ClearOne, Inc. Form 10-Q Summary
Business Context and Reporting Period
ClearOne provides conferencing, collaboration, professional audio, video, software, licensing and network-streaming solutions. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company reported 8,301,273 shares outstanding as of June 15, 2018.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $7.289 million | $11.678 million | Down 38% |
| Gross profit | $4.099 million | $6.678 million | Down 39% |
| Gross margin | 56% | 57% | Down approximately 1 percentage point |
| Operating loss | $2.442 million | $0.526 million | Loss increased |
| Net loss | $1.846 million | $0.468 million | Loss increased 294% |
| Basic and diluted loss per share | $0.22 | $0.05 | Loss increased |
| Net cash used in operating activities | $0.299 million | $1.363 million | Improved by $1.064 million |
Revenue consisted of professional audio products of $4.933 million, unified communications endpoints of $1.036 million, and video products of $1.320 million. Equipment revenue was $7.109 million and software and licensing revenue was $0.180 million.
At March 31, 2018, cash and cash equivalents were $5.577 million, marketable securities totaled $10.548 million, working capital was approximately $24.9 million, and total assets were $64.186 million. Total liabilities were $7.312 million and shareholders’ equity was $56.874 million. The filing does not disclose material borrowings or a separate debt balance.
Total inventory was $23.187 million, including $8.565 million classified as long-term inventory. The company recorded a $255,000 inventory valuation loss during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined $4.389 million, or 38%, with declines in all product categories. Professional audio revenue declined 43%, unified communications endpoints declined 23%, and video revenue declined 20%.
- Management attributed the revenue decline primarily to slower adoption of the Converge Pro 2 platform, alleged infringement of strategic patents by competitors, and lower licensing revenue.
- Gross margin declined because of higher inventory obsolescence costs and lower licensing revenue.
- Sales and marketing expense increased 5% to $2.868 million, while research and product development expense declined 13% to $2.056 million and general and administrative expense declined 23% to $1.617 million.
- General and administrative expense benefited from the capitalization of $1.283 million of external patent-defense costs. The company stated that it had spent approximately $5.1 million on this litigation from 2016 through March 31, 2018.
- Cash used in operations improved primarily from favorable changes in receivables and other operating assets and liabilities, despite the higher net loss.
- The company adopted the new revenue standard using the modified retrospective method on January 1, 2018. The adoption increased retained earnings by $2.783 million, reduced deferred product revenue by $4.338 million, reduced distributor channel inventory by $1.555 million, and reduced Q1 2018 revenue by $852,000. Prior-period financial information was not restated.
Guidance, Outlook, Risks and Unusual Items
- No quantitative revenue or earnings guidance was provided.
- Management is pursuing patent litigation, introducing new products, reducing costs, accelerating product development, and lowering inventory levels. It expects these actions and working-capital management to support liquidity and future growth, but success is not assured.
- A large U.S. distributor resigned in June 2018, which management stated could adversely affect near-term revenue.
- The company faces intense competition, rapidly changing technology, pricing pressure, potential product obsolescence, inventory write-down risk, supplier and transportation risks, foreign currency exposure, customer and product concentration, and intellectual-property litigation risk.
- Open purchase orders with electronics manufacturing service providers totaled approximately $3.0 million at March 31, 2018.
- The company capitalized $1.283 million of patent-defense costs during the quarter, based on its assessment that a successful legal outcome was probable and would increase patent value.
- The stock repurchase program expired in March 2018 and was not renewed. The company repurchased 17,549 shares for approximately $147,000 during the quarter.
- The company paid a $0.07-per-share dividend in March 2018. On June 13, 2018, after the reporting period, it announced suspension of the quarterly dividend program.
- Disclosure controls and procedures were not effective as of March 31, 2018 because of a material weakness involving timely and accurate financial reporting, disclosures, and assessment of internal controls. Management engaged a third-party consultant and began a remediation plan.
- The filing reports no material developments in previously disclosed legal proceedings, no material changes to prior risk factors, and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether revenue stabilizes following the adoption of the new revenue-recognition standard and the loss of a large U.S. distributor.
- The status, future cost, and potential financial benefit or adverse exposure from the strategic patent litigation.
- Whether the $23.2 million inventory balance, including $8.6 million of long-term inventory, can be sold without additional write-downs.
- Management’s progress in remediating the material weakness in internal control over financial reporting.
- The effect of dividend suspension and the expired share-repurchase program on future cash preservation and shareholder returns.
- Whether operating cash flow can remain positive or improve despite continuing operating losses and planned investments.