ClearOne, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The financial statements are unaudited and presented in accordance with U.S. GAAP. ClearOne provides conferencing, collaboration, and audiovisual streaming solutions, including audio conferencing, microphones, and video products.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | Year-to-date 2020 | Year-to-date 2019 |
|---|---|---|---|---|
| Revenue | $8.412 million | $5.992 million | $20.503 million | $18.717 million |
| Gross profit | $3.520 million | $2.537 million | $8.976 million | $8.180 million |
| Gross margin | 41.8% | 42.3% | 43.8% | 43.7% |
| Operating loss | $(1.160) million | $(2.098) million | $(4.750) million | $(6.593) million |
| Net loss | $(1.260) million | $(1.976) million | $(5.044) million | $(6.423) million |
| Loss per diluted share | $(0.07) | $(0.12) | $(0.30) | $(0.39) |
Q3 revenue increased 40%, while nine-month revenue increased 10%. Video products were the principal growth driver: Q3 video revenue rose 263% to $3.211 million, and nine-month video revenue rose 59% to $5.833 million. Q3 microphone revenue increased 11%, while audio conferencing revenue declined 5%. For the nine-month period, audio conferencing revenue declined 4% and microphone revenue declined 1%.
Q3 gross margin declined modestly because of product mix, freight and tariff costs, and higher inventory-obsolescence costs. Nine-month gross margin was broadly stable. Operating expenses declined 7% year to date, primarily because of lower sales and marketing expenses, partially offset by higher general and administrative costs and legal expenses.
Cash and cash equivalents were $5.583 million at September 30, 2020, compared with $4.064 million at December 31, 2019. Working capital was $15.617 million, down from $18.9 million at year-end 2019. Marketable securities totaled $3.013 million at fair value. Total assets were $57.772 million and shareholders’ equity was $44.250 million.
Net cash used in operating activities improved to $0.309 million for the first nine months of 2020 from $6.570 million in the prior-year period. Investing cash usage increased to $4.429 million, including $5.565 million of capitalized patent-defense costs. Financing activities provided $6.274 million, including $4.764 million from issuing common stock and warrants and $1.499 million from a Paycheck Protection Program loan.
Debt, Liquidity, and Commitments
- Senior convertible notes had $3.0 million of principal outstanding, with a net carrying amount of $2.370 million. The notes mature in December 2023, bear interest at a variable rate, and are convertible initially at $2.11 per share.
- The notes were issued to Edward D. Bagley, an affiliate and significant shareholder, and are secured by a first-priority lien on Company assets.
- The PPP loan has a $1.499 million principal amount, a two-year term, and a 1.0% interest rate. The Company intends to seek forgiveness for qualifying expenses.
- Total contractual obligations were approximately $10.8 million, including debt, lease obligations, and $3.8 million of open purchase orders.
- Inventory totaled $14.1 million, including $6.3 million classified as long-term. Management expects to sell long-term inventory at or above stated cost, but timing and amounts are uncertain.
- Management believes available liquidity, working-capital management, cost reductions, and anticipated revenue improvements will fund operating needs through at least November 16, 2021, although additional financing may be required.
Material Changes and Unusual Items
- The Company raised $4.8 million through a September 2020 common-stock and warrant issuance and received $1.5 million under the PPP.
- Patent-defense spending totaled $5.6 million during the first nine months and approximately $19.2 million from 2016 through September 30, 2020. These external legal costs were capitalized because management believed a successful outcome was probable and would increase patent value.
- ClearOne received U.S. Patent No. 10,728,653 in July 2020 relating to beamforming microphone-array technology.
- In September 2020, a federal court held that Shure violated a preliminary injunction and ordered that Shure no longer manufacture, market, or sell the identified MXA910 product. Other patent, validity, infringement, false-advertising, and post-grant proceedings remain pending.
- The Company continued to report losses and maintained a full valuation allowance against deferred tax assets; current-year losses did not generate a U.S. income-tax benefit.
Outlook, Commentary, and Risks
Management is pursuing growth through video products, cloud collaboration, BMA-CT microphone solutions, product innovation, cost reductions, and intellectual-property enforcement. Management stated that Q3 U.S. growth was partly attributable to COVID-19-related stimulus programs and increased use of collaboration products by remote workers, but cautioned that the result may not indicate a continuing trend.
Key risks include the uncertain duration and effect of COVID-19, intense competition and pricing pressure, dependence on professional installed audio products, potential inventory write-downs, patent litigation outcomes and continued legal spending, the need for additional financing, customer and product concentration, supplier and component risks, foreign-exchange exposure, product obsolescence, and potential dilution from future equity financing or convertible securities. The filing provides no formal revenue or earnings guidance.
Investor Verification Checklist
- Verify the sustainability of the sharp increase in video-product revenue and the extent to which Q3 demand reflected temporary COVID-19 conditions or stimulus programs.
- Track cash burn, capitalized patent-defense costs, litigation outcomes, and whether future legal expenditures could require additional financing.
- Assess the recoverability and turnover of the $6.3 million long-term inventory balance and the related risk of future write-downs.
- Review the terms, security interests, conversion features, and maturity schedule of the senior convertible notes and PPP loan.
- Monitor the status and economic value of the ClearOne-Shure litigation, including pending motions, appeals, and the post-grant review of the ’653 Patent.
- Evaluate potential shareholder dilution from the 2020 stock and warrant issuance, convertible notes, and outstanding warrants.