What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 83 added, 123 removed, 101 unchanged (67% of the section changed)

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

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.

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

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

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

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

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

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

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

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

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

In early 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.

In early 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.

Throughout 2022, we have continued our efforts to protect our intellectual property rights, primarily through litigation.

See Part II, Item 1.

Legal Proceedings.

On January 30, 2023, we introduced the new CHAT® 150 BT group speakerphone with USB and Bluetooth connectivity that enhances the conferencing experience for the ultimate in business class performance.

With simple, instant connection to personal computers, mobile devices or Bluetooth-enabled desk phones, the CHAT® 150 BT group speakerphone provides users with an affordable way to upgrade home offices, executive offices, and mid-size meeting rooms with BYOD convenience and superior audio clarity for audio conferences and video meetings.

The CHAT® 150 BT speakerphone also has an audio bridging feature that allows far end conference participants connected via a software conferencing application through USB, local users of the speakerphone, and far end callers on a mobile call connected through Bluetooth to all join the same call and hear each other clearly.

Featuring a steerable microphone array with first-mic priority, the CHAT® 150 BT speakerphone intelligently activates the microphone closest to the person speaking, reducing interference from ambient noise.

Like all ClearOne microphone products, the CHAT® 150 BT speakerphone is compatible with popular collaboration platforms including Microsoft® Teams, Zoom™, WebEx™, Google® Meet™, and many more.

The new BT model retains all the class-leading features of the original CHAT® 150 speakerphone, including Advanced Noise Cancellation, Full Duplex Distributed Echo Cancellation™ and Automatic Level Control algorithms, to ensure highly intelligible, natural audio capture and playback.

It also supports NFC tap-to-pair and includes a wired USB connection for compatibility with the full variety of modern devices.

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

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

Overall revenue decreased by 10% in the third quarter of 2022 when compared to the third quarter of 2021, primarily due to a significant decrease in revenues from video products and a further decrease in revenues from microphones, which were partially offset by an increase in revenues from audio conferencing products.

Overall revenue decreased by 3% during the first nine months of 2022 when compared to revenue in the first nine months of 2021 due to decrease in revenue from video products, which was largely offset by an increase in revenues from audio conferencing products and microphones.

Despite the negative consequences of global supply chain issues and the infringement of our patents on professional installed products, our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") continued to result in overall Beamforming Microphone Array ("BMA") revenue being higher than last year.

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

Our revenue performance in 2022-Q3 was also impacted negatively due to our inability 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.

On January 16, 2023, we introduced UNITE 260 Pro camera, a professional grade 4K Ultra HD camera featuring both a 20X optical zoom and 16X digital zoom that allows users to capture every participant in all meeting, training, and learning environments it is deployed in.

Compatible with all popular meeting applications like Microsoft® Teams, Zoom™, WebEx™, and Google® Meet™, the new camera features an AI-based smart face tracking mode that keeps a selected presenter in the frame as they move about the room.

Alternatively, the camera’s AI-based auto framing mode always keeps an entire group in perfect view.

With dual video outputs HDMI and IP, the UNITE 260 Pro Camera is an excellent choice for a hybrid environment:

streaming content while simultaneously showing it live where the presentation is occurring.

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

Overall revenue decreased by 45% in the first quarter of 2023 when compared to the first quarter of 2022, primarily due to a significant decrease in revenues from all product categories, especially microphones.

The revenue decline was primarily due to our continued inability 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 electronics manufacturing services provider and due to the decline in demand for video products.

We expect the challenges with the manufacturing transition from China to Singapore to ease in the second half of 2023.

Our revenue performance in 2023-Q1 was also partially impacted negatively due to 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 end of 2023.

Our gross profit margin increased modestly to 41.0% during the third quarter of 2022 from 40.8% during the third quarter of 2021.

Our gross profit margin decreased to 38.7% during the first nine months of 2022 compared to 42.6% during the first nine months of 2021.

Net loss decreased from $2.2 million in the third quarter of 2021 to $1.2 million in the third quarter of 2022 .

Our net loss decreased from $5.4 million in the first nine-month of 2021 to $3.5 million in the first nine-month of 2022.

The decrease in net loss was mainly due to (a) the recognition of $1.5 million in gain from the forgiveness of CARES Act Paycheck Protection Program Loan and (b) a decrease of $1.9 million in operating expenses after excluding amortization costs relating to our capitalized patent defense costs, which were partially offset by (c) decrease in absolute gross profit dollars as a result of reduced gross margin, and (d) increased amortization costs relating to our capitalized patent defense costs.

Our gross profit margin decreased to 31.5% during the first quarter of 2023 from 37.3% during the first quarter of 2022.

Gross Profit margin decreased year over year mainly due to increase in administration and overhead costs as a percentage of revenue and increase in inventory obsolescence costs.

Net loss decreased from $2.0 million in the first quarter of 2022 to $0.8 million in the first quarter of 2023 .

The decrease in net loss was mainly due to a receipt of $1.35 million from a one-time legal settlement of a contract dispute.

This receipt, included in other income was partially offset by an increase in operating losses of $0.3 million.

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

Industry conditions

We operate in a very dynamic and highly competitive industry which is dominated on the one hand by a few players with respect to certain products like 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 competitors vary within each product category.

Our installed professional audio conferencing products, which are our flagship product category, continue to be ahead of the competition despite the reduction in revenues.

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

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

Our video products and beamforming microphone arrays, especially the BMA 360, are critical to our long term growth.

Our installed professional audio conferencing products, which is our flagship product category, continue to be ahead of the competition despite the reduction in revenues.

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

Despite our strong leadership position in the installed professional audio conferencing market, we face challenges to revenue growth due to the limited size of the market, 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 curated audio solutions with our high quality professional cameras, and our high-end audio conferencing technology will generate high growth in the near future.

We derive a major portion of our revenue (approximately 51% for the year ended December 31, 2021) from international operations and expect this trend to continue in the future.

Most of our revenue from outside the U.S.

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.

Most of our revenue from ou tside the U.S.

is billed in U.S.

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Dollar denominated prices of our products less competitive.

In December 2019, a novel strain of coronavirus (“COVID- 19 ”) started spreading from China and was declared a pandemic.

The COVID- 19 pandemic caused severe global disruptions and had varying impact on our business.

The installed audio conferencing market was negatively impacted due to lockdowns, postponement of projects and restrictions on the ability of installers to visit commercial sites.

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

The extent of COVID-19’s effect on our operational and financial performance keeps evolving and depends on multiple factors including the severity and infectiousness of current and future virus strains, the 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 primarily resulting from COVID-19 have caused significant fluctuations in our costs of goods resulting in a reduction of our gross margins in the first nine months of 2022.

We expect these fluctuations to continue through at least the end of 2022.

If the global economy’s recovery from the pandemic continues to experience supply chain disruptions, it 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.

The installed audio conferencing market was negatively impacted due to lockdowns , postponement of projects and restrictions on installers to visit commercial sites.

On the other hand, COVID- 19 generated higher than normal demand in 2020 for our video products and personal conferencing products due to the significant expansion of work-from-home market.

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

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

Deferred product revenue increased to $73 thousand on September 30, 2022 compared to $54 thousand on December 31, 2021.

Deferred product revenue increased to $71 thousand on March 31, 2023 compared to $63 thousand on December 31, 2022.

A detailed discussion of our results of operations follows below.

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

Results of Operations for the three and nine months ended September 30, 2022

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2022 (“ 2022 - Q3 ”) ("2022-YTD") and 2021 (" 2021 - Q3 ") ("2021-YTD") , respectively, together with the percentage of total revenue which each such item represents:

Three months ended September 30,

Nine months ended September 30,

Results of Operations for the three months ended March 31, 2023

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three months ended March 31, 2023 (“ 2023 - Q1 ”) ("2023-YTD") and 2022 (" 2022 - Q1 ") ("2022-YTD") , respectively, together with the percentage of total revenue which each such item represents:

Three months ended March 31,

(dollars in thousands)

Change Favorable (Adverse) in %

Cost of goods sold

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Provision for income taxes

Our revenue decreased to $6.3 million in 2022-Q3 compared to $7.0 million in 2021-Q3 primarily due to a 59% decline in video products and a 7% decline in microphones, which were partially offset by a 10% increase in audio conferencing.

Our revenues, especially with respect to BMA and professional audio conferencing products were negatively impacted by our inability 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.

Our wireless mics and traditional ceiling mics registered significant revenue increases in 2022-Q3.

The audio conferencing category as a whole increased mainly due to a significantly strong revenue performance of our professional mixers while other categories declined in revenues.

Video products suffered declines in 2022-Q3 compared to 2021-Q3 due to lack of demand for video cameras as well as video conferencing equipment.

During the third quarter of 2022, revenues from Americas declined by 5% primarily due to decreased revenues from Latin America.

During 2022-Q3 revenues from the Asia Pacific, including the Middle East, India and Australia decline by 5% primarily due to declines in revenues from all sub-markets except the Middle East, Japan and Korea, with the Middle East showing significant increase in revenues.

Finally, revenues from Europe and Africa decreased significantly by 31% in 2022-Q3 primarily due to decreases across all the sub-markets except Southern Europe.

During the nine months ended September 30, 2022 our revenues decreased from $21.8 million to $21.2 million compared to the same period in 2021 due to revenue from video products decreasing by 36 %, microphones increasing by 4%, and audio conferencing increasing by 9%.

The increase in revenue from microphones was due to growth in revenues from all categories of microphones.

The audio conferencing category as a whole increased mainly due to a strong revenue performance by our professional mixers.

During 2022-YTD Americas declined by 4%, Asia Pacific, including the Middle East and India increased by 7% and Europe and Africa declined by 12%.

India, the Middle East and Northern Europe led in revenue growth while Latina America, China and Southern Europe suffered major revenue decreases.

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

Our revenue decreased to $4.2 million in 2023-Q1 compared to $7.5 million in 2022-Q1 due to a 59% decline in microphones, a 55% decline in video products, and a 27% decline in audio conferencing.

Except for wireless mics and premium audio conferencing, both of which constitute a small percentage of our revenue all other product categories suffered revenue declines year over year.

Revenues from BMA and professional audio conferencing products were negatively impacted by our inability 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 electronics manufacturing services provider.

Our traditional ceiling mics, personal audio conferencing products, video cameras and video conferencing equipment suffered revenue declines due to lack of demand.

During the first quarter of 2023, revenues from Americas declined by 58% primarily due to decreased revenues from all the regions.

During 2023-Q1 revenues from the Asia Pacific, including the Middle East, India and Australia decline by 18% primarily due to declines in revenues from all sub-markets except India and Australia.

Finally, revenues from Europe and Africa decreased significantly by 46% in 2023-Q1 primarily due to decreases across all the sub-markets except Central Europe.

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

Costs of Goods Sold and Gross Profit

Cost of goods sold includes expenses associated with finished goods purchased from outsourced manufacturers, the repackaging of our products, our manufacturing and operations organization, property and equipment depreciation, warranty expense, freight expense, royalty payments, and the allocation of overhead expens es.

Our gross profit margin increased from 40.8% during 2021-Q3 to 41.0 % during 2022 -Q3 .

The gross profit margin was negatively impacted due to increases in material costs due to continuing supply chain constraints and an increase in inventory obsolescence, which were partially offset by reduced freight, tariff costs and overhead costs.

Our gross profit margin decreased from 42.6% during 2021 -YTD to 38.7% during 2022-YTD.

The gross profit margin decreased primarily due to increases in material costs due to continuing supply chain constraints, which was partially offset by reduced inventory obsolescence costs, freight, tariff costs and overhead costs in 2022-YTD .

Our gross profit margin decreased from 37.3% during 2022-Q1 to 31.5 % during 2023 -Q1 .

The gross profit margin was negatively impacted due to increases in material costs due to mainly due to increase in administration and overhead costs as a percentage of revenue and increase in inventory obsolescence costs .

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

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

Total operating expenses were $3.7 million in 2022-Q3 compared to $4.9 million in 2021-Q3.

Total operating expenses were $12.8 million for 2022-YTD compared to $14.3 million for 2021-YTD.

Total operating expenses in 2023-Q1 was $3.5 million compared to $4.7 million in 2022-Q1.

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

2 unchanged sentences

The decrease was primarily due to decreases in employment expenses and consultant expenses due to a reduction in the headcount and due to decrease in commissions paid to employees and consultants.

S&M expenses for 2022-YTD decreased to $4.3 million from $5.0 million for 2021-YTD.

The decrease was primarily due to decreases in employment expenses and consultant expenses due to a reduction in the headcount and due to decrease in commissions paid to employees and consultants.

This overall decrease was partially offset by increase in trade-show related costs.

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.

1 unchanged sentence

The decrease was primarily due to reduction in employment expenses due to reduction in the headcount and a decrease in project-related expenses.

R&D expenses decreased to $3.4 million in 2022-YTD, from $4.3 million in 2021-YTD.

The decrease was primarily due to reduction in employment expenses due to reduction in the headcount and a decrease in project-related expenses.

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

G&A expenses remained almost the same at $1.7 million in 2021-Q3 and 2022-Q3.

The reduction in employee related expenses were partially offset by an increase in amortization costs relating to our capitalized patent defense costs.

G&A expenses increased from $5.0 million in 2021-YTD to $5.1 million in 2022-YTD.

The increases in amortization costs relating to our capitalized patent defense costs and insurance costs were partially offset by decreases in employee-related expenses, legal expenses and consulting expenses .

G&A expenses decreased to $1.3 million in 2023-Q1 compared to $1.8 million in 2022-Q1.

The reduction was primarily due to (i) a decrease in amortization costs relating to our capitalized patent defense costs, which was fully amortized in 2022-Q4, (ii) a decline in audit fees, (iii) and a decline in employment-related expenses, partially offset by (iv) increase in legal expenses, and (v) insurance expenses .

Other income (expense), net

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

Other income during the first nine months of 2022 includes $1.5 million recognized on the gain arising from the CARES Act Paycheck Protection Program loan forgiveness.

Other items remained immaterial during the third quarter of 2022 and 2021.

I nterest expense decreased to $0.1 million in 2022-Q3 compared to $0.2 million in 2021-Q3.

Interest expense decreased to $0.3 million in 2022 -YTD compared to $0.4 million in 2021-YTD .

Other income (expense), net includes interest income, foreign currency changes and gain or loss on disposal of assets.

Other income in 2023-Q1 included a receipt of $1.35 million from a one-time legal settlement of a contract dispute.

Other items included in other income remained immaterial during 2023-Q1 and 2022-Q1.

I nterest expense increased to $0.3 million in 2023-Q1 compared to $0.1 million in 2022-Q1.

primarily due to interest associated with the prepayment of the $2 million bridge loan in January 2023.

Provision for income taxes

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

Provision for income taxes recognized for 2022-Q3 and 2022-YTD primarily relates to foreign jurisdictions .

During each of the three months ended March 31, 2023 and 2022, we did not recognize any benefit from the losses incurred due to setting up a full valuation allowance.

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

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2022, our cash and cash equivalents were approximately $1.5 million compared to $1.1 million as of December 31, 2021.

Our working capital was $ 19.3 million and $18.0 million as of September 30, 2022 and December 31, 2021, respectively.

Net cash used in opera ting activities was approximately $2.1 million in 2022 -YTD , an inc rease of cash used in operating activities of approximately $0.6 million from $1.5 million of cash provided by operating activities in 2021-YTD.

The increase in cash outflow was due to a negative change in operating assets and liabilities of $0.7 million, partially offset by a decrease in net loss by $0.2 million after adjusting for non-cash charges.

Net cash provided by investing activities were $2.3 million in 2022-YTD compared to net cash used in investing activities of $4.2 million in 2021-YTD, a change in cash flow of $ 6.4 million.

The change in cash flow was primarily due to (a) an increase in proceeds from sale of marketable securities net of any purchases in 2021-YTD to $1.5 million, and (b) a decrease in capitalized patent defense costs by $4.9 million .

Net cash provided by financing activities in 2022-YTD was $0.2 million, comprised primarily of a $0.8 million refund of the CARES Act Paycheck Protection Program Loan with interest offset by $0.5 million repayment of principal amounts due on senior convertible notes.

In comparison, cash provided by financing activities was $11.0 million in 2021-YTD, which consisted primarily of issuance of common stock and borrowing through issuance of short-term notes partially offset by repayment of a portion of senior convertible debt.

Capitalization of patent defense costs .

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

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

During the nine months ended September 30, 2022 we spent $0.6 million on legal costs related to the defense of our patents and capitalized the entire amount.

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

See Part II, Item1.

Legal Proceedings.

We have already spent approximately $28.8 million from 2016 through September 30, 2022 towards this litigation and may be required to spend more to continue our legal defense.

As of September 30, 2022 , our cash and cash equivalents were approximately $1.5 million compared to $ 1.1 million as of December 31, 2021.

Our working capital was $19.3 million as of September 30, 2022 .

Net cash used in operating activities was $2.1 million for the nine months ended September 30, 2022 , an increase of $0.6 million from $1.5 million of cash used in operating activities in the nine months ended September 30, 2021 .

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

We 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, we issued $ 2,000 in common stock as consideration for the cancellation and termination of the 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 our core strategies of product innovation and prudent cost management will bring us back to profitability in the future.

We believe, although there can be no assurance, that all of these measures and effective management of working capital, including collecting on the income tax receivable balance, will provide the liquidity needed to meet our operating needs through at least November 14, 2023.

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

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

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

As of September 30, 2022 , we had open purchase orders of approximately $2.2 million mostly for purchase of inventory.

As of September 30, 2022 , we had inventory totaling $12.7 million, of which non-current inventory accounted for $3.0 million.

As of March 31, 2023, our cash and cash equivalents were approximately $59.0 million compared to $1.0 million as of December 31, 2022.

Our working capital was $ 68.7 million and $69.3 million as of March 31, 2023 and December 31, 2022, respectively.

Net cash provided by opera ting activities was approximately $60.3 million in 2023 -Q1 , an inc rease of cash provided by ope rating activities of approximately $61.4 million from $1.0 million of cash used by operating activities in 2022-Q1.

The increase in cash inflow was primarily due to $56.4 million in receipts from legal settlements, the receipt of $4.5 million from the return of a bond deposited with a court, and a $1.3 million refund of income taxes with interest.

These receipts were partially offset by operating losses.

Net cash used in investing activities in 2023-Q1 was $0.1 million compared to $1.8 million of net cash provided by investing activities in 2022-Q1.

In 2022-Q1 cash provided by investing activities primarily consisted of $2.0 million in proceeds from sale of marketable securities, partially offset by capitalized patent defense costs of $0.2 million.

Net cash used in financing activities in 2023-Q1 was $2.2 million, comprised primarily of repayment of the bridge loan of $2.0 million and $0.2 million payments of principal amounts due on senior convertible debt.

This compares to $0.4 million used in principal amounts due on senior convertible debt in 2022-Q1 .

As of March 31, 2023 , our cash and cash equivalents were approximately $ 59.0 million compared to $1.0 million as of December 31, 2022 .

Our working capital was $ 68,7 million as of March 31, 2023 .

Net cash provided by operating activities was $ 60.3 million for the three months ended March 31, 2023 , an increase of $ 61.4 million compared to $ 1.0 million of cash used in operating activities for the three months ended March 31, 2022 .

The company announced a special one -time cash dividend of $ 1.00 per share or eligible warrant (please see Note 10 - Subsequent events) which will be paid on May 31, 2023 and is expected to generate cash outflows of approximately $29.0 million.

The Company also paid approximately $ 6.6 million towards income taxes in April 2023.

The Company 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 the current cash position and all of these measures and effective management of working capital, will provide the liquidity needed to meet our operating needs through at least May 15, 2024 .

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 its 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, or delay product development and enhancement.

As of March 31, 2023 , we had open purchase orders of approximately $1.6 million mostly for the purchase of inventory.

As of March 31, 2023 , we had inventory totaling $11.3 million, of which non-current inventory accounted for $2.9 million.

This compares to total inventories of $11.7 million and non-current inventory of $2.7 million as of December 31, 2022 .

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2022 (in millions):

The following table summarizes our contractual obligations as of March 31, 2023 (in millions):

Payment Due by Period

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis