Company Quick10K Filing
Clearone
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 17 $37
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-17 Quarter: 2019-03-31
10-K 2019-04-15 Annual: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
S-1 2018-09-26 Public Filing
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-06-20 Quarter: 2018-03-31
10-K 2018-04-20 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-K 2017-03-16 Annual: 2016-12-31
10-Q 2016-11-09 Quarter: 2016-09-30
10-Q 2016-08-04 Quarter: 2016-06-30
10-Q 2016-05-10 Quarter: 2016-03-31
10-K 2016-03-15 Annual: 2015-12-31
10-Q 2016-01-13 Quarter: 2015-09-30
10-Q 2015-08-12 Quarter: 2015-06-30
10-Q 2015-05-15 Quarter: 2015-03-31
10-K 2015-03-31 Annual: 2014-12-31
10-Q 2014-10-31 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-14 Quarter: 2014-03-31
10-K 2014-03-20 Annual: 2013-12-31
10-Q 2013-11-08 Quarter: 2013-09-30
10-Q 2013-08-07 Quarter: 2013-06-30
10-K 2013-03-25 Annual: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-04-02 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-17 Quarter: 2011-03-31
10-K 2011-03-31 Annual: 2010-12-31
10-Q 2010-11-15 Quarter: 2010-09-30
10-Q 2010-08-13 Quarter: 2010-06-30
10-Q 2010-05-17 Quarter: 2010-03-31
8-K 2020-01-29 Enter Agreement, Exhibits
8-K 2019-12-30 Shareholder Vote
8-K 2019-12-17 Sale of Shares, Regulation FD
8-K 2019-12-08 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-11-14 Earnings, Exhibits
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-08-06 Regulation FD, Exhibits
8-K 2019-05-20 Earnings, Exhibits
8-K 2019-04-16 Earnings, Exhibits
8-K 2019-04-08 Officers
8-K 2018-12-06 Other Events, Exhibits
8-K 2018-12-03 Other Events, Exhibits
8-K 2018-11-14 Other Events
8-K 2018-11-13 Earnings, Exhibits
8-K 2018-11-01 Other Events
8-K 2018-10-25 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-06-13 Earnings, Exhibits
8-K 2018-05-16 Exhibits
8-K 2018-04-20 Other Events, Exhibits
8-K 2018-04-20 Earnings, Exhibits
8-K 2018-04-04 Exhibits
8-K 2018-01-10 Enter Agreement, Officers
CLRO 2019-09-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_163924.htm
EX-31.2 ex_163925.htm
EX-32.1 ex_163926.htm
EX-32.2 ex_163927.htm

Clearone Earnings 2019-09-30

CLRO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ENT 56 703 1,003 649 123 -228 -127 835 19% -6.6 -33%
OTEL 40 118 103 64 34 9 23 107 53% 4.6 7%
MARK 39 25 42 64 44 -23 -8 37 68% -4.5 -88%
CLRO 37 56 8 27 12 -17 -7 34 44% -4.6 -31%
APWC 35 306 84 0 0 0 0 35 0%
JCS 28 54 9 66 24 1 3 14 37% 5.5 1%
OCC 25 42 20 73 20 -5 -3 30 27% -9.7 -13%
WSTL 22 47 8 40 16 -14 -13 -2 40% 0.2 -29%
SUNW 17 29 22 65 10 -7 -6 17 15% -2.6 -24%
NVMM 13 32 30 49 14 -10 -8 29 29% -3.6 -32%

10-Q 1 clro20190930_10q.htm FORM 10-Q clro20190930_10q.htm
 

 

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period _______ to _______

 

Commission file number:001-33660

CLEARONE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

87-0398877

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. employer identification number)

 

 

 

5225 Wiley Post Way, Suite 500, Salt Lake City, Utah

 

84116

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (801) 975-7200

 

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Larger Accelerated Filer ☐

Accelerated Filer ☐ 

Non-Accelerated Filer ☐ 

Smaller Reporting Company ☒ 

 

Emerging Growth Company ☐ 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading Symbol(s)

  

Name of each exchange

on which registered

Common Stock, $0.001

 

CLRO

 

The NASDAQ Capital Market

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

The number of shares of ClearOne common stock outstanding as of November 14, 2019 was 16,646,323.

 

 

 

 

CLEARONE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019

 

INDEX

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

5

 

 

 

 

Unaudited Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 4.

Controls and Procedures

22

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

23

 

 

 

Item 1A.

Risk Factors

23

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

 

 

 

Item 3.

Defaults Upon Senior Securities

23

 

 

 

Item 4.

Mine Safety Disclosures

23

 

 

 

Item 5.

Other Information

23

 

 

 

Item 6.

Exhibits

24

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

 

CLEARONE, INC

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

 

   

September 30,

2019

   

December 31,

2018

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 2,010     $ 11,211  

Marketable securities

    1,640       951  

Receivables, net of allowance for doubtful accounts of $709 and $631, respectively

    6,319       6,782  

Inventories, net

    11,689       13,228  

Prepaid expenses and other assets

    5,638       2,193  

Total current assets

    27,296       34,365  

Long-term marketable securities

    2,243       3,764  

Long-term inventories, net

    7,143       8,953  

Property and equipment, net

    1,099       1,388  

Operating lease - right of use assets, net

    2,547        

Intangibles, net

    12,609       10,249  

Other assets

    197       196  

Total assets

  $ 53,134     $ 58,915  

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Accounts payable

  $ 1,735     $ 3,729  

Accrued liabilities

    2,864       1,996  

Deferred product revenue

    227       283  

Total current liabilities

    4,826       6,008  

Deferred rent

          135  

Operating lease liability

    2,129        

Other long-term liabilities

    195       571  

Total liabilities

    7,150       6,714  
                 

Shareholders' equity:

               

Common stock, par value $0.001, 50,000,000 shares authorized, 16,646,323 and 16,630,597 shares issued and outstanding

    17       17  

Additional paid-in capital

    58,037       57,840  

Accumulated other comprehensive loss

    (172

)

    (181

)

Accumulated deficit

    (11,898

)

    (5,475

)

Total shareholders' equity

    45,984       52,201  

Total liabilities and shareholders' equity

  $ 53,134     $ 58,915  

 

See accompanying notes

 

 

 

CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Dollars in thousands, except per share amounts)

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenue

  $ 5,992     $ 6,683     $ 18,717     $ 20,943  

Cost of goods sold

    3,455       3,703       10,537       10,614  

Gross profit

    2,537       2,980       8,180       10,329  
                                 

Operating expenses:

                               

Sales and marketing

    1,907       2,168       6,121       7,796  

Research and product development

    1,428       1,781       4,322       5,757  

General and administrative

    1,300       1,341       4,330       4,500  

Total operating expenses

    4,635       5,290       14,773       18,053  
                                 

Operating loss

    (2,098

)

    (2,310

)

    (6,593

)

    (7,724

)

                                 

Other income, net

    142       5       235       78  
                                 

Loss before income taxes

    (1,956

)

    (2,305

)

    (6,358

)

    (7,646

)

                                 

Provision for (benefit from) income taxes

    20       7,837       65       6,505  
                                 

Net loss

  $ (1,976

)

  $ (10,142

)

  $ (6,423

)

  $ (14,151

)

                                 

Basic weighted average shares outstanding

    16,646,323       8,306,707       16,635,954       8,304,974  

Diluted weighted average shares outstanding

    16,646,323       8,306,707       16,635,954       8,304,974  
                                 

Basic loss per share

  $ (0.12

)

  $ (1.22

)

  $ (0.39

)

  $ (1.70

)

Diluted loss per share

  $ (0.12

)

  $ (1.22

)

  $ (0.39

)

  $ (1.70

)

                                 
                                 

Comprehensive loss:

                               

Net loss

  $ (1,976

)

  $ (10,142

)

  $ (6,423

)

  $ (14,151

)

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

    (78 )     (22

)

    76       (93

)

Change in foreign currency translation adjustment

    (50 )     (13

)

    (67

)

    (51

)

Comprehensive loss

  $ (2,104

)

  $ (10,177

)

  $ (6,414

)

  $ (14,295

)

 

See accompanying notes

 

 

 

CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)

 

   

Nine months ended September 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net loss

  $ (6,423

)

  $ (14,151

)

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization expense

    1,449       1,169  

Amortization of right-of-use assets

    419        

Amortization of deferred rent

          (29

)

Stock-based compensation expense

    177       379  

Provision for doubtful accounts, net

    78       112  

Change of inventory to net realizable value

    537       471  

Deferred income taxes

          6,531  

Changes in operating assets and liabilities:

               

Receivables

    368       2,458  

Inventories

    2,812       1,087  

Prepaid expenses and other assets

    (4,186 )     (369

)

Accounts payable

    (1,994

)

    (758

)

Accrued liabilities

    863       (112

)

Income taxes payable

    359       (364

)

Deferred product revenue

    (56

)

    (44

)

Operating lease liabilities

    (973

)

     

Other long-term liabilities

          39  

Net cash used in operating activities

    (6,570

)

    (3,581

)

                 

Cash flows from investing activities:

               

Purchase of property and equipment

    (106

)

    (281

)

Purchase of intangibles

    (43

)

    (94

)

Capitalized patent defense costs

    (3,371

)

    (3,573

)

Proceeds from maturities and sales of marketable securities

    9,823       7,502  

Purchases of marketable securities

    (8,913

)

    (2,284

)

Net cash provided by (used in) investing activities

    (2,610

)

    1,270  
                 

Cash flows from financing activities:

               

Net proceeds from equity-based compensation programs

    20       32  

Dividend payments

          (583

)

Repurchase and cancellation of stock

          (147

)

Net cash provided by (used in) financing activities

    20       (698

)

                 

Effect of exchange rate changes on cash and cash equivalents

    (41

)

    (40

)

                 

Net decrease in cash and cash equivalents

    (9,201

)

    (3,049

)

Cash and cash equivalents at the beginning of the period

    11,211       5,571  

Cash and cash equivalents at the end of the period

  $ 2,010     $ 2,522  

  

See accompanying notes

 

 

CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)

 

The following is a summary of supplemental cash flow activities:

 

   

Nine months ended September 30,

 
   

2019

   

2018

 

Cash paid for income taxes

  $ 1     $ 11  

 

See accompanying notes

 

 

CLEARONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except 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 AV streaming solutions for voice and visual communications. The performance and simplicity of our advanced, comprehensive solutions offer unprecedented levels of functionality, reliability and scalability.

 

Basis of Presentation:

 

The fiscal year for ClearOne is the twelve months ending on December 31. The consolidated financial statements include the accounts of ClearOne and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.

 

These accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are not audited. Certain information and footnote disclosures that are usually included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been either condensed or omitted in accordance with SEC rules and regulations. The accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 2019 and December 31, 2018, the results of operations for the three and nine months ended September 30, 2019 and 2018, and the cash flows for the nine months ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results for a full-year period. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.

 

Significant Accounting Policies:

 

The significant accounting policies were described in Note 1 to the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2018. There have been no changes to these policies during the nine months ended September 30, 2019 that are of significance or potential significance to the Company except for the change in accounting for leases as described below.

 

Recent accounting standard related to leases: In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). This new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11 which provides an alternative transition method that allows entities to apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company has adopted the requirements of ASU 2016-02 on January 1, 2019, the first day of fiscal year 2019, using the optional transition method. The Company elected to use certain practical expedient options, which allows an entity not to reassess whether any existing or expired contracts contain leases. There was an increase in assets of $2,966 and liabilities of $3,101 due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases with the difference of $135 related to existing deferred rent that reduced the ROU asset recorded. The standard did not have a material impact on our condensed consolidated statements of operations and comprehensive loss.

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

 

Accounting policy related to 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 September 30, 2019 and December 31, 2018, the Company was not party to any 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.

 

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. 

 

Liquidity:

 

As of September 30, 2019, our cash and cash equivalents were approximately $2,010 compared to $11,211 as of December 31, 2018. Our working capital was $22,470 as of September 30, 2019. Net cash used in operating activities was $6,570 for the nine months ended September 30, 2019, an increase of cash used of $2,989 from $3,581 of cash used in operating activities in the nine months ended September 30, 2018.

 

We are currently pursuing all available legal remedies to defend our strategic patents from infringement. We have already spent approximately $11,877 from 2016 through September 30, 2019 towards this litigation and may be required to spend more to continue our legal defense. We believe the recent decision by the U.S. District Court in August granting our request for a preliminary injunction to prevent our competitor from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. We believe that the decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from further infringing our Graham patent (U.S. Patent No. 9,813,806) pending a full trial. We believe this ruling will help pave way for ClearOne’s recovery from the immense harm inflicted by our competitor's infringement of our valuable patents.

 

We have been actively engaged in preserving cash by suspending our dividend program, allowing our share repurchase program to expire and implementing company-wide cost reduction measures. In addition, we expect to generate additional cash as our inventory levels are brought down to historical levels. We also believe that the measures taken by us will yield higher revenues in the future. We believe all of these and effective management of working capital will provide the liquidity needed to meet our operating needs through at least November 15, 2020. We also believe that our strong portfolio of intellectual property and our solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs; however, there can be no assurance that, if needed, we will be successful in obtaining the necessary funds through equity or debt financing.  If we need additional capital and are unable to secure financing, we may be required to further reduce expenses, delay product development and enhancement, or revise our strategy regarding ongoing litigation.

 

2. Revenue Information

 

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

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Audio conferencing

  $ 2,920     $ 3,433     $ 8,520     $ 10,686  

Microphones

    2,189       2,124       6,525       6,689  

Video products

    883       1,126       3,672       3,568  
    $ 5,992     $ 6,683     $ 18,717     $ 20,943  

 

The following table disaggregates the Company’s revenue into major regions:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

North and South America

  $ 3,235     $ 4,082     $ 10,488     $ 12,538  

Asia (including Middle East) and Australia

    1,931       1,693       5,764       5,592  

Europe and Africa

    826       908       2,465       2,813  
    $ 5,992     $ 6,683     $ 18,717     $ 20,943  

 

 

  3. Earnings (Loss) Per Share

 

Earnings (loss) per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive potential common stock outstanding during the period. Stock options are considered to be potential common stock. The computation of diluted earnings (loss) per share does not assume exercise or conversion of securities that would have an anti-dilutive effect.

 

Basic earnings (loss) per common share is the amount of net earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted earnings (loss) per common share is the amount of earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period and to each share of potential common stock outstanding during the period, unless inclusion of potential common stock would have an anti-dilutive effect.

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

The following table sets forth the computation of basic and diluted earnings (loss) per common share:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Numerator:

                               

Net loss

  $ (1,976

)

  $ (10,142

)

  $ (6,423

)

  $ (14,151

)

Denominator:

                               

Basic weighted average shares outstanding

    16,646,323       8,306,707       16,635,954       8,304,974  

Dilutive common stock equivalents using treasury stock method

                       

Diluted weighted average shares outstanding

    16,646,323       8,306,707       16,635,954       8,304,974  
                                 

Basic loss per common share

  $ (0.12

)

  $ (1.22

)

  $ (0.39

)

  $ (1.70

)

Diluted loss per common share

  $ (0.12

)

  $ (1.22

)

  $ (0.39

)

  $ (1.70

)

                                 

Weighted average options outstanding

    561,634       711,888       572,845       727,980  

Anti-dilutive options not included in the computations

    561,634       711,888       572,845       727,980  

 

 

4. Marketable Securities

 

The Company has classified its marketable securities as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive income (loss) in stockholders’ 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 September 30, 2019 and December 31, 2018 were as follows:

 

   

Amortized

cost

   

Gross

unrealized

holding

gains

   

Gross

unrealized

holding

losses

   

Estimated

fair value

 

September 30, 2019

                               

Available-for-sale securities:

                               

Corporate bonds and notes

  $ 2,331     $ 25     $ (4

)

  $ 2,352  

Municipal bonds

    1,520       11             1,531  

Total available-for-sale securities

  $ 3,851     $ 36     $ (4

)

  $ 3,883  
                                 

December 31, 2018

                               

Available-for-sale securities:

                               

Corporate bonds and notes

  $ 2,911     $ 1     $ (31

)

  $ 2,881  

Municipal bonds

    1,849             (15

)

    1,834  

Total available-for-sale securities

  $ 4,760     $ 1     $ (46

)

  $ 4,715  

 

 Maturities of marketable securities classified as available-for-sale securities were as follows at September 30, 2019:

 

   

Amortized

cost

   

Estimated

fair value

 

Due within one year

  $ 1,639     $ 1,640  

Due after one year through five years

    2,212       2,243  

Due after five years

           

Total available-for-sale securities

  $ 3,851     $ 3,883  

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

Debt securities in an unrealized loss position as of September 30, 2019 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, although there can be no assurance that such recovery will occur. The available-for-sale marketable securities with continuous gross unrealized loss position for less than 12 months and 12 months or greater and their related fair values were as follows:

 

   

Less than 12 months

   

More than 12 months

   

Total

 
   

Estimated

fair value

   

Gross

unrealized

holding

losses

   

Estimated

fair value

   

Gross

unrealized

holding

losses

   

Estimated

fair value

   

Gross

unrealized

holding

losses

 

As of September 30, 2019

                                               

Corporate bonds and notes

  $ 293     $ (4

)

  $ 101     $     $ 394     $ (4

)

Municipal bonds

                     

 

         

 

Total

  $ 293     $ (4

)

  $ 101     $

 

  $ 394     $ (4

)

 

 

5. Intangible Assets

 

Intangible assets as of September 30, 2019 and December 31, 2018 consisted of the following:

 

   

Estimated useful

lives (years)

   

September 30,

2019

   

December 31,

2018

 

Tradename

   5 to 7     $ 555     $ 555  

Patents and technological know-how

    10         16,746       13,377  

Proprietary software

   3 to 15       2,981       2,981  

Other

   3 to 5       323       323  

Total intangible assets

              20,605       17,236  

Accumulated amortization

              (7,996

)

    (6,987

)

Total intangible assets, net

            $ 12,609     $ 10,249  

 

The amortization of intangible assets for the three and Nine months ended September 30, 2019 and 2018 was as follows:

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Amortization of intangible assets

  $ 354     $ 279     $ 1,054     $ 791

 

 

The estimated future amortization expense of intangible assets is as follows:

 

Years ending December 31,

 

Amount

 

2019 (Remainder)

  $ 332  

2020

    1,259  

2021

    1,259  

2022

    1,259  

2023

    1,252  

Thereafter

    7,248  

Total

    12,609  

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

 

6. Inventories

 

Inventories, net of reserves, as of September 30, 2019 and December 31, 2018 consisted of the following:

 

   

September 30,

2019

   

December 31,

2018

 

Current:

               

Raw materials

  $ 530     $ 1,795  

Finished goods

    11,159       11,433  
    $ 11,689     $ 13,228  
                 

Long-term:

               

Raw materials

  $ 1,953     $ 2,165  

Finished goods

    5,190       6,788  
    $ 7,143     $ 8,953  

  

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 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, although there can be no assurance of the timing or amount of any sales.

 

Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory for the three and nine months ended September 30, 2019 and 2018 was as follows:

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory

  $ 168

 

  $ 45

 

  $ 537

 

  $ 471

 

 

 

7. 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 three and nine months ended September 30, 2019 and 2018 was as follows:

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Rent expense

  $ 147     $ 230     $ 510     $ 703  

 

We occupy a 5,000 square-foot facility in Gainesville, Florida under the terms of an operating lease that expires in February 2021 with the possibility of renewing the lease for 10 more years. The Gainesville facility is used primarily to support our research and development activities.

 

We currently occupy a 21,443 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in March 2024, with an option to extend for additional five years. The facility supports our principal administrative, sales, marketing, customer support, and research and product development activities.

 

We occupied a 10,700 square-foot warehouse in Shenzhen, China under the terms of an operating lease, that expired in September 2019, which served as manufacturing support center for Asia.

 

We occupy a 7,070 square-foot facility in Austin, Texas - under the terms of an operating lease that expired in October 2019. This facility supports our sales, marketing, customer support, and research and development activities.

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

We occupy a 3,068 square-foot facility in Zaragoza, Spain under the terms of an operating lease expiring in March 2020.  This office supports our research and development and customer support activities

 

We occupy a 6,175 square-foot facility in Chennai, India - under the terms of an operating lease expiring in August 2021. This facility supports 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 and repair center.  

 

Supplemental cash flow information related to leases was as follows:

 

   

Nine months ended

September 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows from operating leases

  $ 504  

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

       

Operating leases

  $  

 

Supplemental balance sheet information related to leases was as follows:

 

   

September 30, 2019

 

Operating lease right-of-use assets

  $ 2,547  
         

Current portion of operating lease liabilities, included in accrued liabilities

  $ 556  

Operating lease liabilities, net of current portion

    2,129  

Total operating lease liabilities

    2,685  
         

Weighted average remaining lease term for operating leases (in years)

    4.6  

Weighted average discount rate for operating leases

    6.1

%

 

The following represents maturities of operating lease liabilities as of September 30, 2019:

 

Years ending December 31,

       

2019 (Remainder)

  $ 178  

2020

    700  

2021

    646  

2022

    595  

2023

    606  

Thereafter

    375  

Total lease payments

    3,100  

Less: Imputed interest

    (415

)

Total

  $ 2,685  

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

 

8. Shareholders' Equity

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Common stock and additional paid-in capital

                               

Balance, beginning of period

  $ 58,002     $ 47,758     $ 57,857     $ 47,472  

Share-based compensation expense

    48       113       177       379  

Proceeds from employee stock purchase plan

    4       12       20       32  

Balance, end of period

  $ 58,054     $ 47,883       58,054       47,883  
                                 

Accumulated other comprehensive loss

                               

Balance, beginning of period

  $ (44

)

  $ (174

)

  $ (181

)

  $ (65

)

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

    (78

)

    (21

)

    76       (92

)

Foreign currency translation adjustment

    (50

)

    (13

)

    (67

)

    (51

)

Balance, end of period

  $ (172

)

  $ (208

)

  $ (172

)

  $ (208

)

                                 

Retained earnings (accumulated deficit)

                               

Balance, beginning of period

  $ (9,922

)

  $ 7,203     $ (5,475

)

  $ 9,160  

Stock repurchased

                      (147

)

Cash dividends, $0.07 per share

                      (583

)

Impact on retained earnings for change in revenue recognition policy

                      2,782  

Net loss

    (1,976

)

    (10,142

)

    (6,423

)

    (14,151

)

Balance, end of period

  $ (11,898

)

  $ (2,939 )   $ (11,898

)

  $ (2,939

)

                                 

Total shareholders' equity

  $ 45,984     $ 44,736     $ 45,984     $ 44,736  

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

 

9. Stock-based Compensation

 

Employee Stock Option Plans

 

The Company’s share-based incentive plans offering stock options are offered under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”), which was restated and approved by the shareholders on December 12, 2015. 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. As of September 30, 2019, there were 549,011 options outstanding under the 2007 Plan. As of September 30, 2019, the 2007 Plan had 946,083 authorized unissued options.

 

A summary of the stock option activity under the Company’s plans for the Nine months ended September 30, 2019 is as follows:

 

   

Number

of shares

   

Weighted

average

exercise

price

 
                 

Options outstanding at beginning of year

    624,256     $ 8.87  

Granted

           

Less:

               

Exercised

           

Forfeited prior to vesting

    (574

)

    11.97  

Canceled or expired

    (74,671

)

    7.66  

Options outstanding at September 30, 2019

    549,011       9.03  

Options exercisable at end of September 30, 2019

    520,286     $ 8.96  

 

As of September 30, 2019, the total remaining unrecognized compensation cost related to non-vested stock options, net of forfeitures, was approximately $90, which will be recognized over a weighted average period of 0.6 year. The total intrinsic value of options outstanding as of September 30, 2019 was $0.

 

Stock-based compensation expense has been recorded as follows:

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Cost of goods sold

  $ 2     $ 3     $ 6     $ 12  

Sales and marketing

          8       1       28  

Research and product development

    11       23       34       81  

General and administrative

    35       78       136       258  
    $ 48     $ 112     $ 177     $ 379  

 

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)

 

 

10. 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 observable inputs. The following table sets forth the fair value of the financial instruments re-measured by the Company as of September 30, 2019 and December 31, 2018:

 

   

Level 1

   

Level 2

   

Level 3

   

Total

 

September 30, 2019

                               

Corporate bonds and notes

  $     $ 2,352     $     $ 2,352  

Municipal bonds

          1,531             1,531  

Total

  $     $ 3,883     $     $ 3,883  

December 31, 2018

                               

Corporate bonds and notes

  $     $ 2,881     $     $ 2,881  

Municipal bonds

          1,834             1,834  

Total

  $     $ 4,715     $     $ 4,715  

 

 

11. Income Taxes

 

The current year loss did not result in income tax benefit due to recording a full valuation allowance against expected benefits. The valuation allowance was recorded as we concluded that it was more likely than not that our deferred tax assets were not realizable primarily due to the Company's recent pre-tax losses. Income tax expense for the three and nine months ended 2019 represents income tax expense recorded for jurisdictions outside the United States. 

 

 

 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are based upon reasonable assumptions at the time made, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not anticipate, including, without limitation, product recalls and product liability claims; infringement of our technology or assertion that our technology infringes the rights of other parties; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth; delays in obtaining regulatory approvals or the failure to maintain such approvals; concentration of our revenue among a few customers, products or procedures; development of new products and technology that could render our products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition, availability of labor and materials, cost increases, and fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; integration of business acquisitions; and other factors referred to in our reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

BUSINESS OVERVIEW

 

ClearOne is a global Company that designs, develops and sells conferencing, collaboration, and AV networking solutions for voice and visual communications. The performance and simplicity of our advanced, comprehensive solutions offer a high level of functionality, reliability and scalability. We derive a major portion of our revenue from audio conferencing products and microphones by promoting our products in the professional audio-visual channel. We have extended our total addressable market from the installed audio conferencing market to adjacent complementary markets – microphones, video collaboration and AV networking. We have achieved this through strategic technological acquisitions as well as by internal product development.

 

During the first quarter of 2019, we began shipping our patented Beamforming Microphone Array Ceiling Tile (BMA CT) to our partners.  All of the innovations developed for the BMA CT make the integrator’s job easier and more profitable. The BMA CT dramatically transforms how integrators can approach system design for ceiling tile installations, allowing for multi-array setups that can utilize a single, low-channel count digital-signal-processing (DSP) mixer while maintaining ClearOne’s high level of performance and reliability. Further simplification comes from the array’s built-in power amplifier, which allows each array to drive two 10-Watt, 8-Ohm loudspeakers. The BMA CT also features ClearOne’s proprietary adaptive steering technology (think of it as smart switching). This provides impeccable room coverage while eliminating the need to adjust individual beams. Integrators can daisy chain ceiling tiles via P-Link (ClearOne’s proprietary peripheral link) for larger conference setups – for simpler wiring and longer distances compared to networked home-run connections. P-Link also allows integrators to daisy chain additional peripherals such as wireless mics, USB Expanders, and GPIO Expanders.  The system supports all of this functionality with zero consumption of analog I/O and signal processing in the DSP mixer leaving those resources available for other needs. The Company was awarded a Sound & Video Contractor magazine “Best of Show Award” for BMA CT, showcased at InfoComm conference in Orlando, Florida in June 2019. 

 

In August 2019, the United States Patent and Trademark Office issued patent number 10,397,697 to ClearOne. This patent, entitled “Band-Limited Beamforming Microphone Array,” describes a method, among other things, of making or using a band-limited beamforming microphone array by augmenting beamformed audio signals with additional audio signals that are not included in the beamforming process. The microphones that generate these additional signals are referred to as non-beamforming microphones. The invention significantly extends design flexibility because the augmented beamforming technology enables a broad range of design choices from larger, higher performance, higher cost beamforming arrays, to smaller beamforming arrays with good performance for less demanding environments at a lower cost. 

 

 

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

 

We also introduced COLLABORATE® Space to our growing family of collaboration solutions.  It’s a suite that unifies messaging, calls and meetings and will energize workflows and increase productivity for everyone involved in the enterprise. Designed as a persistent, user-friendly collaboration suite, COLLABORATE Space contains many powerful UCC capabilities, as well as the seamless ability to make calls outside the network.  We also added new features including classroom functionality, multiple screen support, and more. The new classroom functionality now found within COLLABORATE Space provides Q&A participation, giving each user electronic “hand raise” capability. There’s also new moderator control over audio and video for all participants, which can number up to 100. If needed, additional participants can be added to any classroom in increments of 100. The moderator also has the ability to transfer the “presenter” role to any participant during the session. Additionally, COLLABORATE Space now includes multi-display support for the moderator host of any conference. Up to 3 displays can be used – one for local participants, one for remote participants, and one for content sharing.

 

With COLLABORATE Space, users can work together one-on-one, or in groups of hundreds, with integrated file sharing, searchable archives, and user presence information. They can connect with colleagues and contacts, via audio and video, with the most intuitive collaboration tools. Users can meet immediately or schedule a meeting and access a full suite of collaboration features, including file sharing, whiteboarding, annotation, chat, and meeting minutes.

 

During the first nine months of 2019, we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents.

 

On August 5, 2019, the Honorable Edmond E. Chang of the Northern District of Illinois issued a preliminary injunction order in the Company’s ongoing litigation with Shure Incorporated, Case No. 17-cv-3087.  In that litigation, ClearOne asserts that Shure’s MXA910 Ceiling Array Microphone, which competes with ClearOne’s beamforming microphone array products, infringes certain of ClearOne’s patents. The August 5 order held that ClearOne had "met its burden of demonstrating entitlement to the extraordinary relief of a preliminary injunction" on U.S. Patent No. 9,813,806 (the “Graham Patent”).  The Court held that ClearOne established that "Shure is likely infringing the ’806 Patent and [that Shure] has not raised a substantial question of the patent’s validity.”  The injunction order prohibits Shure from “manufacturing, marketing, and selling the MXA910 to be used in its drop-ceiling mounting configuration, including marketing and selling the MXA910 in a way that encourages or allows integrators to install it in a drop-ceiling mounting configuration."

 

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

 

Overall revenue declined in the third quarter of 2019 when compared to the third quarter of 2018, with declines seen in all product categories except microphones. We believe the on-going infringement of ClearOne’s patents is the major cause of our revenue decline in the audio conferencing and microphones categories. Our gross profit margin decreased from 45% in the third quarter of 2018 to 42% during the third quarter of 2019. Net loss decreased from $10.1 million in the third quarter of 2018 to $2.0 million in the third quarter of 2019. The net loss in the third quarter of 2018 included about $7.8 million in tax expenses due to recording of valuation allowance as we concluded that it was more likely than not that our deferred tax assets were not realizable primarily due to the Company's continuing pre-tax losses. 

 

Overall revenue declined in the first nine months of 2019 when compared to same period in 2018, with declines seen in all product categories, except video. We believe the on-going infringement of ClearOne’s patents — which is improperly forcing the Company to compete against its own patented technology — is the major cause of our revenue decline in the audio conferencing and microphones categories. We believe the revenue decline in video products was caused partially by increased competition in the space as well as due to reduced attention from our partners caused by the alternatives made available through infringement of our patents. Our gross profit margin decreased to 44% during the first nine months of 2019 from 49% during the same nine months in 2018. Gross profit margin decreased primarily due to increased material costs and reduction of higher margin professional audio conferencing products in the revenue mix. Net loss during the first nine months of 2019 decreased to $6.4 million from $14.2 million during the same period in 2018. The net loss in 2018 included about $7.8 million in tax expenses due to recording of a valuation allowance as we concluded that it was more likely than not that our deferred tax assets were not realizable primarily due to the Company's continuing pre-tax losses. 

 

We believe the recent decision by the U.S. District Court in August granting our request for a preliminary injunction to prevent Shure from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. The decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops Shure from further infringing the Graham patent pending a full trial. Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave the way for ClearOne’s recovery from the immense harm inflicted by Shure's infringement of our valuable patents.

 

 

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

 

Industry conditions

 

We operate in a very dynamic and highly competitive industry which is dominated on the one hand by a few players with respect to certain products like traditional video conferencing appliances while on the other influenced heavily by a fragmented reseller market consisting of numerous regional and local players. The industry is also characterized by venture capitalist funded start-ups and private companies willing to fund cumulative cash losses in order to gain market share and achieve certain non-financial goals.

 

Economic conditions, challenges and risks

 

The audio-visual products market is characterized by intense competition and rapidly evolving technology. Our competitors vary within each product category. Our installed professional audio conferencing products, which is our flagship product category, continue to be ahead of the competition despite the reduction in revenues. Our strength in this space is largely due to our fully integrated suite of products consisting of DSP mixers, wide range of professional microphone products and video collaboration products. Despite our strong leadership position in the installed professional audio conferencing market, we face challenges to revenue growth due to the limited size of the market and pricing pressures from new competitors attracted to the commercial market due to higher margins.

 

Revenue from our video products are critical to our long-term growth. We face intense competition in this market from well-established market leaders as well as emerging players rich with marketing funds. We expect our strategy of combining Spontania, our cloud-based video conferencing product, Collaborate, our appliance-based media collaboration product, our high-quality professional cameras, and our high-end audio conferencing technology will generate high growth in the near future. We believe we are also well positioned to capitalize on the continuing migration away from the traditional hardware-based video conferencing systems to software-based video conferencing applications.

 

We derive a major portion of our revenue (approximately 47% for the year ended December 31, 2018) from international operations and expect this trend to continue in the future. Most of our revenue from outside the U.S. is billed in U.S. dollars and is not exposed to any significant currency risk. However, we are exposed to foreign exchange risk if the U.S. dollar is strong against other currencies as it will make U.S. Dollar denominated prices of our products less competitive.

 

A detailed discussion of our results of operations follows below.

 

 

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

 

Results of Operations for the three and nine months ended September 30, 2019

 

The following table sets forth certain items from our unaudited condensed consolidated statements of operations (dollars in thousands) for the three and nine months ended September 30, 2019 (“2019 Q3”) ("2019 YTD") and 2018 (“2018-Q3”) ("2018-YTD"), respectively, together with the percentage of total revenue which each such item represents:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2019

   

2018

   

Percentage Change 2019

vs 2018

   

2019

   

2018

   

Percentage Change 2019

vs 2018

 

Revenue

  $ 5,992     $ 6,683       -10

%

  $ 18,717     $ 20,943       -11

%

Cost of goods sold

    3,455       3,703       -7

%

    10,537       10,614       -1

%

Gross profit

    2,537       2,980       -15

%

    8,180       10,329       -21

%

Sales and marketing

    1,907       2,168       -12

%

    6,121       7,796       -21

%

Research and product development

    1,428       1,781       -20

%

    4,322       5,757       -25

%

General and administrative

    1,300       1,341       -3

%

    4,330       4,500       -4

%

Total operating expenses

    4,635       5,290       -12

%

    14,773       18,053       -18

%

Operating loss

    (2,098

)

    (2,310

)

    9

%

    (6,593

)

    (7,724

)

    15

%

Other income, net

    142       5       2740

%

    235       78       201

%

Loss before income taxes

    (1,956

)

    (2,305

)

    15

%

    (6,358

)

    (7,646

)

    17

%

Provision for (benefit from) income taxes

    20       7,837       -100

%

    65       6,505       -99

%

Net loss

  $ (1,976

)

  $ (10,142

)

    81

%

  $ (6,423

)

  $ (14,151

)

    55

%

 

Revenue

 

Our revenue decreased to $6.0 million in 2019-Q3 compared to $6.7 million in 2018-Q3. The highest decline was seen in the video category with a 21.5% decline followed by audio conferencing with a 15% decline. Revenue from microphones grew by 3% due to modest growth in sales of ceiling mics and beamforming microphones. The decline in the audio conferencing category was due to a decline in the professional installed audio conferencing and personal conferencing. The decline in the video category was due to a decline in both network media streaming and video conferencing. We believe that the on-going infringement of ClearOne’s patents is the major cause of our revenue decline in audio conferencing and the microphone categories. The share of audio conferencing products in our product mix decreased from 51% in 2018-Q3 to 49% in 2019-Q3. The share of microphones increased from 32% to 37%. The share of video products in the revenue mix dropped slightly to 15% from 17%. During 2019-Q3 revenue declined in the USA, Canada, Australia, China, and Northern Europe offset by revenue increases in Japan, South Korea, Middle East, India, and Southern Europe. The Asia Pacific, including the Middle East, increased by 14%, Europe and Africa declined by 9% and the Americas declined by 21%.

 

Our revenue decreased to $18.7 million in 2019 YTD compared to $20.9 million in 2018 YTD. The highest decline was seen in the audio conferencing category with a 20% decline followed by microphones with a 2% decline. Revenue from video products grew by a modest 3% mainly due to growth in revenue from sales of videoconferencing appliances, cameras and cloud-based videoconferencing services. The decline in the audio conferencing category was due to a decline in all subcategories including professional installed audio conferencing, personal conferencing and tabletop conferencing. The decline in the microphones category was due to a decline in beamforming microphones and ceiling microphones offset by an increase in revenue from wireless mics. The on-going infringement of ClearOne’s patents is the major cause of our revenue decline in audio conferencing and microphone categories. The share of audio conferencing products in our product mix decreased from 51% in 2018 YTD to 46% in 2019 YTD. The share of microphones increased from 32% to 35%. The share of video products in the revenue mix increased from 17% to 20%. During 2019-YTD revenue declined in all regions except the Middle East, India, South Korea, and Southern Europe. The decline was more pronounced in Canada, China, Australia, and Northern Europe. The Asia Pacific, including the Middle East increased by 3%, Europe and Africa declined by 12% and the Americas declined by 16%.

 

We believe, although there can be no assurance, that we will return to a growth path if we are able to successfully implement our strategic initiatives focused on product innovation, cost reduction and defense of our intellectual property.

 

 

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

 

Costs of Goods Sold and Gross Profit

 

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

 

Our gross profit for 2019-Q3 was approximately $2.5 million or 42% compared to approximately $3.0 million, or 45%, for 2018-Q3. Gross Profit margin decreased mainly due to an increase in inventory obsolescence costs.

 

Our gross profit margin decreased to 44% during 2019 YTD from 49% during 2018 YTD. The gross profit margin decreased primarily due to increased material costs and the reduction of higher-margin professional audio conferencing products in the revenue mix.

 

Our profitability in the near-term continues to depend significantly on our revenues from professional installed audio-conferencing products. We hold long-term inventory and if we are unable to sell our long-term inventory, our profitability might be affected by inventory write-offs and price mark-downs. Our long-term inventory includes approximately $1.6 million of wireless microphone-related finished goods and assemblies, $1.8 million of Converge Pro and Beamforming microphone array products, $0.8 million of network media streaming products and about $1.9 million of raw materials that will be used for manufacturing professional audio conferencing products. Any business changes that are adverse to these product lines could potentially impact our ability to sell our long-term inventory in addition to our current inventory.

 

Operating Expenses

 

Operating expenses include sales and marketing (“S&M”) expenses, research and product development (“R&D”) expenses and general and administrative (“G&A”) expenses. Total operating expenses were $4.6 million for 2019-Q3 compared to $5.3 million for 2018-Q3. Total operating expenses were $14.8 million for 2019 YTD compared to $18.1 million for 2018 YTD. The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items.

 

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

 

S&M expenses for 2019-Q3 decreased to $1.9 million from $2.2 million for 2018-Q3. The decrease was mainly due to decreases in employee-related costs including benefits and commissions and allocations of overhead expenses partially offset by an increase in demonstration inventory costs.

 

S&M expenses for 2019 YTD decreased to $6.1 million from $7.8 million for 2018 YTD. The decrease was mainly due to decreases in employee-related costs including benefits, commissions to employees and independent representatives, allocations of overhead expenses, and advertising costs partially offset by an increase in marketing expenses related to tradeshows and promotions.

 

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

 

R&D expenses were approximately $1.4 million for 2019-Q3, as compared to $1.8 million for 2018-Q3. The decrease was primarily due to reductions in employee-related costs, and allocations of overhead expenses.

 

R&D expenses were approximately $4.3 million for 2019 YTD, as compared to $5.8 million for 2018 YTD. The decrease was primarily due to reductions in employee-related costs, and allocations of overhead expenses.

 

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

 

G&A expenses remained almost the same at $1.30 million in 2019-Q3 compared to $1.34 million in 2018-Q3. G&A expenses for 2019 YTD decreased marginally to $4.3 million compared to $4.5 million in 2018 YTD.

 

 

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

 

Other income (expense), net

 

Other income (expense), net, includes interest income, interest expense, and foreign currency changes. Other income increased to $142,000 in 2019-Q3 compared to $5,000 in 2018-Q3. The increase was mainly due to the recording of realized gain on sale of marketable securities of  $83,000 in 2019-Q3. Other income increased to $0.2 million from $0.1 million in 2018 YTD. The increase was mainly due to the increase in realized gain on sale of marketable securities. 

 

Provision for income taxes

 

During 2019 YTD, we did not recognize any benefit from the losses incurred due to setting up of full valuation allowance. Income tax expense for 2019-Q3 and 2019 YTD represents current income tax expense recorded for jurisdictions outside the United States. During 2018-Q3 the Company recorded discrete tax expense of $6.5 million, due primarily to the recording of a full valuation allowance on the Company’s net deferred tax assets.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2019, our cash and cash equivalents were approximately $2.0 million compared to $11.2 million as of December 31, 2018. Our working capital was $22.5 million and $28.4 million as of September 30, 2019 and December 31, 2018, respectively.

 

Net cash used in operating activities was approximately $6.6 million in 2019 YTD, an increase of cash used of approximately $3.0 million from $3.6 million of cash used in operating activities in 2018 YTD. The increase in cash used was primarily due to a decrease in non-cash charges of $3.4 million and increase in cash outflows due to change in operating assets and liabilities of $7.3 million which includes $4.5 million towards payment of a bond for securing the preliminary injunction in our litigation to stop the infringement of our patents, partially offset by a decrease in net loss by $7.7 million.

 

Net cash used in investing activities was $2.6 million for 2019 YTD compared to net cash provided by investing activities of $1.3 million during the 2018 YTD, an increase in cash used of $3.9 million. The increase in cash used in investing activities was primarily due to a decrease in net cash inflows from marketable securities of approximately $4.3 million partially offset by a decrease in capitalized patent defense costs by $0.2 million.

 

Capitalization of patent defense costs. We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. When we capitalize patent defense costs we amortize the costs over the remaining estimated useful life of the patent, which is 15 to 17 years. During 2019 YTD we spent $3.4 million on legal costs related to the defense of our patents and capitalized the entire amount.

 

We are currently pursuing all available legal remedies to defend our strategic patents from infringement. We have already spent approximately $11.9 million from 2016 through September 30, 2019 towards this litigation and may be required to spend more to continue our legal defense. We believe the recent decision by the U.S. District Court in August granting our request for a preliminary injunction to prevent our competitor from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. We believe that the decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from further infringing our Graham patent (U.S. Patent No.9,813,806) pending a full trial. We believe this ruling will help pave way for ClearOne’s recovery from the immense harm inflicted by our competitor's infringement of our valuable patents.

 

We have been actively engaged in preserving cash by suspending our dividend program, allowing our share repurchase program to expire and implementing company-wide cost reduction measures. In addition, we expect to generate additional cash as our inventory levels are brought down to historical levels. We also believe that the measures taken by us will yield higher revenues in the future. We believe all of these and effective management of working capital will provide the liquidity needed to meet our short-term and long-term operating requirements and finance our growth plans. We also believe that our strong portfolio of intellectual property and our solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs. In addition to capital expenditures, we may use cash in the near future for selective infusions of technology, sales and marketing, infrastructure, and other investments to fuel our growth.

 

At September 30, 2019, we had open purchase orders of approximately $1.0 million for purchase of inventory.

 

At September 30, 2019, we had inventory totaling $18.8 million, of which non-current inventory accounted for $7.1 million. This compares to total inventories of $22.2 million and non-current inventory of $9.0 million as of December 31, 2018.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no off-balance-sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, results of operations or liquidity.

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our discussion and analysis of our results of operations and financial position are based upon our unaudited consolidated financial statements included under Item 1 of this Form 10-Q, which have been prepared in conformity with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. Except with respect to our revenue recognition practices included in Note 1. “Business Description, Basis of Presentation and Significant Accounting Policies” under Item 1 of this Form 10-Q, there have been no changes to the critical accounting policies as explained in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

For a discussion of recent accounting pronouncements, see Note 1: “Business Description, Basis of Presentation and Significant Accounting Policies” in the notes to our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q.

 

Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4.     CONTROLS AND PROCEDURES

 

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2019 was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Financial and Accounting Officer. Based upon this evaluation, our Chief Executive Officer and Senior Vice President of Finance concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2019 due to the material weakness in internal control over financial reporting as described below.

 

Management identified a material weakness in the operating effectiveness of internal control over financial reporting relating to the accurate and timely reporting of its financial results and disclosures and its testing and assessment of the design and effectiveness of internal controls over financial reporting in a timely manner. 

 

To address the material weakness, management is working with our third-party internal controls consultant to assist with the implementation of a remediation plan which will supplement the existing controls. The remediation plan will include an assessment of personnel levels and responsibilities, additional training of financial reporting personnel and ability to handle new requirements and projects on a timely basis with respect to the preparation of the consolidated financial statements and public company reporting requirements and timelines. The material weakness will be fully remediated when, in the opinion of management, the control processes have been operating for a sufficient period of time to provide reasonable assurance as to their effectiveness. The remediation and ultimate resolution of the material weakness will be reviewed with the Audit Committee of the Board of Directors.

 

Except as noted above, there has been no change in the Company's internal control over financial reporting as of September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

On February 15, 2019, the Company filed a petition for inter partes review of Shure’s U.S. Patent No. 9,565,493 (“’493 Patent”), arguing that all claims of the ’493 Patent should be cancelled in light of several prior art references, including ClearOne’s U.S. Patent No. 9,813,806 (the “’806 Patent”). Shure has opposed the petition, and a decision by the Patent Trial and Appeal Board whether to institute inter partes review is expected by August 20, 2019.

 

On July 18, 2019, Shure, Inc. filed a lawsuit against the Company in the U.S. Court for the District of Delaware. The lawsuit alleges ClearOne’s BMA CT product, launched in February of 2019, infringes Shure’s '493 Patent. Furthermore, Shure alleged in the lawsuit that ClearOne engaged in unfair competition, tortious interference, deceptive trade practices and false advertising. Shure is seeking monetary damages and multiple injunctive reliefs. The Company believes that the lawsuit is a baseless retaliatory action by Shure and intends to vigorously defend it.

 

On August 5, 2019, the Honorable Edmond E. Chang of the Northern District of Illinois issued a preliminary injunction order in the ongoing litigation in that district between the Company and Shure Incorporated, Case No. 11-cv-3087.  In that litigation, ClearOne asserts that Shure’s MXA910 Ceiling Array Microphone, which competes with ClearOne’s beamforming microphone array products, infringes patents related to those products.  The August 5 order held that ClearOne had "met its burden of demonstrating entitlement to the extraordinary relief of a preliminary injunction" on U.S. Patent No. 9,813,806.  The Court held that "Shure is likely infringing the ’806 Patent and has not raised a substantial question of the patent’s validity.”  The injunction order prohibits Shure from “manufacturing, marketing, and selling the MXA910 to be used in its drop-ceiling mounting configuration, including marketing and selling the MXA910 in a way that encourages or allows integrators to install it in a drop-ceiling mounting configuration."

 

Item 1A. RISK FACTORS

 

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

  

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a) None.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. OTHER INFORMATION

 

Not applicable.

 

 

 

Item 6. EXHIBITS

 

Exhibit No.

 

Title of Document

 

 

 

31.1

 

Section 302 Certification of Chief Executive Officer (filed herewith)

 

 

 

31.2

 

Section 302 Certification of Principal Financial Officer (filed herewith)

 

 

 

32.1

 

Section 906 Certification of Chief Executive Officer (filed herewith)

 

 

 

32.2

 

Section 906 Certification of Principal Financial Officer (filed herewith)

 

 

 

101.INS

 

XBRL Instance Document (filed herewith)

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema (filed herewith)

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definitions Linkbase (filed herewith)

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase (filed herewith)

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and 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)

 

 

 

 

By:

/s/ Zeynep Hakimoglu

November 14, 2019

 

Zeynep Hakimoglu

President, Chief Executive Officer and Chairman of the Board

(Principal Executive Officer)

 

 

 

 

By:

/s/ Narsi Narayanan

November 14, 2019

 

Narsi Narayanan

Senior Vice President of Finance

(Principal Accounting and Principal Financial Officer)

 

 

25