) compliance and other financial reporting functions from August 2007 through February 2009 at Solo Cup Company, a publicly-reporting international consumer products company.

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The Board of Directors has determined that Eric L.

Robinson is an “audit committee financial expert” and each member is independent in accordance with applicable rules and regulations of NASDAQ and the SEC.

Robinson is an “audit committee financial expert” and each member is independe nt in accordance with applicable rules and regulations of NASDAQ and the SEC.

EXECUTIVE COMPENSATION

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All Other Compensation

Zeynep Hakimoglu - Chief Executive Officer and President

Derek Graham, Chief Executive Officer ( 1 )

Year ended December 31, 2022

Narsi Narayanan - Chief Financial Officer

Year ended December 31, 2022

Narsi Narayanan - Senior Vice President of Finance

Year ended December 31, 2021

Zeynep Hakimoglu - Chief Executive Officer and President (2)

Year ended December 31, 2022

The amounts in the “Option Awards” column reflect the aggregate grant date fair value of awards of stock options granted pursuant to our long-term incentive plans during the periods reported above, computed in accordance with FASB ASC Topic 718, Compensation - Stock Compensation.

The assumptions made in the valuation of our option awards and the material terms of option awards are disclosed in Note 10 - Share-Based Compensation in our Notes to Consolidated Financial Statements included in Part IV of this Form 10-K.

Year ended December 31, 2021

Graham was appointed as Interim CEO on May 24, 2022 and became permanent CEO on Jan 26, 2023.

( 2 ) Zeynep Hakimoglu served as CEO and President till May 24, 2022, when her employment with ClearOne was terminated.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

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Unexercisable

Zeynep Hakimoglu

Narsi Narayanan

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There were no exercises of stock options by named executive officers during 2022.

During 2021, 16,666 shares vested for Zeynep Hakimoglu and 10,000 shares vested for Narsi Narayanan.

DIRECTOR COMPENSATION

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Other Compensation

Historically, the Company's non-employee directors have received an annual grant of stock options to purchase 10,000 shares of the Company's common stock, of which one-third of the shares vest on the first anniversary of the grant date, and the remaining vest in equal monthly increments over the subsequent 24-month period.

During 2021, each non-executive director named above received a grant of stock options to purchase 10,000 shares with 6-year expiry period.

T he amounts in the “Option Awards” column reflect the aggregate grant date fair value of awards of stock options granted pursuant to our long-term incentive plans during the periods reported above, computed in accordance with FASB ASC Topic 718 , Compensation - Stock Compensation.

All directors are reimbursed by the Company for their out-of-pocket travel and related expenses, if any, incurred in attending all Board of Directors and committee meetings.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding ownership of our common stock as of April 15, 2022, except as otherwise stated, by ( i ) each director and nominee for director, (ii) the named executive officers, (iii) all of our named executive officers and directors as a group, and (iv) each person known to us to be the beneficial owner of more than 5% of our outstanding common stock.

The following table sets forth certain information regarding ownership of our common stock as of March 31, 2022, except as otherwise stated, by (i) each director and nominee for director, (ii) the named executive officers, (iii) all of our named executive officers and directors as a group, and (iv) each person known to us to be the beneficial owner of more than 5% of our outstanding common stock.

Shares Beneficially Owned

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Directors and Executive Officers:

Zeynep Hakimoglu

Narsi Narayanan

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Except as otherwise indicated, each person may be reached at our corporate offices c/o ClearOne, Inc., 5225 Wiley Post Way, Suite 500, Salt Lake City, Utah 84116.

The percentages shown in Column (B) are calculated based on 22,410,126 shares of common stock outstanding on April 15, 2022.

The numbers shown in Column (D) and percentages shown in Column (E) include the shares of common stock actually owned as of April 15, 2022 and the shares of common stock that the identified person or group had the right to acquire within 60 days of such date.

In calculating the percentage of ownership, all shares of common stock that each identified person or group had the right to acquire within 60 days of April 15, 2022 upon the exercise of the stock options , secured convertible notes and warrants shown in Column (C) are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by the persons or groups listed above.

The percentages shown in Column (B) are calculated based on 23,955,767 shares of common stock outstanding on March 31, 2022.

The numbers shown in Column (D) and percentages shown in Column (E) include the shares of common stock actually owned as of March 31, 2022 and the shares of common stock that the identified person or group had the right to acquire within 60 days of such date.

In calculating the percentage of ownership, all shares of common stock that each identified person or group had the right to acquire within 60 days of March 31, 2022 upon the exercise of the stock options, secured convertible notes and warrants shown in Column (C) are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by the persons or groups listed above.

This information is based upon the Form 3 filed with the SEC as of July 20, 2020.

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This information is based upon Schedule 13D/A and Form 4 as filed by Mr.

Bagley with the SEC in September 2020 and December 2020, respectively.

Bagley with the SEC in September 2020 and January 2022, respectively.

Bryan Bagley, who resigned as Director effective November 6, 2012, is the son of Edward D.

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Bagley is paid a fee of $5,000 per month and is eligible to participate in our equity incentive programs and will be granted stock options commensurate with grants of stock options made to our directors.

During 2021, he was paid $60,000 as consulting fees and was awarded a grant of stock option to purchase 10,000 shares.

During 2022, he was paid $60,000 as consulting fees.

During 2022, he did not receive any grant of stock options.

Director Independence

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Registration Rights Agreement.

Confidential Separation Agreement and General Release.

Promissory Note dated October 28, 2022.

Confidential Settlement and License Agreement.

Code of Ethics, approved by the Board of Directors on August 23, 2006

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The cover page from this Annual Report on Form 10-K formatted in Inline XBRL

* Constitutes a management contract or compensatory plan or arrangement.

* Certain confidential portions of this exhibit have been excluded from this exhibit in accordance with Rule 24b-2 because such information is (1) not material, and (2) the Company customarily and actually treats that information as private or confidential.

† Filed herewith

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CLEARONE, INC.

/s/ Zeynep Hakimoglu

Zeynep Hakimoglu

President and Chief Executive Officer

April 15, 2022

Chief Executive Officer

March 31, 2023

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Zeynep Hakimoglu

/s/ Narsi Narayanan

Zeynep Hakimoglu

Narsi Narayanan

President and Chief Executive Officer

Senior Vice President of Finance

Chief Financial Officer

(Principal Executive Officer)

(Principal Accounting and Principal Financial Officer)

April 15, 2022

March 31, 2023

Director and Chairman of the Board

April 15, 2022

March 31, 2023

/s/ Bruce Whaley

April 15, 2022

March 31, 2023

CLEARONE, INC.

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Report of Independent Registered Public Accounting Firm (Auditor ID:

Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2021 and 2020

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021 F-3

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2022 and 2021 F-4

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2022 and 2021 F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-6

Notes to Consolidated Financial Statements F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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We have audited the accompanying consolidated balance sheets of ClearOne, Inc.

and subsidiaries (collectively, the Company) as of December 31, 2021 and 2020 , and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021 , and the related notes (collectively referred to as the consolidated financial statements).

and subsidiaries (collectively, the Company) as of December 31, 2022 and 2021 , and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022 , and the related notes (collectively referred to as the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material aspects, the financial position of ClearOne as of December 31, 2022 and 2021 , and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022 , in conformity with accounting principles generally accepted in the United States of America.

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We believe that our audits provide a reasonable basis for our opinion.

Emphasis of Matter - Gain on Legal Settlement

As discussed more fully in Note 8 to the consolidated financial statements, the Company and another party entered into a confidential settlement and license agreement (the Agreement) on December 9, 2022.

Under the terms of the Agreement, all of the litigations between the parties were dismissed with prejudice and both the Company and the other party released all claims against the other arising from or in connection with the matters that were subject to the litigations.

The Company received a one-time settlement payment in early January 2023 in the amount of $55,000,000 after the dismissal of the litigations in accordance with the Agreement.

The Company and the other party agreed to certain covenants not to sue.

As of December 31, 2022, the Company recorded a receivable of $55,000,000 for the proceeds.

During the year ended December 31, 2022, the Company recognized a gain of $33,623,000, after deducting the entire capitalized legal costs totaling $27,374,000 net of amortized costs of $5,997,000.

Critical Audit Matters

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Capitalized patent defense costs

As described in Notes 3 and 8 to the consolidated financial statements, the Company is involved in litigation against a competitor related to intellectual property rights.

As described in Notes 3 and 8 to the consolidated financial statements, the Company was involved in litigation against a competitor related to intellectual property rights.

The Company has capitalized legal expenses related to the defense of certain patents as intangible assets on the balance sheet based on the satisfaction of two conditions:

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(1) evaluating management’s process for estimating obsolete and slow moving inventory levels, (2) comparing historical sales trends and inventory consumption reports for selected products to quantities on hand in order to evaluate potential excess or obsolete inventory, (3) evaluating and discussing forecasts and expectations with management as well as assumptions regarding alternative uses, and (4) evaluating the reasonableness of management’s assumptions.

We have served as the Company’s auditor since October 14, 2015.

/s/ TANNER LLC

Salt Lake City, Utah

April 15, 2022

March 31, 2023

We have served as the Company’s auditor since October 14, 2015.

CLEARONE, INC.

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Marketable securities

Receivables, net of allowance for doubtful accounts of $ 326 and $ 506 , respectively

Legal settlement receivable

Receivables, net of allowance for doubtful accounts of $ 326

Inventories, net

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Shareholders’ equity:

Common stock, par value $ 0.001 , 50,000,000 shares authorized, 22,410,126 and 18,775,773 s hares issued and outstanding , respectively

Common stock, par val ue $ 0.001 , 50,000,000 shares authorized, 23,955,767 and 22,410,126 shares i ssued and outstanding , respectively

Additional paid-in capital

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Other income, net

Loss before income taxes

Income (loss) before income taxes

Provision for (benefit from) income taxes

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Other comprehensive income (loss):

Unrealized gain (loss) on available-for-sale securities, net of tax

Unrealized loss on available-for-sale securities, net of tax

Change in foreign currency translation adjustment

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Common stock and paid-in capital

Balance, beginning of period

Balance, beginning of year

Issuance of common stock

Issuance of warrants and senior convertible notes

Share-based compensation expense

Proceeds from employee stock purchase plan

Balance, end of period

Balance, end of year

Accumulated other comprehensive loss

Balance, beginning of period

Unrealized gain (loss) on available-for-sale securities, net of tax

Balance, beginning of year

Unrealized loss on available-for-sale securities, net of tax

Foreign currency translation adjustment

Balance, end of period

Balance, end of year

Accumulated deficit

Balance, beginning of period

Balance, beginning of year

Net income (loss)

Balance, end of period

Balance, end of year

Total shareholders' equity

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Share-based compensation expense

Provision for doubtful accounts, net

Change of inventory to net realizable value

Loss on disposal of assets

Gain recognized on Paycheck Protection Plan Loan forgiveness

Gain on legal settlement proceeds, net of capitalized legal costs less amortization

Changes in operating assets and liabilities:

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Purchase of marketable securities

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

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Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents at the beginning of the year

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Cash paid for interest

Supplemental disclosure of non-cash investing and financing activities

Right-of-use assets obtained in exchange for lease obligations

Issue of common stock in consideration of cancellation of debt

See accompanying notes

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Basis of Presentation:

Fiscal Year – This report on Form 10-K includes consolidated balance sheets for t he years ended December 31, 2021 and 2020 and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the years 2021 and 2020 .

Fiscal Year – This report on Form 10-K includes consolidated balance sheets for t he years ended December 31, 2022 and 2021 and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the years ended December 31, 2022 and 2021 .

Consolidation – These consolidated financial statements include the financial statements of ClearOne, Inc.

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At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limits.

As of December 31, 2022, there was one cash account that exceeded federally insured limits, in the amount of $ 564 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Leasehold improvement amortization is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the related assets.

Intangible Assets – Intangible assets acquired in a purchase business combination are amortized over their useful lives unless these lives are determined to be indefinite.

Intangible Assets – Intangible assets are amortized over their useful lives unless these lives are determined to be indefinite.

Intangible assets are carried at cost, less accumulated amortization.

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Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell.

Recent accounting standard related to leases:

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”).

This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Early adoption is permitted.

In July 2018, the FASB issued ASU No.

2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, using the optional transition method.

The Company elected to use certain practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases.

There was an increase in assets of $ 2,966 and liabilities of $ 3,101 due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases with the difference of $ 135 related to existing deferred rent that reduced the ROU asset recorded.

The standard did not have a material impact on our condensed consolidated statements of operations and comprehensive income (loss).

Change in accounting policy related to leases:

We determine if an arrangement is a lease at inception.

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Under the available practical expedient, we account for the lease and non-lease components as a single lease component.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

Revenue Recognition Policy:

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The Company evaluates certain factors including the customer’s ability to pay (or credit risk).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled.

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Deferred gross profit

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

The Company offers rebates and market development funds to certain of its distributors, dealers/resellers, and end-users based upon the volume of product purchased by them.

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The inventory due from the customer is accounted at cost or market value whichever is lower.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

The following table disaggregates the Company’s revenue into primary product groups:

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Balance at end of year

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

Advertising – The Company expenses advertising costs as incurred.

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Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of such allowances.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

The valuation allowance is based on our estimates of future taxable income and the period over which we expect the deferred tax assets to be recovered.

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In 2018 , as a result of negative evidence, principally three years of cumulative pre-tax operating losses, we concluded that it was more likely than not that net operating losses, tax credits and other deferred tax assets were not realizable and therefore, we recorded a full valuation allowance against those net deferred tax assets.

We continue to record full valuation against our net deferred tax assets.

Adjustments to the valuation allowance increase or decrease the Company’s income tax provision or benefit.

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Net income (loss)

Interest adjustment under if-converted method

Basic weighted average shares

Dilutive common stock equivalents using treasury stock method

Dilutive common stock equivalents using if-converted method

Diluted weighted average shares

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Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

Share-Based Payment – We estimate the fair value of stock options using the Black-Scholes option-pricing model, which requires certain estimates, including an expected forfeiture rate and expected term of options granted.

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The Company has determined that other recently issued accounting standards will not have a material impact on its consolidated financial position, results of operations or cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

As of December 31, 2022 , cash and cash equivalents were approximately $ 984 compared to $ 1,071 as of December 31, 2021 .

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Net cash used in operating activities was $ 4,179 for the twelve months ended December 31, 2022, a decrease of cash used of $ 215 from $ 4,394 of cash used in operating activities in the twelve months ended December 31, 2021.

The Company is currently pursuing all available legal remedies to defend its strategic patents from infringement.

The Company has already spent approximately $ 28,156 from 2016 through 2021 towards this litigation and may be required to spend more to continue its legal defense.

The Company has been actively engaged in preserving cash by suspending its dividend program, allowing the share repurchase program to expire in 2018 and implementing company-wide cost reduction measures.

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

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

The Company also believes that the measures taken by it will continue to yield higher revenues in the future.

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

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

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

If the Company needs additional capital and is unable to secure financing, it may be required to further reduce expenses, delay product development and enhancement, or revise its strategy regarding ongoing litigation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

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.

Marketable Securities

3 unchanged sentences

Dividend and interest income are recognized when earned.

The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of security at December 31, 2021 and 2020 were as follows:

Amortized cost

9 unchanged sentences

Total available-for-sale securities

December 31, 2020

Available-for-sale securities:

Corporate bonds and notes

Municipal bonds

Total available-for-sale securities

Maturities of marketable securities classified as available-for-sale securities were as follows at December 31, 2021 :

Due within one year

Due after one year through five years

Total available-for-sale securities

There were no debt securities in an unrealized loss position as of December 31, 2021.

There were no available-for-sale securities as of December 31, 2022 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9 unchanged sentences

Total intangible assets, net

P atents and technological know-how include capitalized legal expenses, net of amortizati o n of $ 22,637 rela ted to our defense of patents from infringement by our competitors.

Legal expenses have been capitalized upon satisfaction of two conditions:

P atents and technological know-how as of December 31, 2021 include capitalized legal expenses, net of amortizati o n of $ 22,637 rela ted to our defense of patents from infringement by our competitors.

Legal expenses were capitalized upon satisfaction of two conditions:

(a) a determination being made that a successful defense of this litigation is probable, and (b) that the monetary benefits arising out of such successful defense will be in excess of the costs for the defense.

The Company capitalized $ 737 and $ 7,836 of litigation expenses related to this matter during the twelve months ended December 31, 2022 and 2021 , respectively.

A gain of $ 33,623 was recognized and included under other income after deducting the entire capitalized legal costs amounting to $ 27,374 net of amortized costs of $ 5,997 from the one-time legal settlement amount of $ 55,000 , which is included in the balance sheet under legal settlement receivable as of December 31, 2022.

Please refer to Note 8 - Commitments and Contingencies for additional information.

28 unchanged sentences

Rent expense for the years ended December 31, 2022 and 2021 was as follows:

W e occup y a 1,350 square-foot facility in Gainesville, Florida under the terms of an operating lease expiring in February 2023 .

W e occup y a 1,350 square-foot facility in Gainesville, Florida under the terms of an operating lease that expires in February 2028 .

The Gainesville facility is used primarily to support our research and development activities.

We occupy a 21,443 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in March 2024 , with an option to extend for additional five years .

We occupy a 21,443 square-foot facility in Salt Lake City, Utah under the terms of an operating lease, which has been amended in February 2023 to expire in February 2028.

Under the terms of this amendment , we will reduce our space to approximately 9,402 square feet.

The facility supports our principal administrative, sales, marketing, customer support, and research and product development activities.

We occupy a 950 square-foot facility in Austin, Texas under the terms of an operating lease expiring in October 20 22 .

This facility support s our sales, marketing, customer support, and research and development activities.

We occupy a 3,068 square-foot facility in Zaragoza, Spain under the terms of an operating lease that expired in March 2022.

This office supported our research and development and customer support activities.

We occupy a 6,175 square-foot facility in Chennai, India under the terms of an operating lease expiring in August 2023.

7 unchanged sentences

Operating leases

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

Supplemental balance sheet information related to leases was as follows:

7 unchanged sentences

Weighted average discount rate for operating leases

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

The following represents maturities of operating lease liabilities as of December 31, 2022 :

9 unchanged sentences

Current portion of operating lease liabilities

Accrued legal fees and costs

Other accrued liabilities

15 unchanged sentences

Intellectual Property Litigation

The Company is involved in litigation against Shure Incorporated (“Shure”).

Shure, Incorporated v.

ClearOne, Inc.

, 17-cv-3078 (N.D.

Shure filed the first lawsuit on April 24, 2017, by filing a complaint in the U.S.

District Court for the Northern District of Illinois seeking a declaratory judgment of non-infringement and invalidity of the Company’s U.S.

9,635,186 (“’186 Patent”) and Patent No.

9,264,553 (“’553 Patent”).

The matter is Shure Inc.

ClearOne, Inc.

17-cv-03078 (the “2017 N.D.

Illinois Matter”).

In early 2018, Shure added a claim that the ’186 Patent is unenforceable.

The Court dismissed Shure’s request for declaratory judgment relating to the ’553 Patent, which at the time in 2017, had not been threatened or asserted by the Company against Shure and had been submitted to the USPTO for reissue.

The Company has filed counterclaims against Shure for willful infringement of the Company’s ’186 Patent and the Company’s U.S.

9,813,806 (“’806 Patent”).

On August 6, 2017, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’186 Patent.

On March 16, 2018, the Court denied the Company’s motion for preliminary injunction regarding the ’186 Patent.

On February 6, 2019, the Company filed a motion for reconsideration in light of the PTAB’s January 24, 2019, decision confirming the patentability of the related ’553 Patent.

On August 25, 2019, the Court denied the Company’s motion for reconsideration.

On April 17, 2018, the Company filed a motion seeking a preliminary injunction to enjoin Shure from continuing to infringe on the Company’s ’806 Patent.

On August 6, 2019, the Court granted the Company’s motion for preliminary injunction regarding the ’806 Patent preventing Shure from manufacturing, marketing, and selling the Shure MXA910 Ceiling Array Microphone for use in its “drop-ceiling mounting configuration.” The Court determined that such sales are likely to infringe the ’806 Patent and that Shure had not raised a substantial question of the ’806 Patent validity.

The Court’s order also prevents Shure from encouraging others to use the Shure MXA910 beamforming microphone array in the “drop-ceiling mounting configuration” and “applies to Shure’s officers, agents, servants, employees, and attorneys, as well as anyone who is in active concert or participation with those listed persons.” On August 20, 2019, the Company deposited $ 4,452,149.60 with the Court to satisfy a bond securing the preliminary injunction.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

On February 21, 2020, the Company asked for a Court order that Shure has been manufacturing, marketing, and selling its redesigned MXA910, the MXA910-A released in December 2019, in violation of a preliminary injunction issued on August 20, 2019.

On September 1, 2020, the Court held Shure in contempt of court for violating the Court’s August 2019 preliminary injunction order.

The Court held that “Shure has violated the preliminary injunction order and is found in contempt because it designed the MXA910-A in such a way that allows it to be easily installed flush in most ceiling grids.” The Court’s order prohibited Shure from continuing to “manufacture, market, or sell the MXA910-A.” In addition, the Court held that “[t]he record is also clear as to the MXA910-60CM, but in an abundance of caution, the Court will refrain from granting that aspect of the contempt motion to allow for additional discovery” on that and the “possibility that Shure also violated the preliminary injunction order” by “pushing” sales of the MXA910 immediately after the issuance of the August 2019 preliminary injunction order.

Shure and ClearOne completed supplemental briefing before the district court relating to the Court’s ruling holding Shure in contempt.

The Court has not yet issued a ruling on the supplemental briefing.

On July 21, 2021, the Federal Circuit dismissed Shure’s appeal of the Court’s ruling holding Shure in contempt.

On July 9, 2020, the Company moved for summary judgment, or partial summary judgment, of infringement by Shure of the ’186 and ’806 patents, and Shure moved on the same day for summary judgment of invalidity of the ’186 and ’806 patents.

On August 12, 2020, Shure also moved for summary judgment on various other aspects of the Company’s infringement claims, including arguing that the MXA910 after a recent firmware update does not infringe the ’186 Patent, that the MXA910-A and MXA910-US do not infringe the ’806 Patent, and that the Company is not entitled to lost profits or treble damages.

The motions remain pending.

Shure Incorporated v.

ClearOne, Inc., No.

IPR2017-01785 (PTAB)

On July 14, 2017, Shure filed a petition with Patent Trial and Appeals Board (“PTAB”) for inter partes review against the ’553 Patent.

The matter is Shure Incorporated v.

ClearOne, Inc.

IPR2017-01785.

On January 29, 2018, the PTAB instituted inter partes review of the ’553 Patent.

On January 24, 2019, PTAB issued a final written decision confirming the patentability of all claims of the ‘553 Patent.

Shure filed a request for a rehearing, which the PTAB denied on March 25, 2019.

Shure appealed the PTAB’s decision to the U.S.

Court of Appeals for the Federal Circuit, which issued a judgment affirming the PTAB’s decision on March 6, 2020.

ClearOne, Inc.

Shure Acquisition Holdings, Inc., IPR2019-00683 (PTAB)

On February 15, 2019, the Company filed a petition for inter partes review of Shure’s U.S.

9,565,493 (“’493 Patent”), arguing that all claims of the ’493 Patent should be cancelled in light of several prior art references, including the ’806 Patent.

The matter is ClearOne, Inc.

Shure Acquisition Holdings, Inc.

, IPR2019-00683.

Shure opposed the petition, but the PTAB instituted inter partes review on August 16, 2019.

Shortly over a year later, on August 14, 2020, the PTAB issued its final written decision, holding that all but two of the original claims in the ’493 Patent, claims 6 and 34, are unpatentable in light of the ’806 and other prior art, and granting Shure’s request to amend 11 claims.

On August 24, the Company filed a request for rehearing with the PTAB, arguing that the 11 amended claims are not patentable based upon the Company’s allegation that Shure withheld from the PTAB two allegedly material references that render those claims unpatentable.

Also on August 24, the Company filed a request for sanctions with the PTAB, arguing that Shure’s failure to disclose two material references to the PTAB violated Shure’s duty of candor.

PTAB denied both the request for hearing and request for sanctions.

The Company has appealed the PTAB’s final written decision to the U.S Court of Appeal for the Federal Circuit.

The parties completed briefing on this appeal in November 2021, and the hearing was held on April 7, 2022.

The Federal Circuit has not yet issued any judgment.

ClearOne, Inc.

Shure, Incorporated, 19-cv-02421 (N.D.

On April 10, 2019, the Company filed a lawsuit against Shure in the United States District Court for the Northern District of Illinois alleging that Shure’s MXA910 and MXA310 infringes the ’553 Patent and that Shure has misappropriated ClearOne’s trade secrets.

The matter is ClearOne, Inc.

, 19-cv-02421 (the “2019 N.D.

Illinois Matter”), and has been coordinated with the initial matter filed in 2017 for trial purposes.

On December 16, 2019, the Court granted the Company’s motion for leave to amend its complaint to add claims against Shure for intentional interference with prospective economic advantage and trade libel.

On January 13, 2020, Shure moved to dismiss the Company’s new claims.

On July 21, 2020, ClearOne informed the Court that it would proceed with its advertising-related claims in Delaware rather than Illinois.

ClearOne thus filed a Second Amended Complaint removing the prospective economic advantage and trade libel claims.

In July 2021, the parties completed briefing on Shure’s early motion to obtain summary judgment and dismissal of ClearOne’s trade secret misappropriation claims.

Shure's motion is still pending.

The parties’ claim construction briefing is also still pending.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

Shure, Incorporated v.

ClearOne, Inc., 19-cv-1343 (D.

On July 18, 2019, Shure, Inc.

filed a lawsuit against the Company in the U.S.

Court for the District of Delaware alleging that ClearOne’s BMA CT product, launched in February of 2019, infringes Shure’s ’493 Patent and that ClearOne engaged in unfair competition, tortious interference, deceptive trade practices, and false advertising.

The matter is Shure, Incorporated v.

ClearOne, Inc.

, 19-cv-1343 (D.

of Delaware).

Shure is seeking monetary damages and injunctive relief.

ClearOne successfully moved to stay Shure’s infringement claim relating to the ’493 Patent because the PTAB instituted inter partes review of the ’493 Patent.

On November 19, 2019, the Court granted Shure’s request for leave to amend its complaint to add a claim of infringement of Shure’s recently issued U.S.

D865723 (the “Design Patent”) and additional claims of trade libel.

In July 2020, the Company filed counterclaims accusing Shure of business torts based on false advertising.

Both parties’ claims are still pending.

The Company believes that Shure’s lawsuit is without merit and intends to vigorously defend itself.

On April 14, 2020, Shure moved for a temporary restraining order and preliminary injunction to prevent the Company from selling the BMA CT and BMA CTH, alleging that these products infringed Shure’s Design Patent.

The Company opposed the motions, and on May 1, Magistrate Judge Burke issued a report and recommendation denying Shure’s request for a temporary restraining order, finding that Shure had failed to show that it would suffer irreparable harm in the absence of injunctive relief and that ClearOne had raised a “substantial question” as to the validity of the Design Patent.

On September 21, 2020, the Court held a hearing on Shure’s motion for a preliminary injunction seeking to enjoin further sale of the BMA CT and Versa bundles that included the BMA CTH.

On January 20, 2021, Magistrate Judge Burke issued a report and recommendation denying Shure’s motion for failure to show both a likelihood of success on the merits and irreparable harm.

After Shure did not file an objection to the report and recommendation, Judge Andrews adopted it and denied Shure’s preliminary injunction motion.

Shure did not file a notice of appeal.

On July 28, 2020, Judge Burke held a claim construction hearing on the Design Patent and issued a report and recommendation on claim construction in October 2020.

Since neither party objected, the district court judge adopted the report and recommendation in November 2020.

On November 1, 2021, a jury trial commenced in the U.S.

District Court for the District of Delaware on Shure’s claim of infringement and ClearOne's counterclaim of invalidity on the sole claim of U.S.

D865,723 (the “’723 patent”).

On the third day of trial, November 3, 2021, a jury returned a verdict in favor of ClearOne on all issues.

The jury found that ClearOne had not infringed the ’723 patent and that the ’723 patent was invalid.

Shortly before trial, Shure dropped its business tort claims against ClearOne, and ClearOne has asked the Court to dismiss Shure’s now withdrawn business tort claims with prejudice.

That request is still pending.

The Court also severed ClearOne’s business tort claims from the trial of Shure’s ’723 patent infringement claims, and the parties are waiting for the Court to schedule a trial on ClearOne’s business tort claims.

Shure’s claim of infringement of U.S Patent No.

9,565,493 is stayed pending ClearOne’s appeal to the U.S.

Court of Appeals for the Federal Circuit of the U.S.

Patent and Trademark Office’s decision regarding the patentability of several amended claims of that patent in an inter partes review proceeding.

That appeal is fully briefed, with the hearing held on April 7, 2022.

Shure, Incorporated v.

Inc., PGR2020-00079 (PTAB)

Also on July 28, 2020, Shure challenges the patentability of the Company’s U.S.

10,728,653 in a post-grant review proceeding before the PTAB.

The matter is Shure, Incorporated v.

, PGR2020-00079 (PTAB).

The Company filed a preliminary response on November 17, 2020, and the PTAB instituted trial by an institution decision dated February 16, 2021.

The institution decision found that five of the seven challenges in the petition were not reasonably likely to prevail, but instituted trial under its all-or-nothing institution policy.

On February 14, 2022, the PTAB issued a final written decision, finding that Shure had not proved that any claims of the ’653 patent were unpatentable.

On February 24, 2022, Shure filed a notice of appeal, indicating that it would appeal the final written decision to the Federal Circuit.

The Company intends to continue to vigorously enforce and defend its intellectual property rights in these proceedings.

The Company has been involved in several litigation proceedings (collectively, the “Litigations”) against Shure Incorporated (“Shure”) as more fully described in the Part I, Item 3 of the Company’s annual report on Form 10-K for the year ended December 31, 2021, as supplemented in Part II, Item 1 of the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2022.

On December 9 , 2022, the Company and Shure entered into a confidential settlement and license agreement (the “Agreement”) .

Under the terms of the Agreement:

All of the Litigations between the parties were dismissed with prejudice and each of the Company and Shure released all claims against the other arising from or in connection with the matters that were subject to the Litigations;

Shure made a one-time settlement payment to the Company in the amount of $ 55,000 within five days after the dismissal of the Litigations in accordance with the Agreement in January 2023;

The Company and Shure agreed to certain patent licenses and covenants not to sue.

The Company capitalized $ 737 and $ 7,836 of litigation expenses related to this matter during the twelve months ended December 31, 2022 and 2021, respectively.

In addition, the Company is also involved from time to time in various claims and legal proceedings which arise in the normal course of our business.

31 unchanged sentences

Expected dividend yield

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

The carrying amount of the Notes was then determined by deducting the fair value of the Warrants from the principal amount of the Notes.

1 unchanged sentence

The equity component is not remeasured while the Notes and Warrants continue to meet the conditions for equity classification for equity components.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

The original issue discount and issuance costs are netted against the liability.

26 unchanged sentences

All other terms and conditions of the Bridge Loan remained the same.

This Bridge Loan of $ 2,000 is included under short-term debt.

As further discussed in Note 16 - Subsequent Events , this Bridge Loan was cancelled on January 4, 2022.

This Bridge Loan of $ 2,000 is included under short-term debt as of December 31, 2021.

On January 4, 2022, the Company entered into a Securities Purchase Agreement with Edward D.

Bagley, pursuant to which the Company issued and sold to Mr.

Bagley, in a private placement 1,538,461 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share, at a purchase price of $ 1.30 per share of Common Stock.

The consideration for the Shares was the cancellation and termination of Mr.

Bagley’s outstanding bridge loan to the Company in the principal amount of $ 2,000 originally issued on July 2, 2021 and amended and restated on September 11, 2021 .

Bagley is an affiliate of the Company and the Company’s single largest stockholder.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3 unchanged sentences

Bank National Association Bank, which provided for a loan in the principal amount of $ 1,499 (“PPP Loan”) pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020.

The PPP Loan has a two -year term and bears interest at a rate of 1.0 % per annum.

The PPP Loan had a two -year term and bears interest at a rate of 1.0 % per annum.

Monthly principal and interest payments are deferred for approximately sixteen months after the date of disbursement.

The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties.

The PPP Loan contains events of default and other provisions customary for a loan of this type.

The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act.

The Company used the entire PPP Loan amount for qualifying expenses and intends to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act.

December 31, 2021

December 31, 2020

Current portion of the PPP Loan included under short-term debt

Long-term portion of the PPP Loan included under long-term debt

The Company's Paycheck Protection Program Loan ("PPP Loan") under the CARES Act was forgiven by Small Business Administration effective April 29, 2022.

With this forgiveness, the Company is not required to repay the principal amount of $ 1,499 and the interest of $ 31 .

The Company received $ 953 back that it had already paid towards principal and interest payments toward the PPP Loan.

The Company treated the forgiveness as extinguishment of debt in this quarter ended September 30, 2022 and reported the entire principal amount forgiven of $ 1,499 along with interest already accounted for of $ 29 as a gain on extinguishment of debt included in other income.

2022 Bridge Loan

On October 28, 2022 the Company obtained a bridge loan in the principal amount of $ 2,000 from Edward D.

Bagley (the “2022 Bridge Loan”), an affiliate of the C ompany.

The 2022 Bridge Loan is evidenced by a promi ssory note dated October 28, 2022 (the “ 2022 Note”) issued by the Company to Mr.

The 2022 Note bears interest at a rate of 12.0 % per annum and matures on October 28, 2023 .

Bagley is an affiliate of the Company and the Company’s single largest stockholder.

This Bridge Loan of $ 2,000 is included under short-term debt as of December 31, 2022.

Share-Based Payments

17 unchanged sentences

(Dollars in thousands, except share and per share amounts)

The Company granted 50,000 options during the year ended December 31, 2021.

The Company did not grant any options during the year ended December 31, 2022.

In applying the Black-Scholes methodology to the 50,000 options granted during the year ended December 31, 2021, the Company used the following assumptions:

Risk free interest rate, average 0.84 %

Expected option life, average

Expected option life, average 5 years

Expected price volatility, average 69.74 %

25 unchanged sentences

The total pre-tax compensation cost related to stock options recognized during the years ended December 31, 2022 and 2021 was $ 112 and $ 131 , respectively.

Tax benefit from compensation cost related to stock options during the years ended December 31, 2021 and 2020 was $ 0 .

Tax benefit from compensation cost related to stock options during the years ended December 31, 2022 and 2021, respectively was $ 28 and $ 0 .

As of December 31, 2022, the total compensation cost related to stock options not yet recognized and before the effect of any forfeitures was $ 152 , which is expected to be recognized over approximately the next 2.65 years on a straight-line basis.

24 unchanged sentences

There were no sales to significant customers that represented more than 10 percent of total revenues during the years ended December 31, 2022 and 2021.

The following table summarizes the percentage of total gross accounts receivable from significant customers that represented more than 10 percent of total gross accounts receivable:

The following table summarizes the percentage of total gross receivables from significant customers that represented more than 10 percent of total gross accounts receivable:

As December 31,

* Sales and accounts receivable from Customer A and Customer B in 2020 did not exceed 10% of revenue and total gross accounts receivable.

Fair Value Measurements

Fair Value Mezasurements

The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price).

10 unchanged sentences

The substantial majority of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs.

The following tables set forth the fair value of the financial instruments re-measured by the Company as of December 31, 2021 and 2020 :

December 31, 2021

Corporate bonds and notes

Municipal bonds

There were no financial instruments that were re-measured by the Company as of December 31, 2022.

The following tables set forth the fair value of the financial instruments re-measured by the Company as of December 31, 2021 .

December 31, 2021

3 unchanged sentences

(Dollars in thousands, except share and per share amounts)

Consolidated loss before taxes for domestic and foreign operations consisted of the following:

Consolidated income (loss) before taxes for domestic and foreign operations consisted of the following:

Year ended December 31,

5 unchanged sentences

Tax benefit (provision)

The income tax (provision) differs from that computed at the federal statutory corporate income tax rate as follows:

The income tax benefit (provision) differs from that computed at the federal statutory corporate income tax rate as follows:

Year ended December 31,

Tax benefit at federal statutory rate

Tax benefit (provision) at federal statutory rate

State income tax benefit (provision), net of federal benefit

1 unchanged sentence

Foreign earnings or losses taxed at different rates

Tax rate change, due primarily to loss carryback

Tax rate change

Change in valuation allowance

Tax provision

Tax benefit (provision)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10 unchanged sentences

Difference in property and equipment basis

Convertible debt

Capitalized research expenditure

Total net deferred income tax asset

1 unchanged sentence

Net deferred income tax asset (liability)

T he C oronavir u s Aid, Relief, and Eco nomic Security Act (the “CARES Act”) was enacted on March 27, 2020.

The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side payroll tax, Paycheck Protection Program, net operating loss carryback periods, and modifications to the net interest deduction limitations.

The most significant impact to the Company from the CARES Act relates to the Paycheck Protection Program and modifications to the net operating loss car ryback periods.

In November 2020, the Company completed its assessment of the impact of the carryb ack provisions from the CARES Act and elected to carry back its net operating losses to previous years.

The Company has not provided for foreig n withholding taxes on undistributed earnings of its non-U.S.

11 unchanged sentences

future taxable income exclusive of reversing temporary differences and carryforwards.

Based on the foregoing criteria, the Company determined that it no longer meets the “more likely than not” threshold that net operating losses, tax credits and other deferred tax assets will be realized.

Accordingly, the Company recorded a full valuation allowance at September 30, 2018, and continues to be in a full valuation allowance position at December 31, 2021 .

Under the five-year carryback provision of the CARES Act, the Company carried back its taxable losses from 2018 through 2020 to years from 2013 through 2015.

As no tax benefit was previously recorded for the years from 2018 through 2021 for the losses, due to the full valuation allowance, the carryback of these losses resulted in a tax benefit of $ 0.4 and $ 7.1 M in 2021 and 2020, respectively.

Based on the foregoing criteria, the Company determined that it does not meet the “more likely than not” threshold that net operating losses, tax credits and other deferred tax assets will be realized.

Accordingly, the Company recorded a full valuation allowance at December 31, 2022 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

As of December 31, 2022 the Company has federal net operating loss (“NOL”) carryforwards of approximately $ 0.4 million (pre-tax), state NOL carryforwards of approximately 0.8 million (pre-tax) and Spain NOL carryforwards of approximately $ 11.6 million (pre-tax).

The federal NOL carryforward begins to expire in 2029.

The federal NOL carryforward expires in 2029.

T he Spain NOL carryforward does not expire.

34 unchanged sentences

All other countries

The Impact of Covid-19

As of the time of this filing the Company’s operating activities have been curtailed by the impact of Covid-19.

Government directives have suspended manufacturing and limited workplace activities beginning March 23, 2020.

The Company has empowered its employees to work remotely wherever possible to minimize the disruption to Company operations.

The Company has received no communications from customers that indicate cancellations or substantial change in delivery schedules.

Public health directives from governments around the world are advising or prohibiting large gatherings to inhibit the spread of Covid-19.

This has suspended the use of our products for much of our installed customer base.

Continued restrictions and the positional behavioral changes resulting from the impact of Covid-19 may continue to influence the demand for our products which typically attract a large audience.

Also, the ongoing impact of Covid-19 on the world’s economy could ultimately have material adverse consequences to the Company;

however, as of now, the Company is unable to determine the likelihood or degree of such adverse consequences.

Subsequent events

On January 4, 2022, the Company entered into a Securities Purchase Agreement with Edward D.

Bagley, pursuant to which the Company agreed to issue and sell, in a private placement 1,538,461 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share, at a purchase price of $ 1.30 per share of Common Stock.

The consideration for the Shares is the cancellation and termination of Mr.

Bagley’s outstanding bridge loan to the Company in the principal amount of $ 2,000,000 originally issued on July 2, 2021 and amended and restated on September 11, 2021.

Bagley is an affiliate of the Company and the Company’s single largest stockholder.

In January 2023, the 2022 Bridge loan of $ 2,000 along with applicable interest was repaid.

The Company received $ 1,350 and recorded the settlement gain in March 2023 upon entering into an agreement with a service provider to settle a contract dispute arising on provision of software services to the Company.

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 9A. Controls and Procedures