ClearOne, Inc. 2020 Q2 Form 10-Q Summary
Business context and reporting period
ClearOne designs and sells conferencing, collaboration, and audiovisual streaming solutions, including audio conferencing, microphones, video products, and cloud-based collaboration services. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $6.36 million | $6.42 million | $12.09 million | $12.73 million |
| Gross profit | $2.62 million | $2.94 million | $5.46 million | $5.64 million |
| Gross margin | 41% | 46% | 45% | 44% |
| Operating loss | $(1.84) million | $(2.10) million | $(3.59) million | $(4.50) million |
| Net loss | $(1.94) million | $(2.10) million | $(3.78) million | $(4.45) million |
| Loss per diluted share | $(0.12) | $(0.13) | $(0.23) | $(0.27) |
Revenue declined 1% in the quarter and 5% year to date. Q2 product revenue included audio conferencing of $2.65 million, microphones of $1.89 million, and video products of $1.82 million. North and South America revenue increased in Q2, while Asia-Pacific, the Middle East, Europe, and Africa declined.
Cash and cash equivalents were $2.1 million at June 30, 2020, compared with $4.1 million at December 31, 2019. Marketable securities totaled $4.0 million at fair value, providing approximately $6.1 million of cash and marketable securities. Working capital was $13.8 million, down from $18.9 million at year-end. Net cash provided by operating activities was $0.1 million for the first six months, compared with $1.4 million used in the prior-year period.
Investing activities used $3.5 million, including $3.8 million of capitalized patent-defense costs. Financing activities provided $1.5 million, primarily from a Paycheck Protection Program loan. Total debt was $3.8 million at June 30, 2020, consisting principally of the $2.3 million carrying amount of secured convertible notes and the $1.5 million PPP loan.
Material changes versus the prior comparable period
- Q2 revenue was essentially flat, but gross profit declined 11% and gross margin fell five percentage points because of product mix, freight and tariff costs, and higher inventory-obsolescence costs.
- Sales and marketing expense decreased 36% in Q2 and 24% year to date, primarily because of lower trade-show, travel, demonstration-inventory, and commission costs.
- Research and product development expense increased 13% in Q2, while general and administrative expense was broadly unchanged.
- Operating and net losses improved despite lower revenue, primarily because of reduced operating expenses. Interest expense increased to $0.1 million in Q2 and $0.2 million year to date following the December 2019 convertible-note issuance.
- Total inventory declined to $14.7 million from $17.7 million at December 31, 2019, but non-current inventory remained significant at $6.5 million.
- Intangible assets increased to $17.1 million from $14.0 million, primarily reflecting capitalized patent-defense costs.
Guidance, outlook, risks, and unusual items
The filing provides no formal revenue or earnings guidance. Management expects product innovation, cost reductions, inventory reduction, and intellectual-property enforcement to support a return to growth, but states that these expectations are uncertain.
Management believes existing liquidity and working-capital measures will support operations through at least August 14, 2021. However, additional financing may be required, and there is no assurance that debt or equity financing will be available. Failure to obtain capital could require further expense reductions, delayed product development, or changes to the litigation strategy.
ClearOne continued extensive patent litigation involving Shure and its microphone products. The company capitalized $3.8 million of patent-defense costs during the first six months and reported approximately $17.4 million of cumulative litigation spending from 2016 through June 30, 2020. ClearOne is seeking enforcement of a preliminary injunction and a contempt order, but the outcome of the litigation is uncertain.
COVID-19 created substantial operating and demand uncertainty. Other significant risks include intense competition, rapidly changing technology, foreign-market exposure, supplier and inventory risks, potential inventory write-downs, customer and product concentration, and the company’s recurring losses. The PPP loan bears interest at 1%, has a two-year term, and may be forgiven if qualifying expenses and other program requirements are satisfied; the company intends to apply for forgiveness.
Important facts for investors to verify
- Whether revenue growth in video products and BMA products can offset continued weakness in audio conferencing and microphones.
- The timing, cost, and ultimate outcome of the Shure patent litigation, including any recovery or additional legal spending.
- Whether the $6.5 million of non-current inventory can be sold without material write-downs.
- Whether the PPP loan will be forgiven and the company’s future debt-service requirements under the convertible notes and PPP loan.
- Whether cash, marketable securities, inventory conversion, and operating cash flow are sufficient to support operations beyond management’s stated August 14, 2021 liquidity horizon.
- The continuing effects of COVID-19, international-market weakness, pricing pressure, and competition on demand and gross margins.