CLEARONE INC 10-K

ITEM 9 A. CONTROLS AND PROCEDURES 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 Interim Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. As required by Rule 13 a- 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 Interim Chief Financial Officer, of the effectiveness and the design and operation of our disclosure controls and pr ocedures as of December 31, 2023 . Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based upon this evaluation, our Chief Executive Officer and Interim 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, 2023 . 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. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected. As a result, there can be no assurance that our disclosure controls and procedures will detect all errors or fraud. Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13 a- 15 (f) and 15 d- 15 (f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2023 based on the framework set forth in Internal Control - Integrated Framework ( 2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using that criteria, management concluded that the design and operation of our internal control over financial reporting were effective as of December 31, 2023 . Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9 B. OTHER INFORMATION (a) None (b) None ITEM 9 C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not Applicable. 41 Table of Contents PART III ITEM 10 . DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth certain information regarding our directors and executive officers as of April 1, 2024. Name Age Position Director or Officer Since Derek L. Graham 56 Chief Executive Officer 2022 Larry R. Hendricks 80 Director * 2003 Lisa B. Higley 56 Director 2020 Eric L. Robinson 57 Chairman, and Director * 2015 Bruce Whaley 73 Director * 2019 Raghunathan Jayashree 53 Interim Chief Financial Officer 2024 * Member of the Audit and Compliance Committee, Compensation Committee and Nominating Committee 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. Mr. 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. Eric. L Robinson has served as a director of our company since July 2015 and was named Chairman of the Board in February 2022. Mr. 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. Mr. Robinson's law practice focused on securities, corporate and other business transactions. For the past five years, Mr. Robinson has been principally employed by MicroPower Global Limited, a company in the semiconductor business, Operation Underground Railroad, Inc. and as a private attorney. At MicroPower , Mr. Robinson acted as General Counsel, Chief Financial Officer and a director. At Operation Underground Railroad, Inc . he acts as VP of Legal Affairs. Mr. Robinson also maintains a law practice and serves as counsel to a number of companies in the fields of regenerative medicine and commercial construction. Mr. Robinson previously served as chief financial officer, in-house counsel, secretary and treasurer of ActiveCare , Inc. from July 2016 until his voluntary resignation in June 2017, and subsequent to Mr. Robinson’s departure, ActiveCare filed a voluntary bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code on July 15, 2018. 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. degree in accounting and he subsequently passed the CPA exam (unlicensed). He graduated from Vanderbilt University with a J.D. where he graduated Order of the Coif and acted as a Managing Editor of the Law Review. Mr. Robinson has previously served as corporate and securities legal counsel to the Company and the Company's largest shareholder, E. Dallin Bagley. 42 Table of Contents Larry R. Hendricks has served as a director of our Company since June 2003. Mr. Hendricks is a Certified Public Accountant who retired in December 2002 after serving as Vice President of Finance and General Manager of Daily Foods, Inc., a national meat processing company. During his 30 -year career in accounting, he served as a self-employed CPA and worked for the international accounting firm Peat Marwick & Mitchell. Mr. Hendricks has served on the boards of eight other organizations, including Tunex International, Habitat for Humanity, Daily Foods, Skin Care International, and the National Advisory Board of the Huntsman College of Business at Utah State University. He earned a Bachelor's Degree in Accounting from Utah State University and a Master of Business Administration Degree from the University of Utah. Lisa B. Higley was appointed a director of our Company effective July 20, 2020. Ms. Higley has been self-employed as a CPA since June 2009. Previously, she was the CFO for Daisy D’s Paper Company from March 2007 until January 2009, where she managed all aspects of the company’s financial and accounting responsibilities. Additionally, Ms. Higley was the CFO for Tunex International from April 2006 to March 2007 where she was accountable for all financial aspects of the corporation. Prior to that, Ms. Higley was a staff tax accountant at Wisen, Smith, Racker & Prescott LLP from February 2004 to April 2006. Ms. Higley earned her Bachelor of Science in Accounting from the University of Oregon and her MBA from Utah State University, and has been a Utah CPA since 2004 . Ms. Higley is the daughter of Edward D. Bagley, our former Chairman of the Board. Mr. Edward D. Bagley beneficially owns 44 % of our issued and outstanding common stock. Bruce Whaley was appointed a director of our Company effective April 16, 2019. Mr. Whaley has extensive experience as a stockbroker for nearly five decades. Mr. Whaley is currently a broker trading at Wilson & Davis, a regional brokerage firm based in Salt Lake City, Utah. He has been with Wilson & Davis since 1988 . Until March 2023, Mr. Whaley also h eld a real estate license and work ed as a real estate agent for Coldwell Banker. Mr. 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. Raghunathan Jayashree was appointed as Interim CFO on February 27, 2024. Ms. Raghunathan joined the Company as a Senior Manager in July 2018 and has served as the Company’s Controller since October 2019. Ms. Raghunathan, has been a Chartered Accountant in India since 1996 and has over twenty years of work experience in the field of accounting. Section 16 (a) Beneficial Ownership Reporting Compliance Section 16 (a) of the Securities Exchange Act, of 1934 as amended, requires our directors, executive officers and persons who own more than 10 % of a registered class of our equity securities to file with the SEC initial reports of ownership on Form 3 and reports of changes of ownership of our equity securities on Forms 4 and 5 . Officers, directors, and greater than 10 % shareholders are required to furnish us with copies of all Section 16 (a) reports they file. Based solely on a review of the reports furnished to us for the year ended December 31, 2023, we believe that each person who, at any time during such fiscal year was a director, officer, or beneficial owner of more than 10 % of our common stock complied with all Section 16 (a) filing requirements during such period. Code of Ethics The Board of Directors adopted a code of ethics that applies to our Board of Directors, executive officers, and employees. The Company's Code of Ethics is posted on our website at www.clearone.com. Insider Trading Policies and Procedures The Company has adopted a Statement of Policy Regarding Compliance with Insider Trading Laws (the "Insider Trading Policy) that establishes policies and procedures governing the purchase, sale, and/or other dispositions of the Company's securities by directors, officers and employees. The Insider Trading Policy requires compliance with all applicable laws, rules and regulations governing the offer and sale of securities and prohibits directors, officers and employees from engaging in transactions in the Company's securities while in possession of material nonpublic information. The Insider Trading Policy establishes quarterly blackout periods during which trading in the Company's securities is prohibited. These blackout periods begins 15 days prior to the end of each fiscal quarter and ends at the opening of trading on the first business day after the public dissemination of Company's financial results for that quarter for a full trading day. In addition, the Insider Trading Policy requires senior officers and key employees to obtain pre-approval of any transactions in Company securities from the Company's Compliance Officer under the Insider Trading Policy, which currently is the Interim Chief Financial Officer. A copy of the Company's Insider Trading Policy is filed as Exhibit 19.1 to this Annual Report on Form 10-K. Nomination Procedures No changes have been made to the procedures by which our shareholders may recommend nominees to our Board of Directors. Audit and Compliance Committee The Company has a separate Audit and Compliance Committee and its members are Eric L. Robinson (Chairman), Larry R. Hendricks and Bruce Whaley. The Board of Directors has determined that Eric L. 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. 43 Table of Contents ITEM 11 . EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth the compensation paid or earned by each named executive officer for the years ended December 31, 2023 and 2022 . SUMMARY COMPENSATION TABLE Name and Principal Position Salary Option Awards Non-Equity Incentive Plan Compensation All Other Compensation Total Derek Graham, Chief Executive Officer ( 1 ) Year ended December 31, 2023 $ 244,147 $ 21,900 $ — $ 100,000 $ 366,047 Year ended December 31, 2022 $ 221,625 $ — $ — $ — $ 221,625 Narsi Narayanan - Chief Financial Officer (2) Year ended December 31, 2023 $ 250,340 $ 14,600 $ — $ 100,000 $ 364,940 Year ended December 31, 2022 $ 230,000 $ — $ — $ — $ 230,000 ( 1 ) Derek L. Graham was appointed as Interim CEO on May 24, 2022 and became permanent CEO on Jan 26, 2023. (2) Narsi Narayanan served as CFO and Corporate Secretary till March 1, 2024, when his employment with ClearOne ended. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END The following table provides information on the holdings of stock options by the named executive officers as of December 31, 2023 . Name Number of Securities Underlying Unexercised Options Option Exercise Price ($) Option Grant Date Option Expiration Date Exercisable Unexercisable Derek Graham 1,250 — 8.340 9-12-2014 9-12-2024 7,500 2,500 2.500 12-14-2020 12-14-2026 — 30,000 1.010 6-15-2023 6-15-2029 Narsi Narayanan 20,000 — 8.340 9-12-2014 9-12-2024 25,000 — 11.960 3-11-2016 3-11-2026 2,500 — 11.000 12-14-2016 12-14-2026 20,000 — 9.900 6-1-2017 6-1-2027 20,000 — 2.500 12-14-2020 12-14-2026 — 20,000 1.010 6-15-2023 6-15-2029 ( 1 ) One -third of the shares underlying each stock option vest on the first anniversary of the grant date and the remaining shares vest equally over a period of 24 months following the first anniversary of the grant date. OPTION EXERCISES AND STOCK VESTED There were no exercises of stock options by named executive officers during 2023. 44 Table of Contents DIRECTOR COMPENSATION The following table summarizes the compensation paid to non-employee directors for the year ended December 31, 2023 . Name Fees Earned or Paid in Cash Option Awards Other Compensation Total Larry R. Hendricks $ 33,600 $ — $ — $ 33,600 Lisa B. Higley 54,000 — — 54,000 Eric L. Robinson 64,800 — — 64,800 Bruce Whaley 33,600 — — 33,600 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. However, during 2023 no expenses were reimbursed to any director. ITEM 12 . 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 March 29, 2024, 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 Currently Owned Currently Owned Percent ( 2 ) Shares that could be acquired within 60 days Total ( 2 ) Percent ( 2 ) Name of Beneficial Owner ( 1 ) (A) (B) (C) (D) (E) Directors and Executive Officers: Derek L. Graham 5,260 0.02 % 9,791 15,051 0.06 % Larry R. Hendricks 18,048 0.08 % 50,000 68,048 0.27 % Lisa B. Higley ( 3 ) 24,501 0.10 % 10,000 34,501 0.14 % Eric L. Robinson 65 — % 38,333 38,398 0.15 % Bruce Whaley 12,000 0.05 % 10,000 22,000 0.09 % Raghunathan Jayashree — — % — — — % Total (Directors and Officers) 59,874 0.25 % 118,124 177,998 0.71 % 5 % Shareholders: Edward D. Bagley (4 ) 10,590,528 44.18 % 723,628 11,314,156 45.60 % 45 Table of Contents ( 1 ) Except as otherwise indicated, each person named in the table has sole voting and investment power, subject to applicable community property law. 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 . ( 2 ) The percentages shown in Column (B) are calculated based on 23,969,148 shares of common stock outstanding on March 29, 2024. The numbers shown in Column (D) and percentages shown in Column (E) include the shares of common stock actually owned as of March 29, 2024 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 29, 2024 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. ( 3 ) This information is based upon the Form 4 filed with the SEC as of June 2, 2023. Lisa Higley, who was appointed a Director effective July 20, 2020, is the daughter of Edward D. Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other. The share amounts indicated for Ms. Higley do not include any shares held by Edward D. Bagley. The share amounts indicated for Ms. Higley do not include 6,546 shares owned by her spouse and 2,252,636 shares held by a trust in which she is a co-trustee. ( 4 ) Mr. Edward D. Bagley may be deemed to own an additional 2,252,636 shares of common stock that are deemed to be owned by his wife, Carolyn Bagley, as a result of her acting as one of four co-trustees of a trust. Mr. Bagley may be deemed to own an additional 355,257 shares of common stock that Carolyn Bagley owns individually. Mr. Bagley, however, disclaims beneficial ownership of these shares that may be indirectly beneficially owned by Mr. Bagley and they are excluded from the amounts reported in the table above. Mr. Edward D. Bagley has sole voting and dispositive power over 11,314,156 shares (including the shares that may be acquired pursuant to exercise of options to purchase 35,277 shares of common stock, and warrants to purchase 685,295 shares of common stock) and shared voting and dispositive power over the 355,257 shares held by Mr. Edward D. Bagley’s spouse. This information is based upon a Form 4 as filed by Mr. Bagley with the SEC on December 15, 2023 and a Schedule 13D Amendment filed by Mr. Bagley with the SEC in September 2020. E. Bryan Bagley, who resigned as Director effective November 6, 2012, is the son of Edward D. Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other. Lisa Higley, who was appointed a Director effective July 20, 2020, is the daughter of Edward D. Bagley, and each of them has previously disclaimed beneficial ownership of common stock beneficially owned by the other. The share amounts indicated for Mr. Edward D. Bagley do not include any shares held by E. Bryan Bagley or Lisa Higley. 46 Table of Contents Equity Compensation Plan Information The f ollowing table sum marizes informatio n, as of December 31, 2023 , relating to equity compensation plans of the Company (including individual compensation arrangements) pursuant to which equity securities of the Company are authorized for issuance. Plan Category (a) Number of securities to be issued upon e xercise of outstanding options a nd rights (b) Weighted‑Average Exercise Price of Outstanding Options and Rights (c) Number of securities remaining available for f uture issuance under e quity compensation plans (ex cluding securities reflected in column(a)) Equity Compensation Plans Approved by Stockholders 607,810 $ 5.03 857,044 Equity Compensation Plans Not Approved by Stockholders — — — Total — $ — — ITEM 13 . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE We recognize that transactions between us and any of our directors, executives or other related persons can present potential or actual conflicts of interest and create the appearance that our decisions are based on considerations other than the best interests of our Company and shareholders. Therefore, as a general matter and in accordance with our Code of Ethics, it is our preference to avoid such transactions. Nevertheless, we recognize that there are situations where such transactions may be in, or may not be inconsistent with, the best interests of our Company. Under the terms of its charter, our Audit and Compliance Committee reviews and, if appropriate, approves or ratifies any such transactions. Pursuant to the charter, the Committee will review any transaction in which we are or will be a participant and the amount involved exceeds $ 120,000 , and in which any of our directors or executives had, has or will have a direct or indirect material interest. After its review, the Committee will only approve or ratify those transactions that are in, or are not inconsistent with, the best interests of our Company and our shareholders, as the Committee determines in good faith. The Company’s Board of Directors adopted the Company's Related Party Transactions Policy on January 18, 2017. This policy is available on our website at http://investors.clearone.com/corporate-governance. Related Party Transactions: Consulting Agreement with Edward D. Bagley On June 3, 2015, the Company entered into a Consulting Agreement with Edward D. Bagley, former Chairman of the Board and greater than 10 % shareholder (“Consulting Agreement”) which became effective on July 29, 2015 for an initial term of three years which was renewed in 2018 for an additional term of three years and renewed again in 2021 for an additional term of 3 years through 2024 . Pursuant to the terms of the Consulting Agreement Mr. 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 2023 , he was paid $ 60,000 as consulting fees. During 2023 , he did not receive any grant of stock options. Director Independence Our Board of Directors has determined, after considering all the relevant facts and circumstances, that Larry Hendricks, Eric Robinson and Bruce Whaley are independent directors, in accordance with the definition of “independence” under the listing standards of NASDAQ, because they have no relationship with us that would interfere with their exercise of independent judgment. 47 Table of Contents ITEM 14 . PRINCIPAL ACCOUNTING FEES AND SERVICES amounts: 2023 2022 Audit fees ( 1 ) $ 256,386 $ 229,111 Audit-related fees ( 2 ) — — Tax fees ( 3 ) 64,525 55,700 All other fees — — Total $ 320,911 $ 284,811 ( 1 ) Represents fees billed for professional services rendered for the audit and reviews of our financial statements filed with the SEC on Forms 10-K and 10-Q. ( 2 ) Represents fees billed for consents provided with respect to registration statements and related amendments. ( 3 ) Represents fees billed for tax filing, preparation, and tax advisory services. Pre-Approval Policies and Procedures The Audit and Compliance Committee ensures that we engage our independent registered public accounting firm to provide only audit and non-audit services that are compatible with maintaining the independence of our public accountants. The Audit and Compliance Committee approves or pre-approves all services provided by our public accountants. Permitted services include audit and audit-related services, tax services and other non-audit related services. Certain services are identified as restricted. Restricted services are those services that may not be provided by our external public accountants, whether identified in statute or determined to be incompatible with the role of an independent auditor. All fees identified in the preceding table were approved by the Audit and Compliance Committee. During 2023 , the Audit and Compliance Committee reviewed all non-audit services provided by our independent registered public accounting firm and concluded that the provision of such non-audit services was compatible with maintaining the independence of the external public accountants. 48 Table of Contents PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 1. Financial Statements: Financial statements set forth under Part II, Item 8 of this Annual Report on Form 10-K are filed in a separate section of this Form 10-K. See the “Index to Consolidated Financial Statements”. 2. Financial Statement Schedules: All schedules are omitted since they either are not required, not applicable or the information is presented in the accompanying consolidated financial statements and notes thereto. 3. Exhibits: The exhibits listed under the Index of exhibits in the next page are filed or incorporated by reference as part of this Form 10-K. ITEM 16. FORM 10-K SUMMARY Not applicable. 49 Table of Contents INDEX TO EXHIBITS Exhibit Number Exhibit Description Form Exhibit Incorporated Herein by Reference Filing Date 3.1 Certificate of Incorporation of ClearOne, Inc. 8-K 3.1 10/29/18 3.2 Bylaws 8-K 3.2 10/29/18 4.1 Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 10-K 4.1 03/30/20 10.1# 1997 Employee Stock Purchase Plan S-8 4.9 10/06/06 10.2# 1998 Stock Option Plan S-8 4.8 10/06/06 10.3# 2007 Equity Incentive Plan S-8 4.7 01/22/08 10.4# ClearOne, Inc. Equity Incentive Plan S-8 4.8 01/26/16 10.5# Amendment No. 1 to the ClearOne, Inc. Equity Incentive Plan S-8 4.11 06/30/15 10.6# ClearOne, Inc. Employee Stock Purchase Plan S-8 4.3 06/30/15 10.7 Form of Securities Purchase Agreement 8-K 10.1 09/14/20 10.8 Form of Securities Purchase Agreement 8-K 10.1 09/13/21 10.9 Form of Registration Rights Agreement 8-K 10.2 09/13/21 10.10 Securities Purchase Agreement. 8-K 10.1 0104/22 10.11 Registration Rights Agreement. 8-K 10.2 01/04/22 10.12# Confidential Separation Agreement and General Release. 8-K 10.1 08/17/22 10.13* Confidential Settlement and License Agreement. 8-K 10.1 12/09/22 10.14* Non-Exclusive Cross License Agreement effective December 23, 2023 by and between ClearOne, Inc. and Sennheiser electronic GmbH & C0. KG. 8-K 10.1 12/27/23 14.1 Code of Ethics, approved by the Board of Directors on August 23, 2006 10-K 14.1 09/14/06 19.1 † ClearOne Inc. Statement of Policy Regarding Compliance with Insider Trading Laws 21.1† Subsidiaries of the registrant 23.1† Consent of Tanner LLC, Independent Registered Public Accounting Firm 31.1† Section 302 Certification of Chief Executive Officer 31.2† Section 302 Certification of Chief Financial Officer 32.1† Section 906 Certification of Chief Executive Officer 32.2† Section 906 Certification of Chief Financial Officer 101.INS‡ XBRL Instance Document 101.SCH‡ XBRL Taxonomy Extension Schema 101.CAL‡ XBRL Taxonomy Extension Calculation Linkbase 101.DEF‡ XBRL Taxonomy Extension Definitions Linkbase 101.LAB‡ XBRL Taxonomy Extension Label Linkbase 101.PRE‡ XBRL Taxonomy Extension Presentation Linkbase 104 The cover page from this Annual Report on Form 10-K formatted in Inline XBRL * 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 ‡ Information furnished herewith shall not be deemed to be “filed” for the purposes of Section 18 of the 1934 Act #Management contract or compensatory plan or arrangement 50 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CLEARONE, INC. Registrant /s/ Derek L. Graham Derek L. Graham Chief Executive Officer April 1, 2024 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/ Derek L. Graham /s/ Raghunathan Jayashree Derek L. Graham Raghunathan Jayashree President and Chief Executive Officer Interim Chief Financial Officer (Principal Executive Officer) (Principal Accounting and Principal Financial Officer) April 1, 2024 April 1, 2024 /s/ Eric L. Robinson /s/ Larry R. Hendricks Eric L. Robinson Larry R. Hendricks Director and Chairman of the Board Director April 1, 2024 April 1, 2024 /s/ Bruce Whaley /s/ Lisa B. Higley Bruce Whaley Lisa B. Higley Director Director April 1, 2024 April 1, 2024 51 Table of Contents CLEARONE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ​ Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 270 ). F-1 Consolidated Balance Sheets as of December 31, 2023 and December 31, 2022 F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2023 and 2022 F-4 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-8 52 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of ClearOne, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of ClearOne, Inc. and subsidiaries (collectively, the Company) as of December 31, 2023 and 2022 , 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, 2023 , 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, 2023 and 2022 , and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023 , in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion T hese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the account or disclosure to which it relates. | F-1 | Table of Contents Assessment of lower of cost or net realizable value of inventories As described in Notes 1 and 4 to the consolidated financial statements, inventories totaling $ 13.8 million as of December 31, 2023 are stated at the lower of cost or market. The Company performs analyses to identify and estimate the net realizable value of excess or slow-moving inventories based on forecasted future product demand. We identified the inventory valuation as a critical audit matter because of the significant balance of inventory held by the Company and because forecasting future product demand involves significant judgement by management. This required a high degree of auditor judgement, subjectivity and effort in performing procedures and evaluating audit evidence to evaluate management’s assumptions related to estimating the reserve of obsolete and slow-moving inventory. Addressing this critical audit matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included, among others: (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. /s/ TANNER LLC Salt Lake City, Utah April 1, 2024 We have served as the Company’s auditor since October 14, 2015. | F-2 | Table of Contents CLEARONE, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) December 31, 2023 December 31, 2022 ASSETS Current assets: Cash and cash equivalents $ 17,835 $ 984 Marketable securities 3,480 — Legal settlement receivable 4,000 55,000 Receivables, net of allowance for credit losses of $ 326 3,279 3,603 Inventories, net 10,625 8,961 Income tax receivable 36 1,071 Prepaid expenses and other assets 4,062 7,808 Total current assets 43,317 77,427 Long-term marketable securities 916 — Long-term inventories, net 3,143 2,707 Property and equipment, net 530 383 Operating lease – right of use assets, net 990 1,047 Intangibles, net 1,689 2,071 Other assets 109 115 Total assets $ 50,694 $ 83,750 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,945 $ 1,284 Accrued liabilities 2,290 3,041 Deferred product revenue 30 63 Short-term debt — 3,732 Total current liabilities 4,265 8,120 Long-term debt — — Op erat ing lease liability, net of current 665 492 Other long-term liabilities 1,079 1,008 Total liabilities 6,009 9,620 Shareholders’ equity: Common stock, par val ue $ 0.001 , 50,000,000 shares authorized, 23,969,148 and 23,955,767 shares i ssued and outstanding , respectively 24 24 Additional paid-in capital 46,047 74,910 Accumulated other comprehensive loss ( 310 ) ( 288 ) Accumulated deficit ( 1,076 ) ( 516 ) Total shareholders’ equity 44,685 74,130 Total liabilities and shareholders’ equity $ 50,694 $ 83,750 See accompanying notes | F-3 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Dollars in thousands, except per share amounts) Year ended December 31, 2023 2022 Revenue $ 18,704 $ 25,205 Cost of goods sold 12,347 15,748 Gross profit 6,357 9,457 Operating expenses: Sales and marketing 4,897 5,517 Research and product development 3,671 4,390 General and administrative 4,561 6,772 Total operating expenses 13,129 16,679 Operating loss ( 6,772 ) ( 7,222 ) Interest expense ( 537 ) ( 420 ) Other income, net 7,183 35,102 Income (loss) before income taxes ( 126 ) 27,460 Provision for income taxes 434 6,904 Net income (loss) $ ( 560 ) $ 20,556 Basic income (loss) per common share $ ( 0.02 ) $ 0.86 Diluted income (loss) per common share $ ( 0.02 ) $ 0.83 Basic weighted average shares outstanding 23,958,184 23,937,962 Diluted weighted average shares outstanding 23,958,184 25,189,147 Comprehensive income (loss): Net income (loss) $ ( 560 ) $ 20,556 Other comprehensive income (loss): Unrealized loss on available-for-sale securities, net of tax ( 15 ) ( 2 ) Change in foreign currency translation adjustment ( 7 ) ( 45 ) Comprehensive income (loss) $ ( 582 ) $ 20,509 See accompanying notes | F-4 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Dollars in thousands ) Year ended December 31, 2023 Year ended December 31, 2022 Common stock and paid-in capital Balance, beginning of year $ 74,934 $ 72,817 Issuance of common stock — 2,000 Dividends paid ( 28,979 ) — Share-based compensation expense 109 113 Proceeds from employee stock purchase plan 7 4 Balance, end of year $ 46,071 $ 74,934 Accumulated other comprehensive loss Balance, beginning of year $ ( 288 ) $ ( 241 ) Unrealized loss on available-for-sale securities, net of tax ( 15 ) ( 2 ) Foreign currency translation adjustment ( 7 ) ( 45 ) Balance, end of year $ ( 310 ) $ ( 288 ) Accumulated deficit Balance, beginning of year $ ( 516 ) $ ( 21,072 ) Net income (loss) ( 560 ) 20,556 Balance, end of year $ ( 1,076 ) $ ( 516 ) Total shareholders' equity $ 44,685 $ 74,130 See accompanying notes | F- 5 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2023 2022 Cash flows from operating activities: Net income (loss) $ ( 560 ) $ 20,556 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization expense 941 2,970 Amortization of right of use of assets 397 597 Share-based compensation expense 109 113 Change of inventory to net realizable value 281 120 Loss on disposal of assets ( 47 ) 146 Gain recognized on Paycheck Protection Plan Loan forgiveness — ( 1,528 ) Gain on legal settlement proceeds, net of capitalized legal costs less amortization ( 4,000 ) ( 33,623 ) Changes in operating assets and liabilities: Receivables 324 1,388 Legal settlement receivable 55,000 — Inventories ( 2,381 ) 1,812 Prepaid expenses and other assets 3,752 684 Accounts payable 661 ( 4,104 ) Accrued liabilities ( 497 ) 485 Income taxes receivable 1,035 6,466 Deferred product revenue ( 33 ) 9 Operating lease liabilities ( 425 ) ( 623 ) Other long-term liabilities 71 353 Net cash provided by (used in) operating activities 54,628 ( 4,179 ) Cash flows from investing activities: Purchase of marketable securities ( 10,298 ) — Purchase of property and equipment ( 375 ) ( 51 ) Purchase of intangibles ( 135 ) ( 137 ) Capitalized patent defense costs — ( 737 ) Proceeds from maturities and sales of marketable securities 5,925 3,010 Net cash provided by (used in) investing activities ( 4,883 ) 2,085 Cash flows from financing activities: Dividend payment ( 28,979 ) — Principal payments of long-term debt ( 3,920 ) ( 720 ) Proceeds from issuance of short-term notes — 2,000 Proceeds from Pay check Protection Program loan — 767 Proceeds from equity-based compensation programs 7 4 Net cash provided by (used in) financing activities ( 32,892 ) 2,051 Effect of exchange rate changes on cash and cash equivalents ( 2 ) ( 44 ) Net decrease in cash and cash equivalents 16,851 ( 87 ) Cash and cash equivalents at the beginning of the year 984 1,071 Cash and cash equivalents at the end of the year $ 17,835 $ 984 | F- 6 | Table of Contents CLEARONE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2023 2022 Supplemental disclosure of cash flow information: Cash paid for income taxes $ 6,905 $ 88 Cash paid for interest 343 226 Supplemental disclosure of non-cash investing and financing activities Right-of-use assets obtained in exchange for lease obligations — 107 Issue of common stock in consideration of cancellation of debt — 2,000 See accompanying notes | F- 7 | Table of Contents CLEARONE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1 . Business Description, Basis of Presentation and Significant Accounting Policies Business Description: ClearOne, Inc., together with its subsidiaries (collectively, “ClearOne” or the “Company”), is a global market leader enabling conferencing, collaboration, and network streaming solutions. The performance and simplicity of our advanced, comprehensive solutions offer unprecedented levels of functionality, reliability and scalability. Basis of Presentation: Fiscal Year – This report on Form 10-K includes consolidated balance sheets for t he years ended December 31, 2023 and 2022 and the related consolidated statements of operations and comprehensive income (loss), shareholders' equity, and cash flows for each of the years ended December 31, 2023 and 2022 . Consolidation – These consolidated financial statements include the financial statements of ClearOne, Inc. and its wholly owned subsidiaries. All inter-Company accounts and transactions have been eliminated in consolidation. Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Key estimates in the accompanying consolidated financial statements include, among others, revenue recognition, allowances for doubtful accounts receivable and product returns, provisions for obsolete inventory, potential impairment of long-lived assets, and deferred income tax asset valuation allowances. Actual results could differ materially from these estimates. Foreign Currency Translation – We are exposed to foreign currency exchange risk through our foreign subsidiaries. Other than our subsidiaries in India and Spain, all other foreign subsidiaries are U.S. dollar functional, for which gains and losses arising from remeasurement are included in earnings. Our Spanish subsidiary is Euro functional, for which gains and losses arising from translation are included in accumulated other comprehensive income or loss. Our Indian subsidiary is Indian Rupee functional, for which gains and losses arising from translation are included in accumulated other comprehensive income or loss. We translate and remeasure foreign assets and liabilities at exchange rates in effect at the balance sheet dates. We translate revenue and expenses using average rates during the year. Concentration Risk – We depend on an outsourced manufacturing strategy for our products. We outsource the manufacture of all of our products to third party manufacturers located in Asia. If any of these manufacturers experience difficulties in obtaining sufficient supplies of components, component prices significantly exceeding the anticipated costs, an interruption in their operations, or otherwise suffer capacity constraints, we would experience a delay in production and shipping of these products, which would have a negative impact on our revenues. Should there be any disruption in services due to natural disaster, economic or political difficulties, transportation restrictions, acts of terror, quarantine or other restrictions associated with infectious diseases, or other similar events, or any other reason, such disruption may have a material adverse effect on our business. Operating in the international environment exposes us to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, and potentially adverse tax consequences, which could materially affect our results of operations. Currently, we have no second source of manufacturing for most of our products. Significant Accounting Policies: Cash Equivalents – The Company considers all highly-liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. The Company places its temporary cash investments with high-quality financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation insurance limits. As of December 31, 2023 , there were three cash accounts in the United States that exceeded federally insured limits, in the amount of $ 17,251 . In addition, there were foreign cash accounts in the amount of $ 192 that were not covered by Federal Deposit Insurance Corporation insurance. | F- 8 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Marketable Securities - The Company has classified its marketable securities as available-for-sale securities. These debt securities are carried at estimated fair value with unrealized holding gains and losses included in other comprehensive income (loss) in shareholders’ equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary results in a charge to earnings and establishes a new cost basis for the security. Losses are charged against “Other income” when a decline in fair value is determined to be other than temporary. We review several factors to determine whether a loss is other than temporary. These factors include, but are not limited to: ( i ) the extent to which the fair value is less than cost and the cause for the fair value decline, (ii) the financial condition and near term prospects of the issuer, (iii) the length of time a security is in an unrealized loss position and (iv) our ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. There were no other-than-temporary impairments recognized during t he years ended December 31, 2023 and 2022 . Accounts Receivable – Accounts receivable are recorded at the invoiced amount, net of expected returns and allowance for doubtful accounts. Generally, credit is granted to customers on a short-term basis without requiring collateral, and as such, these accounts receivable, do not bear interest, although a finance charge may be applied to such receivables that are past due. The Company extends credit to customers who it believes have the financial strength to pay. The Company has in place credit policies and procedures, an approval process for sales returns and credit memos, and processes for managing and monitoring channel inventory levels. The allowance for credit losses is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Management regularly analyzes accounts receivable including current aging, historical write-off experience, customer concentrations, customer creditworthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. We review customer accounts quarterly by first assessing accounts with aging over a specific duration and balance over a specific amount. We review all other balances on a pooled basis based on past collection experience. Accounts identified in our customer-level review as exceeding certain thresholds are assessed for potential allowance adjustment if we conclude the financial condition of that customer has deteriorated, adversely affecting their ability to make payments. Delinquent account balances are written off if the Company determines that the likelihood of collection is not probable. If the assumptions that are used to determine the allowance for credit losses change, the Company may have to provide for a greater level of expense in future periods or reverse amounts provided in prior periods. The Company’s allowance for doubtful accounts activity for the years ended December 31, 2023 and 2022 is as follows: Year Ended December 31, 2023 2022 Balance at beginning of the year $ 326 $ 326 Allowance increase (decrease) — — Write offs, net of recoveries — — Balance at end of the year $ 326 $ 326 Inventories – 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 also includes advance replacement units (valued at cost) provided by the Company to end-users to service defective products under warranty. The value of advance replacement units included i n the inventory was $ 96 and $ 193 , as of December 31, 2023 and 2022 , respectively. The inventory consists of current inventory of $ 10,625 and long-term inventory of $ 3,143 . 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. | F- 9 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Property and Equipment – Property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized. Routine maintenance, repairs, and renewal costs are expensed as incurred. Gains or losses from the sale, trade-in, or retirement of property and equipment are recorded in current operations and the related book value of the property is removed from property and equipment accounts and the related accumulated depreciation and amortization accounts. Estimated useful lives are generally two to ten years . Depreciation and amortization are calculated over the estimated useful lives of the respective assets using the straight-line method. 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 are amortized over their useful lives unless these lives are determined to be indefinite. Intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, which are generally three to ten years . Intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized. Impairment of Long-Lived Assets - Long-lived assets, such as property, equipment, and definite-lived intangible assets subject to depreciation and amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to estimated future undiscounted net cash flows of the related asset or group of assets over their remaining lives. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset. Impairment of long-lived assets is assessed at the lowest levels for which there are identifiable cash flows that are independent of other groups of assets. The impairment of long-lived assets requires judgments and estimates. If circumstances change, such estimates could also change. Assets held for sale are reported at the lower of the carrying amount or fair value, less the estimated costs to sell. Leases: We determine if an arrangement is a lease at inception. Operating leases are included in operating lease - right of use (“ROU”) assets, accrued liabilities, and operating lease liability in our consolidated balance sheets. As of adoption of ASC 842 and as of December 31, 2023 and December 31, 2022 , the Company was not party to finance lease arrangements. ROU assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and operating lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. Under the available practical expedient, we account for the lease and non-lease components as a single lease component. Revenue Recognition Policy: The Company generates revenue from sales of its audio and video conferencing equipment to distributors, system integrators and value-added resellers. The Company also generates revenue, to a much lesser extent, from sale of software and licenses to distributors, system integrators, value-added resellers and end-users. The Company recognizes revenue when it satisfies a performance obligation in an amount reflecting the consideration to which it expects to be entitled. For sales agreements, the Company has identified the promise to transfer products, each of which are distinct, to be the performance obligation. The Company applies a five -step approach in determining the amount and timing of revenue to be recognized: ( 1 ) identifying the contract with a customer, ( 2 ) identifying the performance obligations in the contract, ( 3 ) determining the transaction price, ( 4 ) allocating the transaction price to the performance obligations in the contract and ( 5 ) recognizing revenue when the performance obligation is satisfied. Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer. Sales agreements with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, warranty and supply, but typically do not require mandatory purchase commitments. In the absence of a sales agreement, the Company’s standard terms and conditions at the time of acceptance of purchase orders apply. The Company considers the customer purchase orders, governed by sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. The Company evaluates certain factors including the customer’s ability to pay (or credit risk). | F- 10 | Table of Contents 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. Sales to distributors, are typically made pursuant to agreements that provide return rights with respect to discontinued or slow-moving products, referred to as stock rotation. Sales to distributors can also be subject to price adjustment on certain products, primarily for distributors with drop-shipping rights. Although payment terms vary, most distributor agreements require payment within 45 days of invoicing. The Company recognizes revenue when it satisfies a performance obligation. The Company recognizes revenue from sales agreements upon transferring control of a product to the customer. This typically occurs when products are shipped or delivered, depending on the delivery terms, or when products that are consigned at customer locations are sold to dealers or end users. Revenue recognized during the twelve months ended December 31, 2023 for equipment sales was $ 18,576 , and for software, licenses, etc. was $ 128 . Sales returns and allowances are estimated based on historical experience. Provisions for discounts and rebates to customers, estimated returns and allowances, ship and credit claims and other adjustments are provided for in the same period the related revenues are recognized, and are netted against revenues. For returns, the Company recognizes a related asset for the right to recover returned products with a corresponding reduction to cost of goods sold. The Company reviews warranty and related claims activity and records provisions, as necessary. Frequently, the Company receives orders with multiple delivery dates that may extend across reporting periods. Since each delivery constitutes a performance obligation, the Company allocates the transaction price of the contract to each performance obligation based on the stand-alone selling price of the products. The Company invoices the customer for each delivery upon shipment and recognizes revenues in accordance with delivery terms. Although payment terms vary, distributors typically pay within 45 days of invoicing and dealers pay within 30 days of invoicing. As scheduled delivery dates are within one year , revenue allocated to future shipments of partially completed contracts are not disclosed. The Company has elected to record freight and handling costs associated with outbound freight after control over a product has transferred to a customer as a fulfillment cost and include it in cost of revenues. Taxes assessed by government authorities on revenue-producing transactions, including value-added and excise taxes, are presented on a net basis (excluded from revenues) in the consolidated statements of operations and comprehensive income (loss). The details of deferred revenue and associated cost of goods sold and gross profit are as follows: As of December 31, 2023 2022 Deferred revenue $ 30 $ 63 Deferred cost of goods sold — — Deferred gross profit $ 30 $ 63 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. The Company records rebates as a reduction of revenue in accordance with GAAP. The Company provides, at its discretion, advance replacement units to end-users on defective units of certain products under warranty. Since the purpose of these units is not revenue generating, the Company tracks the units due from the end-user, until the defective unit has been returned. Any amount due from the customer upon failure to return the products is accounted as receivable only after establishing customer's failure to return the products. The inventory due from the customer is accounted at cost or market value whichever is lower. | F- 11 | Table of Contents 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: Year Ended December 31, 2023 2022 Audio Conferencing $ 8,366 $ 11,829 Microphones 7,749 9,824 Video products 2,589 3,552 $ 18,704 $ 25,205 The following table disaggregates the Company’s revenue into major regions: Year Ended December 31, 2023 2022 North and South America $ 9,047 $ 12,297 Asia (including Middle East) and Australia 7,338 7,828 Europe and Africa 2,319 5,080 $ 18,704 $ 25,205 Warranty Costs – The Company accrues for warranty costs based on estimated warranty return rates and estimated costs to repair. These reserve costs are classified as accrued liabilities on the consolidated balance sheets. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty returns, and repair cost. The Company reviews the adequacy of its recorded warranty accrual on a quarterly basis. The details of changes in the Company’s warranty accrual are as follows: Year Ended December 31, 2023 2022 Balance at the beginning of year $ 194 $ 194 Accruals/additions — — Usage/claims — — Balance at end of year $ 194 $ 194 Advertising – The Company expenses advertising costs as incurred. Advertising costs consist of trade shows, magazine advertisements, and other forms of media. Advertising expenses for t he years ended December 31, 2023 and 2022 totaled $ 661 and $ 572 , respectively, and are included in sales and marketing on the consolidated statements of operations and comprehensive income (loss). Income Taxes – The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry-forwards. These temporary differences will result in deductible or taxable amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some or all of the deferred tax assets may not be realized. On a quarterly basis, the Company tests the value of deferred tax assets for impairment at the taxpaying-component level within each tax jurisdiction. Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of such allowances. | F- 12 | Table of Contents 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. Our assessment of future taxable income is based on historical experience and current and anticipated market and economic conditions and trends. 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. As of December 31, 2023 the Company had no net deferred tax assets due to valuation allowances recorded to account for the consecutive quarters with losses before taxes. Recent changes: There were no changes that had a material impact on the Company's consolidated financial position, results of operations or cash flows. Earnings Per Share – The following table sets forth the computation of basic and diluted loss per common share: Year Ended December 31, 2023 2022 Numerator: Net income (loss) $ ( 560 ) $ 20,556 Interest adjustment under if-converted method — 285 ( 560 ) 20,841 Denominator: Basic weighted average shares 23,958,184 23,937,962 Dilutive common stock equivalents using if-converted method — 1,251,185 Diluted weighted average shares 23,958,184 25,189,147 Basic income (loss) per common share: $ ( 0.02 ) $ 0.86 Diluted income (loss) per common share: $ ( 0.02 ) $ 0.83 Weighted average options, warrants and convertible portion of senior convertible notes outstanding 6,258,917 6,788,671 Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation 6,258,917 5,510,600 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. We also make decisions regarding the method of calculating expected volatilities and the risk-free interest rate used in the option-pricing model. The resulting calculated fair value of stock options is recognized as compensation expense over the requisite service period, which is generally the vesting period. 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. Other recent accounting pronouncements: 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. | F- 13 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Liquidity: As of December 31, 2023 , cash and cash equivalents were approximately $ 17,835 compared to $ 984 as of December 31, 2022 . Our working capital was $ 39,052 as of December 31, 2023 compared to $ 69,307 as of December 31, 2022 . Net cash provided by operating activities was $ 54,628 for the twelve months ended December 31, 2023 , an increase in cashflows of $ 58,807 from $ 4,179 of cash used in operating activities in the twelve months ended December 31, 2022 . 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 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 $ 2,000 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 . 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 $ 28,979 . 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 estimated $ 14,500 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, will provide the liquidity needed to meet our operating needs through at least April 1, 2025. 2 . Marketable Securities The Company has classified its marketable securities as available-for-sale securities. These debt securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive income (loss) in shareholders’ equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. 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 securities at December 31, 2023 were as follows: Amortized cost Gross unrealized holding gains Gross unrealized holding losses Estimated fair value December 31, 2023 Available-for-sale securities: US Treasury securities $ 1,804 $ — $ ( 1 ) $ 1,803 Mutual funds 1,498 7 — 1,505 Certificates of deposit 103 — — 103 Corporate debt securities 1,007 — ( 22 ) 985 Total available-for-sale securities $ 4,412 $ 7 $ ( 23 ) $ 4,396 | F- 14 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Maturities of marketable securities classified as available-for-sale securities were as follows at December 31, 2023: Amortized cost Estimated fair value Due within one year $ 3,497 $ 3,480 Due after one year through five years 915 916 Total available-for-sale securities $ 4,412 $ 4,396 There were no available-for sale securities as of December 31, 2022. Debt securities in an unrealized loss position as of December 31, 2023 were not deemed impaired at acquisition and subsequent declines in fair value are not deemed attributed to declines in credit quality. Management believes that it is more likely than not that the securities will receive a full recovery of par value. The available-for-sale marketable securities in a gross unrealized loss position as of December 31, 2023 are summarized as follows: Less than 12 months More than 12 months Total Estimated Gross Estimated Gross Estimated Gross fair value unrealized fair value unrealized fair value unrealized holding holding holding losses losses losses As of December 31, 2023 US Treasury Securities $ 1,803 $ ( 1 ) - $ - $ 1,803 $ ( 1 ) Mutual Funds 1,505 - - - 1,505 - Certificates of Deposit 103 - - - 103 - Corporate Debt securities 985 ( 22 ) - - 985 ( 22 ) $ 4,396 $ ( 23 ) $ - $ - $ 4,396 $ ( 23 ) | F- 15 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 3 . Intangible Assets Intangibl e assets as of December 31, 2023 an d 2022 consisted of the following: Estimated useful lives As of December 31, (in years) 2023 2022 Tradename 5 to 7 $ 555 $ 555 Patents and technological know-how 10 to 20 7,187 7,053 Proprietary software 3 to 15 2,981 2,981 Other 3 to 5 324 323 Total intangible assets, gross 11,047 10,912 Accumulated amortization ( 9,358 ) ( 8,841 ) Total intangible assets, net $ 1,689 $ 2,071 During t he years ended December 31, 2023 and 2022 , amortization of these intangible assets were $ 517 and $ 2,512 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. The estimated future amortization expense of intangible assets is as follows: Years ending December 31, 2024 $ 257 2025 196 2026 195 2027 65 2028 21 Thereafter 955 Total $ 1,689 | F- 16 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 4 . Inventories Inventories, net of reserves, consisted of the following: As of December 31, 2023 2022 Current: Raw materials $ 2,086 $ 4,499 Finished goods 8,539 4,462 Total $ 10,625 $ 8,961 Long-term: Raw materials $ 1,789 $ 1,068 Finished goods 1,354 1,639 Total $ 3,143 $ 2,707 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. We have developed programs to reduce the inventory to normal operating levels in the near future . We expect to sell the above inventory, net of reserves, at or above the stated cost and believe that no loss will be incurred on its sale. The losses incurred on valuation of inventory at the lower of cost or market value and write-off of obsolete inv entory amounted to $ 281 and $ 120 during t he years ended December 31, 2023 and 2022 , respectively. 5 . Property and Equipment Major classifications of property and equipment and estimated useful lives were as follows: Estimated useful lives As of December 31, in years 2023 2022 Office furniture and equipment 3 to 10 $ 70 $ 66 Leasehold improvements 2 to 7 193 121 Vehicles 5 to 10 57 41 Manufacturing and test equipment 2 to 10 1,442 1,146 1,762 1,374 Accumulated depreciation and amortization ( 1,232 ) ( 991 ) Property and equipment, net $ 530 $ 383 Depreciation expense on property and equipment for t he years ended December 31, 2023 and 2022 was $ 238 and $ 263 , respectively. | F- 17 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 6 . Leases Rent expense is recognized on a straight-line basis over the period of the lease taking into account future rent escalation and holiday periods. Rent expense for the years ended December 31, 2023 and 2022 was as follows: Year ended December 31, 2023 2022 Rent expense $ 480 $ 684 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 9,402 square-foot facility in Salt Lake City, Utah under the terms of an operating lease, which expires in February 2028. The facility supports our principal administrative, sales, marketing, customer support, and research and product development activities. We occupy a 6,175 square-foot facility in Chennai, India under the terms of an operating lease expiring in August 2024. This facility support s our administrative, marketing, customer support, and research and product development activities. We occupy a 40,000 square-foot warehouse in Salt Lake City, Utah under the terms of an operating lease expiring in April 2025, which serves as our primary inventory fulfillment center. Supplemental cash flow information related to leases was as follows: Year ended December 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 492 $ 680 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 397 $ 107 Supplemental balance sheet information related to leases was as follows: December 31, 2023 December 31, 2022 Operating lease right-of-use assets $ 990 $ 1,047 Current portion of operating lease liabilities, included in accrued liabilities $ 383 $ 641 Operating lease liabilities, net of current portion 665 492 Total operating lease liabilities $ 1,048 $ 1,133 Weighted average remaining lease term for operating leases (in years) 3.39 2.12 Weighted average discount rate for operating leases 6.47 % 5.93 % | F- 18 | Table of Contents 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, 2023 : Years ending December 31, 2024 $ 439 2025 272 2026 210 2027 216 2028 37 Thereafter — Total lease payments 1,174 Less: Imputed interest ( 126 ) Total $ 1,048 7 . Accrued Liabilities Accrued liabilities consist of the following: As of December 31, 2023 2022 Accrued salaries and other compensation $ 632 $ 1,148 Sales and marketing programs and customer credit balances 640 605 Product warranty 194 194 Current portion of operating lease liabilities 383 641 Other accrued liabilities 441 453 Total $ 2,290 $ 3,041 | F-19 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 8 . Commitments and Contingencies We establish contingent liabilities when a particular contingency is both probable and estimable. The Company is not aware of any pending claims or assessments, other than as described below, which may have a material adverse impact on the Company’s financial position or results of operations. Outsource Manufacturers. We have manufacturing agreements with electronics manufacturing service (“EMS”) providers related to the outsourced manufacturing of our products. Certain manufacturing agreements establish annual volume commitments. We are also obligated to repurchase Company-forecasted but unused materials. The Company has non-cancellable, non-returnable, and long-lead time commitments with its EMS providers and certain suppliers for inventory components that will be used in production. The Company’s purchase commitments under such agreements is approximately $ 3,596 as of December 31, 2023 . Uncertain Tax Positions. As further discussed in Note 13 - Income Taxes , we had $ 968 of uncertain tax positions as of December 31, 2023 . Due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability to any particular year. Legal Proceedings. Intellectual Property Litigation The Company was involved in several litigation proceedings (collectively, the “Litigations”) against Shure Incorporated (“Shure”). 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; and ● The Company and Shure agreed to certain patent licenses and covenants not to sue. The Company capitalized $ 0 and $ 737 of litigation expenses related to this matter during the twelve months ended December 31, 2023 and 2022 , 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. The Company also settled another intellectual property matter by entering into a cross licensing agreement in December 2023 and accepting a one-time payment of $ 4,000 in March 2024. The amount is recognized and included under other income in the consolidated statement of operations and in the consolidated balance sheet under legal settlement receivable as of December 31, 2023. 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. Such matters are subject to many uncertainties and outcomes that are not predictable. However, based on the information available to us, we do not believe any such other proceedings will have a material adverse effect on our business, results of operations, financial position, or liquidity. Conclusion We believe there are no other items that will have a material adverse impact on the Company’s financial position or results of operations. Legal proceedings are subject to all of the risks and uncertainties of legal proceedings and there can be no assurance as to the probable result of any legal proceedings. The Company believes it has adequately accrued for the aforementioned contingent liabilities. If adverse outcomes were to occur, our financial position, results of operations and cash flows could be negatively affected materially for the period in which the adverse outcomes are known. | F- 20 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 9 . Debt Senior Convertible Notes and Warrants On December 17, 2019, the Company completed the issuance and sale of $ 3,000 aggregate principal amount of secured convertible notes of the Company (the “Notes”) and warrants (the “Warrants”) to purchase 340,909 shares of common stock, par value $ 0.001 per share of the Company (the “Common Stock”), in a private placement transaction. The Notes and Warrants were issued and sold to Edward D. Bagley, an affiliate of the Company, on the terms and conditions of a Note Purchase Agreement dated December 8, 2019 between the Company, certain subsidiary guarantors of the Company, and Mr. Bagley. Mr. Bagley is an affiliate of the Company and was the beneficial owner of approximately 46.6 % of the Company’s issued and outstanding shares of Common Stock. The Notes matured on December 17, 2023 (the “Maturity Date”) and accrued interest at a variable rate adjusted on a quarterly basis and equal to two and one -half percent ( 2.5 %) over the greater of (x) five and one -quarter percent ( 5.25 %) and (y) the Prime Rate as published in the Wall Street Journal (New York edition) as of the beginning of such calendar quarter. The Notes may be converted into shares of the Company’s Common Stock at any time at the election of Mr. Bagley at an initial conversion price of $ 2.11 per share (the “Conversion Price”), or 120 % of the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market. Also, the Company can cause a mandatory conversion of the Notes if the volume weighted average closing price of the Common Stock over 90 consecutive trading days exceeds 200 % of the Conversion Price. In addition, the Notes may be redeemed by the Company for cash at any time after December 17, 2020 upon payment of the outstanding principal balance of the Notes and any unpaid and accrued interest. The Company also is required to redeem the Notes upon the occurrence of a change in control of the Company. The Notes were fully repaid as per the terms of the Note on December 17, 2023. No part of the Note was converted into a common stock. The Warrants have an initial exercise price equal to $ 1.76 , the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market, and are exercisable until December 17, 2026. The Warrants must be exercised for cash, unless at the time of exercise there is not a then effective registration statement for the resale of the shares of Common Stock issuable upon exercise of the Warrants, in which case the Warrants may be exercised via a cashless exercise feature that provides for net settlement of the shares of Common Stock issuable upon exercise. Concurrent with the issuance of the Notes and Warrants pursuant to the Note Purchase Agreement, the Company, the Guarantors and Mr. Bagley entered into a Guaranty and Collateral Agreement (the “Collateral Agreement”) pursuant to which the Company and the Guarantors granted Mr. Bagley a first priority lien interest in all of the Company’s assets as security for the Company’s performance of its obligations under the Notes and Warrants. The net proceeds after original issue discount and issuance costs of $ 346 were approximately $ 2,654 . The Company expects to use the proceeds from the sale of the Notes and Warrants for general corporate purposes and working capital. In accounting for the issuance of the Notes, the Company separated Notes and Warrants into liability and equity components. The carrying amount of Warrants, being an equity component, was first calculated using Black-Scholes method with the following assumptions: Risk-free interest rate 1.82 % Expected life of Warrants (years) 7 Expected price volatility 49.94 % Expected dividend yield 0 % The carrying amount of the Notes was then determined by deducting the fair value of the Warrants from the principal amount of the Notes. The carrying amount of the Notes was further separated into equity and liability components after separating the value of the conversion feature into an equity component and leaving the remaining value as liability. The equity component is not remeasured while the Notes and Warrants continue to meet the conditions for equity classification for equity components. | F- 21 | Table of Contents 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. The following table represents the carrying value of Notes and Warrants: December 31, 2023 December 31, 2022 Liability component: Principal $ — $ 1,920 Less: debt discount and issuance costs, net of amortization — ( 188 ) Net carrying amount $ — $ 1,732 Equity component ( 1 ) : Warrants $ — $ 318 Conversion feature — 122 Net carrying amount $ — $ 440 Current portion of liability component included under short-term debt $ — $ 1,920 Long-term portion of liability component included under long-term debt — — Liability component total $ — $ 1,920 ( 1 ) Recorded on the consolidated balance sheets as additional paid-in capital. Debt discount and issuance costs are amortized over the life of the note to interest expense using the effective interest method. During the twelve months December 31, 2023 amortization of debt discount and issuance costs were $ 188 and $ 197 respectively. | F- 22 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) Paycheck Protection Program Loan On April 18, 2020, the Company, entered into a loan agreement with U.S. 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 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 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. Short-term Bridge Loans On July 2, 2021, the Company obtained a bridge loan in the principal amount of $ 2,000 from Edward D. Bagley (the “ 2021 Bridge Loan”), an affiliate of the C ompany. The Bridge Loan was evidenced by a promissory note dated July 2, 2021 (the “Note”) issued by the Company to Mr. Bagley. The Note bore interest at a rate of 8.0 % per annum. On September 11, 2021, the Company amended and restated the terms of the Bridge Loan to extend the latest maturity date from October 1, 2021 to January 3, 2022 . All other terms and conditions of the Bridge Loan remained the same. 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 . Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder. O n 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 Company. The 2022 Bridge Loan was evidenced by a promissory note dated October 28, 2022 (the “ 2022 Note”) issued by the Company to Mr. Bagley. The 2022 Note bore interest at a rate of 12.0 % per annum and had a maturity date of October 28, 2023 . Mr. 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. In January 2023, the 2022 Bridge loan of $ 2,000 along with applicable interest was repaid in full. 10 . Share-Based Payments Employee Stock Option Plans The Company’s share-based incentive plan offering stock options is primarily through 2007 Equity Incentive Plan (the “ 2007 Plan”). Under this plan, one new share is issued for each stock option exercised. The plan is described below. The 2007 Plan was restated and approved by the shareholders on December 12, 2016. Provisions of the restated 2007 Plan include the granting of up to 2,000,000 incentive and non-qualified stock options, stock appreciation rights, restricted stock and restricted stock units. Options may be granted to employees, officers, non-employee directors and other service providers and may be granted upon such terms as the Compensation Committee of the Board of Directors determines in their sole discretion. All vesting schedules for options granted are based on 3 or 4 -year vesting schedules, with either one -third or one -fourth vesting on the first anniversary and the remaining options vesting ratably over the remainder of the vesting term. Generally, directors and officers have 3 -year vesting schedules and all other employees have 4 -year vesting schedules. Additionally, in the event of a change in control or the occurrence of a corporate transaction, the Company’s Board of Directors has the authority to elect that all unvested options shall vest and become exercisable immediately prior to the event or closing of the transaction. As of December 31, 2023 , the Company had 217,810 options with contractual lives of ten years and 390,000 options with contractual lives of six years . | F- 23 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) As of December 31, 2023 , there were 607,810 options outstanding under the 2007 Plan. As of December 31, 2023 , the 2007 Plan had 857,044 authorized unissued options. The Company uses judgment in determining the fair value of the share-based payments on the date of grant using an option-pricing model with assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the risk-free interest rate of the awards, the expected life of the awards, the expected volatility over the term of the awards, and the expected dividends of the awards. The Company uses the Black-Scholes option pricing model to determine the fair value of share-based payments granted under the guidelines of ASC Topic 718 . The Company did not grant any options during the year ended December 31, 2022 . In applying the Black-Scholes methodology to the 160,000 options granted during the year ended December 31, 2023 , the Company used the following assumptions: Risk free interest rate, average 3.91 % Expected option life, average 5 years Expected price volatility, average 91.47 % Expected dividend yield 0 % The risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of the grant, based on the expected life of the stock option. The expected life of the stock option is determined using historical data. The expected price volatility is determined using a weighted average of daily historical volatility of the Company’s stock price over the corresponding expected option life. Under guidelines of ASC Topic 718 , the Company recognizes the associated compensation cost for only those awards expected to vest on a straight-line basis over the underlying requisite service period. The Company estimated the forfeiture rates based on its historical experience and expectations about future forfeitures. The following table shows the stock option activity: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value As of December 31, 2021 831,071 $ 6.47 4.10 $ — Granted — — Expired and canceled ( 274,379 ) 7.44 Forfeited prior to vesting ( 68,215 ) 2.50 Exercised — — As of December 31, 2022 488,477 $ 6.48 3.42 $ — Granted 160,000 1.01 Expired and canceled ( 35,457 ) 7.29 Forfeited prior to vesting ( 5,210 ) 2.50 Exercised — — As of December 31, 2023 607,810 $ 5.03 3.32 $ — Vested and Expected to Vest at December 31, 2022 488,477 $ 6.48 3.42 $ — Vested at December 31, 2022 373,612 $ 7.72 3.22 $ — Vested and Expected to Vest at December 31, 2023 607,810 $ 5.03 3.32 $ — Vested at December 31, 2023 403,365 $ 6.90 2.51 $ — | F- 24 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) The total pre-tax compensation cost related to stock options recognized during the years ended December 31, 2023 and 2022 was $ 106 and $ 112 , respectively. Tax benefit from compensation cost related to stock options during the years ended December 31, 2023 and 2022 , respectively was $ 27 and $ 28 . As of December 31, 2023 , the total compensation cost related to stock options not yet recognized and before the effect of any forfeitures was $ 157 , which is expected to be recognized over approximately the next 2.32 years on a straight-line basis. Employee Stock Purchase Plan During the years ended December 31, 2023 and 2022 , the Company issued shares to employees under the Company’s 2016 Employee Stock Purchase Plan (the “ESPP”). The ESPP was approved by the Company’s shareholders on December 12, 2016. As of December 31, 2023 , and December 31, 2022 , 382,143 and 395,524 , respectively of the originally approved 500,000 shares were available for offerings under the ESPP. Offering periods under the ESPP commence on each Jan 1 and July 1 and continue for a duration of six months. The ESPP is available to all employees who do not own, or are deemed to own, shares of stock making up an excess of 5 % of the combined voting power of the Company, its parent or subsidiary. During each offering period, each eligible employee may purchase shares under the ESPP after authorizing payroll deductions. Under the ESPP, each employee may purchase up to the lesser of 2,500 shares or $ 25 of fair market value (based on the established purchase price) of the Company’s stock for each offering period. Unless the employee has previously withdrawn from the offering, his or her accumulated payroll deductions will be used to purchase common stock on the last business day of the period at a price equal to 85 % (or a 15 % discount) of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. Shares purchased and compensation expense associated with Employee Stock Purchase Plans were as follows: 2023 2022 Shares purchased under ESPP plan 13,381 7,180 Plan compensation expense $ 3 $ 1 Issuance of Common Stock and Warrants O n September 13 , 2020 , the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers named therein (the “Purchasers”), pursuant to which the Company issued and sold, in a registered direct offering 2,116,050 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share (the “Common Stock”) at an offering price of $ 2.4925 per share, (the “Registered Offering”). The Company received gross proceeds of approximately $ 5,275 ( 4,764 net of issuance costs) in connection with the Registered Offering, before deducting placement agent fees and related offering expenses. In a concurrent private placement, the Company issued to the Purchasers who participated in the Registered Offering warrants exercisable for an aggregate of 1,058,025 shares of common stock at an exercise price of $ 2.43 per share. Each warrant became immediately exercisable and had an expiry term of five years from the issuance date. On September 12, 2021, the Company entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued 3,623,189 shares of the Company's common stock, par value $ 0.001 per share at an offering price of $ 2.76 per share. The Company received gross proceeds of approximately $ 10,000 and net proceeds of $ 9,288 after deducting placement agent fees and related offering expenses. In a concurring private placement the Company also issued to the same purchasers warrants exercisable for an aggregate of 3,623,189 shares of common stock at an exercise price of $ 2.64 per share. Each warrant became immediately exercisable and will expire on March 15, 2027. | F- 25 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 11 . Significant Customers There were no sales to significant customers that represented more than 10 percent of total revenues during the years ended December 31, 2023 and 2022 . 12 . Fair Value Measurements 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). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels: Level 1 - Quoted prices in active markets for identical assets and liabilities. Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. This category generally includes U.S. Government and agency securities; municipal securities; mutual funds and securities sold and not yet settled. Level 3 - Unobservable inputs. The substantial majority of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs. 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, 2023 . Level 1 Level 2 Level 3 Total December 31, 2023 Mutual funds $ 1,505 $ — $ — $ 1,505 US Treasury securities — 1,803 — 1,803 Certificates of deposit — 103 — 103 Corporate debt securities — 985 — 985 Total $ 1,505 $ 2,891 $ — $ 4,396 | F- 26 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 13 . Income Taxes Consolidated income (loss) before taxes for domestic and foreign operations consisted of the following: Year ended December 31, 2023 2022 Domestic $ 1,043 $ 28,754 Foreign ( 1,169 ) ( 1,294 ) Total $ ( 126 ) $ 27,460 The Company’s provision for income taxes consisted of the following: Year ended December 31, 2023 2022 Current: Federal $ ( 131 ) $ ( 6,753 ) State ( 219 ) ( 98 ) Foreign ( 84 ) ( 53 ) Total current ( 434 ) ( 6,904 ) Deferred: Federal ( 43 ) 1,132 State 78 ( 976 ) Foreign 293 165 Total 328 321 Change in valuation allowance ( 328 ) ( 321 ) Total deferred — — Tax provision $ ( 434 ) $ ( 6,904 ) The income tax provision differs from that computed at the federal statutory corporate income tax rate as follows: Year ended December 31, 2023 2022 Tax benefit (provision) at federal statutory rate $ 26 $ ( 5,768 ) State income tax benefit (provision), net of federal benefit ( 10 ) ( 1,093 ) Research and development tax credits 66 457 Foreign earnings or losses taxed at different rates ( 72 ) ( 68 ) Tax rate change ( 116 ) ( 60 ) Other — ( 51 ) Change in valuation allowance ( 328 ) ( 321 ) Tax benefit (provision) $ ( 434 ) $ ( 6,904 ) | F- 27 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following: 2023 2022 Deferred revenue $ 3 $ 11 Basis difference in intangible assets 6,080 6,604 Inventory reserve 880 2,258 Net operating loss carryforwards 4,730 3,075 Research and development tax credits 115 48 Accrued expenses 108 120 Stock-based compensation 210 215 Allowance for sales returns and doubtful accounts 81 81 Difference in property and equipment basis ( 108 ) ( 83 ) Convertible debt ( 110 ) ( 110 ) Capitalized research expenditure 1,507 922 Other 337 364 Total net deferred income tax asset 13,833 13,505 Less: Valuation allowance ( 13,833 ) ( 13,505 ) Net deferred income tax asset (liability) $ — $ — The Company has not provided for foreig n withholding taxes on undistributed earnings of its non-U.S. subsidiaries since these earnings are intended to be reinvested indefinitely, in accordance with guidelines contained in ASC Topic 740 , Accounting for Income Taxes . It is not practical to estimate the amount of additional taxes that might be payable on such undistributed earnings. The Company routinely evaluates the likelihood of realizing the benefit of its deferred tax assets and may record a valuation allowance if, based on all available evidence, it determines that it is more likely than not some portion of the tax benefit will not be realized. As of December 31, 2023 , the Company had an aggregate of approximately $ 13.8 million in deferred tax assets primarily related to intangible assets, net operating losses, tax credit carryforwards, and inventory basis differences. On a quarterly basis, the Company tests the value of deferred tax assets for impairment at the taxpaying-component level within each tax jurisdiction. Significant judgment and estimates are required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following: ● sufficient taxable income within the allowed carryback or carryforward periods; ● future reversals of existing taxable temporary differences, including any tax planning strategies that could be utilized; ● nature or character (e.g., ordinary vs. capital) of the deferred tax assets and liabilities; and ● future taxable income exclusive of reversing temporary differences and carryforwards. 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, 2023 . | F- 28 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) As of December 31, 2023 the Company has federal net operating loss (“NOL”) carryforwards of approximately $ 5.8 million (pre-tax), state NOL carryforwards of approximately 6.3 million (pre-tax) and Spain NOL carryforwards of approximately $ 12.7 million (pre-tax). The federal NOL carryforward expires in 2029 . T he Spain NOL carryforward does not expire. The state NOL carryforwards expire over various periods. Effective July 1, 2007, the Company adopted the accounting standards related to uncertain tax positions. This standard requires that tax positions be assessed using a two -step process. A tax position is recognized if it meets a “more likely than not” threshold, and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized. Uncertain tax positions must be reviewed at each balance sheet date. Liabilities recorded as a result of this analysis must generally be recorded separately from any current or deferred income tax accounts. The total amount of unrecognized tax benefits at December 31, 2023 and 2022 , that would favorably impact our effective tax rate if recognized was $ 1,034 and $ 976 , respectively. As of December 31, 2023 and 2022 , we acc rued $ 111 and $ 44 , respectively, in interest and penalties related to unrecognized tax benefits. We account for interest expense and penalties for unrecognized tax benefits as part of our income tax provision. Although we believe our estimates are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our historical income tax provisions and accruals. Such difference could have a material impact on our income tax provision and operating results in the period in which we make such determination. A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions is as follows: Year ended December 31, 2023 2022 Balance - beginning of year $ 962 $ 895 Additions based on tax positions related to the current year 18 75 Reductions for tax positions of prior years ( 5 ) — Lapse in statutes of limitations ( 7 ) ( 8 ) Uncertain tax positions, ending balance $ 968 $ 962 The Company’s U.S. federal income tax returns for 2018 through 2023 are subject to examination. The Company's U.S. 2018 federal income tax return is currently under examination. The Company also files in various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to federal, state, or non-U.S. income tax examinations by tax authorities for years prior to 2017 . | F- 29 | Table of Contents NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 14 . Geographic Sales Information The United States was the only country to contribute more than 10 percent of total revenues in each fiscal year. The Company’s revenues are substantially denominated in U.S. dollars and are summarized geographically as follows: Year ended December 31, 2023 2022 Un ited States $ 8,186 $ 12,096 All other countries 10,518 13,109 Total $ 18,704 $ 25,205 15 . Subsequent events On March 10, 2024 t he Company's Board of Directors declared a special dividend of $ 0.50 per share of the Company's stock and eligible warrants to be paid on April 10, 2024. This is expected to result in a cash outflow of approximately $ 14,500 . | F-30|