What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 118 added, 92 removed, 168 unchanged (56% of the section changed)

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We have extended our total addressable market from the installed audio conferencing market to adjacent complementary markets – microphones, video collaboration and AV networking.

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

We have achieved this historically 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

See also Part II, Item 1.

Legal Proceedings.

On January 16, 2023, we introduced UNITE 260 Pro camera, a professional grade 4 K Ultra HD camera featuring both a 20 X optical zoom and 16 X 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.

In April 2023 we announced the immediate market availability of the Versa UCS2100 Collaboration Switcher Kit.

Designed for use in small to mid-sized meeting rooms, board rooms, and executive offices, the Versa UCS2100 automatically detects HDMI and USB-C sources, such as a dedicated in-room PC or a Bring-Your-Own-Meeting (BYOM) laptop and offers the flexibility for users to access the same set of in-room AV peripherals, such as cameras and audio devices.

Its USB-C input provides up to 60 watts charging and provides simultaneous 1 x HDMI output and 1 x HDBaseT output.

When combined with ClearOne UNITE series PTZ cameras, INTERACT, CONVERGE® Pro 2, CONVERGE® HUDDLE, and CHAT series audio conferencing devices, the Versa UCS2100 delivers guaranteed performance and a streamlined user experience that supports automatic source detection and switching and is controllable via RS-232, TCP/IP, or front panel buttons.

In May 2023, we launched eight new COLLABORATE® Versa® packaged hardware systems to provide optimized audio and video performance for conference rooms and personal office spaces.

The updated lineup of bundled solutions empowers businesses of all sizes and means to leverage powerful conferencing capabilities that include automatic voice tracking, face tracking and echo cancellation.

The new lineup of COLLABORATE Versa solutions offers an ideal package for every small-to-medium sized conferencing space or personal office, giving business owners and IT staff mission-specific options that ensure maximum value, utility and performance in any room.

The solutions launched were COLLABORATE Versa Room CT 160 , COLLABORATE Versa Room CT, COLLABORATE Versa 20 , COLLABORATE Versa 20 Plus, COLLABORATE Versa 160 , COLLABORATE Versa 60 , COLLABORATE Versa Pro 160 , and COLLABORATE Versa Pro 60 .

In June 2023, we returned to Infocomm for the first time since 2019 with a complete suite of products, programs, and on-site demonstrations designed to help partners grow their business across every vertical market where increased collaboration is a priority.

We exhibited our solutions in Booth # 3061 in the Orange County Convention Center from June 14-16, 2023 in Orlando, Florida.

At Infocomm 2023 , we unveiled the BMA 360 D, the newest member of the world’s most advanced beamforming microphone array ceiling tile family.

The BMA 360 D offers unrivaled audio performance and native compatibility with any Dante-enabled DSP mixer.

The new Dante-compatible beamforming microphone array allows integrators and users to leverage ClearOne’s industry-leading microphone innovations in more projects and spaces than ever before.

The BMA 360 D takes our groundbreaking product to the next level by leveraging standard IP networking infrastructure in an enterprise, empowering AV and IT practitioners to upgrade existing room solutions to use more powerful microphones and expanding flexibility that enables third-party DSP integrations in new system designs.

The added power and advanced beamforming also enhance the performance of critical modern functions such as voice lift and camera tracking.

Dante integration in the BMA 360 D enhances the array’s functionality by delivering unprocessed beam audio on individual Dante transmit channels.

Additionally, a smart-switched output is delivered on a separate Dante channel to provide the optimal mix of active inputs while enabling ClearOne’s full suite of audio enhancements, which include echo cancellation, noise cancellation, and level control.

The BMA 360 D incorporates the industry’s only ultra-wideband, frequency-invariant beamforming mic array technology with uniform gain response across all frequency bands.

With proprietary FiBeam™ and DsBeam™ technology, participants experience natural and full-fidelity audio across all beams and within a single beam.

DsBeam delivers superb clarity and intelligibility through unparalleled sidelobe depth below - 40 dB, resulting in superior rejection of reverb and noise even in challenging environments.

Integrator setup is simplified by convenient preset beam patterns for common room layouts, while custom beam patterns can be created for unique floor plans.

Combined with adaptive steering that focuses audio pickup on active speakers, the adjustable beam patterns provide impeccable coverage of every meeting or conference participant.

The exceptional accuracy of ClearOne’s beamforming and adaptive steering technologies also enhance the performance of voice lift and camera tracking functions for any attached DSP mixer.

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

We also introduced at Infocomm, our powerful new DIALOG® UVHF wireless microphone system that combines class-leading flexibility, Power over Ethernet (PoE) simplicity, Dante technology, and up to 350 usable frequencies to offer professional-quality audio conferencing, video collaboration, and sound reinforcement for any size room.

The new DIALOG UVHF system offers businesses and institutions a flexible wireless microphone system that can address varying types of audio pickup needs for rooms of virtually any size.

With up to 350 available frequencies across 160 MHz of RF range, the system also delivers incredibly robust reception.

Now corporate boardrooms, training rooms, college lecture halls, courtrooms and other multi-use venues can ensure excellent audio pickup quality and meet varying pickup needs with the simplicity of PoE that enables installation virtually anywhere through a single CAT 6 ethernet cable.

ClearOne’s free support for system design and remote commissioning makes it easier than ever to outfit any presentation space with a professional-quality multi-function audio pickup solution.

The DIALOG UVHF system allows integrators, room designers and meeting hosts to address a wide range of audio pickup needs through five lavalier, lanyard and headset-type body microphones, two handheld microphones, a boundary microphone and three gooseneck microphones for podium use.

Powering the microphones is simple and efficient, as all models use the same 12 -hour off-the-shelf Li-ion battery that can be charged via USB-C or an optional eight -bay network-connected charging dock.

Firmware updates can be done over the network, while the transmitters charge.

The Dante-enabled system includes an eight -channel Dante Access Point to ensure optimal signal transmission and system reliability, while an optional DIALOG UVHF Dante interface provides eight Euroblock balanced analog outputs, including mixed output, USB audio output and eight GPIOs.

The lightweight plenum-rated access point provides versatile mounting options for wall, ceiling, tabletop or pole mounting, including VESA mount holes.

The DIALOG UVHF is the only system with a wireless access point that delivers antenna redundancy and diversity, with dual antennas providing spatial and polarization diversity that helps maintain high audio quality in harsh environments.

A wired ethernet connection adds the ability to connect management software to the access point via a web browser.

Secure RF connections are created using full-time standards-based FIPS 197 AES- 256 encryption.

ClearOne’s solutions are designed to support all leading collaboration platforms, including Microsoft Teams, Google Meet, GoToMeeting, Zoom and WebEx.

In August 2023, we showcased our full range of conferencing, collaboration, and communications solutions at CEDIA 2023 held in Denver, Colorado.

During the event, we highlighted the CHAT® 150 BT Speakerphone (USB and Bluetooth speakerphone), Versa® Mediabar™ (video soundbar), UNITE® 60 ( 4 K ePTZ wide-angle tracking camera), COLLABORATE® Versa® Pro CT (product bundle consisting of Huddle DSP and BMA CTH beamforming mic array ceiling tile), COLLABORATE® Versa® Lite CT (USB Plug-N-Play beamforming mic array ceiling tile), and COLLABORATE® Versa® 60 (product bundle consisting of CHAT® 150 USB speakerphone, a UNITE® 60 wide angle 4 K ePTZ camera, and a VERSA USB Hub).

In August 2023, we announced that our entire line of commercial and residential solutions is available for specification within the popular D-Tools software program for integrators.

D-Tools’ System Integrator software and D-Tools Cloud platform make it easier than ever for integrators to specify ClearOne solutions for any type of installation.

In September 2023, our new DIALOG® UVHF Wireless Microphone System was named a winner in the Higher Education category of the 2023 Tech & Learning Magazine Awards of Excellence.

The annual Tech & Learning Awards of Excellence program, conducted by leading educational technology publication Tech & Learning, recognizes innovation in the edtech industry and celebrates the most impressive products and solutions that support learning environments.

In October 2023, we debuted the new Versa USB 22 D Dante Adapter at InfoComm India 2023 .

Versa USB 22 D enables users to seamlessly connect computers to a Dante network and use any audio application for playback or capture without installing software.

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

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

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

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

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

During 2023 , our overall revenue of $ 18.7 million decreased by 26 % when compared to revenue of $ 25.2 million during 2022 .

The decrease in revenue was seen across all product categories and major regions.

We believe the revenue decline was primarily due to the decline in demand for video products and due to our inability in the first half of 2023 to source adequate inventory to meet the demand for professional audio products and BMA due to the transition of manufacturing of our products from China to Singapore by our EMS provider.

We believe that many of our channel partners who could not buy our products due to product shortages caused by our manufacturing transition issues are yet to resume their typical buying pattern with us.

We also believe that the lack of Microsoft Teams certification for our products is increasingly impacting our ability to sell our conferencing and collaboration solutions.

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

Our gross profit margin decreased to 34 % during 2023 from 38 % in 2022 .

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

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

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

Net income of $ 20.6 million in 2022 changed to net loss of $ 0.6 million in 2023 .

The change from net income to net loss was primarily due to the recognition in 2022 of a gain of $ 33.6 million included under other income related to the one -time legal settlement receivable of $ 55 million net of unamortized capitalized legal expenses of $ 21.4 million.

This gain was partially offset by (a) a decrease in the tax provision by $ 6.5 million (b) recognition of settlement gains from two separate settlements of $ 5.3 million, (c) increase in interest income by $ 1.7 million, and (d) increase in operating income by $ 0.4 million.

Industry conditions

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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.

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

Economic conditions, challenges and risks

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

Despite our strong leadership position in the installed professional audio conferencing market, we face challenges to revenue growth due to the limited size of the market, 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.

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

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

We expect these fluctuations to continue in 2023.

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

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

Deferred Revenue

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

De ferred revenue decreased from $ 63 thousand in 2022 to $ 30 thousand in 2023 due to decrease in new subscriptions to the video conferencing software.

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

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Total operating expenses

Interest expense

Other income, net

Operating loss

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Our revenue decreased by 26 % to $ 18.7 million in 2023 compared to $ 25.2 million of revenue in 2022 .

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

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

Revenue from all product categories declined during the year with audio conferencing, microphones and video products declining by 29%, 21% and 27% respectively.

Video products suffered a decline in revenues in 2023 compared to 2022 due to a lack of demand for video products due to bottoming of demand for the work from home and learn from home markets and due to extreme pricing pressures.

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

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

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

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

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

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

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

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

Revenue decreases were also d ue to our inability in the first half of 2023 to source adequate inventory to meet the demand for professional audio products and BMA due to the transition of manufacturing of our products from China to Singapore by our EMS provider.

We also believe that the lack of Microsoft Teams certification for our products is increasingly impacting our ability to sell our conferencing and collaboration solutions.

The share of audio conferencing products in our product mix decreased from 47 % in 2022 to 45% in 2023 .

The share of microphones in the revenue mix increased slightly from 39 % in 2022 to 41% in 2023 .

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

Share of video products in the revenue mix remained the same at 14% in 2022 and 2023.

During 2023 , revenue decreased significantly in all regions of the world.

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Our gross profit during 2023 was approximately $ 6.4 million or 34% compared to approximately $ 9.5 mill ion or 38 % in 2022 .

The gross profit margin was negatively impacted due to increase in material costs due to supply chain constraints and increased administration costs as a percentage of revenue partially offset by reduction in inventory obsolescence and freight and tariff costs.

The gross profit margin was negatively impacted due to (a) an increase in freight and tariff costs as a percentage of revenue , (b) increased administration costs as a percentage of revenue, and (c) an increase in inventory obsolescence costs.

These increases in cost of goods sold as a percentage of revenue was partially offset by reduction in material costs as a percentage of revenue.

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

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

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

Our long-term inventory includes approximately $0.2 million of Converge Pro and Beamforming microphone array products, $1.0 million of cameras, and $1.6 million of raw materials that will be used primarily for manufacturing professional audio conferencing products and BMA microphones.

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

Operating Expenses and Profits (Losses)

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S&M expenses in 2023 decreased to $ 4.9 million, compared to $ 5.5 million in 2022 .

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

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

The decrease was primarily due to (a) decreases in employment expenses and consultant expenses, (b) a decrease in commissions paid to employees, full-time consultants and independent manufacturer representatives.

This overall decrease was partially offset by (a) an increase in trade-show-related costs, and (b) an increase in travel expenses.

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

R& D expenses decreased from $ 4.4 million in 2022 to $ 3.7 million in 2023 .

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

The decrease was primarily due to (a) a decrease in project-related expenses, (b) a decrease in employment expenses including salaries and bonuses, and (c) a decrease in allocation of common expenses to R&D.

This overall decrease was partially offset by an increase in legal expenses incurred on application for new patents.

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

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

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

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

G&A expenses decreased to $ 4.6 million in 2023 , compared to $ 6.8 million in 2022 .

The decrease was primarily due to (a) a decrease in amortization of capitalized legal costs related to patents litigation, and (b) a decrease in employment expenses including salaries and bonuses .

This decrease was partially offset by (a) an increase in consulting expenses including investor relations costs, and (b) an increase in directors and officers insurance expenses.

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

Interest expense

I nterest expense increased to $0.5 million in 2023 compared to $0.4 million in 2022.

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

Other income (expense), net

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

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

Other items remained immaterial in 2022 and 2021.

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

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

Other income in 2 023 included (a) $5.3 million from two separate legal settlements, and (b) $1.9 million of interest income received on marketable securities.

Other income in 2022 included (a) a gain recognized of $33.6 million related to the one-time legal settlement receivable of $55 million, net of unamortized capitalized legal expenses of $21.4 million (b) $1.5 million in gain from the forgiveness of CARES Act Paycheck Protection Program Loan, and (c) $1.9 million of interest income received on marketable securities.

Provision for income taxes

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

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

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

The effective tax provision rate was below 0 % in 2023 , comp ared to 25 % effective tax benefit rate during 2022 .

Income tax provision for 2023 was $ 0.4 million as compared to an income tax provision of $ 6.9 million in 2022 .

The significant change in income taxes was primarily due to a decrease in net income in 2023 compared to 2022.

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

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Our working capital was $ 39.1 million and $ 69.3 million as of December 31, 2023 and 2022 , respectively.

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

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

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

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

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

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

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

Capitalization of patent defense costs .

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

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

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

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

Net cash flows used in operating activities were approximately $ 54.6 million during 2023 , an increase of ap proximately $ 58.8 million from $ 4.2 million used in opera ting activities in 2022 .

The increase in cash provided was primarily due to receipt of settlement proceeds of $56.3 million from two separate settlements and income tax refunds, partially offset by change in operating assets and liabilities.

Net cash used in investing activities was $ 4.9 million in 2023 compared to $ 2.1 million provided by investing activities in 2022 , an increase in cash used of $ 7.0 million.

The increase in cash used in investing activities in 2023 was primarily due to an increase in net cash outflows from purchase of marketable securities net of sale of marketable securities of approximately $7.4 million partially offset by a decrease of $0.7 million in capitalized legal spending.

Net cash used in financing activities was $ 32.9 million during 2023 compared to net cash provided by financing activities of $ 2.1 million during 2022 , a decrease in cash provided of $ 34.9 million.

The decrease was primarily due to payment of a special dividend of $29.0 million and an increase in principal payments of debt.

This decrease was further increased by lack of any capital raise in 2023 compared to capital raised through equity and debt issuances of $ 2.0 million in 2022 .

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

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 raised additional capital in 2019 by issuing senior c onvertible 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 million 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 million.

The Company paid a special one -time cash dividend of $ 1.00 per share of ClearOne common stock or the eligible warrants on June 1, 2023 amounting to $29 million.

On March 11, 2024 the Company's Board of Directors declared another special dividend of $ 0.50 per share of the Company's stock and eligible warrants amounting to $14.5 million to be paid on April 10, 2024.

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

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

As of December 31, 2023 , we had open purchase orders of approximately $ 3.6 million mostly for purchase of inventory.

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Payment Due by Period

Senior Convertible Notes and short-term notes

Operating lease obligations

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When there are changes to the assumptions used in the option-pricing model, including fluctuations in the market price of our common stock, there will be variations in the calculated fair value of our future stock option awards, which results in variation in the compensation cost recognized.

Inventories are valued at the lower of cost or market, with cost computed on a first-in, first-out (“FIFO”) basis.

In addition to the price of the product purchased, the cost of inventory includes the Company’s internal manufacturing costs, including warehousing, engineering, material purchasing, quality and product planning expenses and applicable overhead, not in excess of estimated realizable value.

Consideration is given to obsolescence, excessive levels, deterioration, direct selling expenses, and other factors in evaluating net realizable value.

The inventory consists of current inventory of $10.6 million and long-term inventory of $3.1 million.

Long term inventory represents inventory held in excess of our current (next 12 months) requirements based on our recent sales and forecasted level of sales.

If we are unable to sell our long-term inventory including due to changes in business conditions, our profitability might be affected by inventory write-offs and price mark-downs.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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Not Applicable

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 7. Management’s Discussion and Analysis