ClearOne, Inc. Form 10-Q Summary
Business Context and Reporting Period
ClearOne designs and sells conferencing, collaboration, and audiovisual streaming solutions, including audio conferencing systems, microphones, video products, and cloud-based collaboration services. This unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company is a smaller reporting company and had 16,630,597 common shares outstanding as of May 15, 2019.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $6.305 million | $7.289 million | Down 13% |
| Gross profit | $2.704 million | $4.099 million | Down 34% |
| Gross margin | 43% | 56% | Down 13 percentage points |
| Operating expenses | $5.095 million | $6.541 million | Down 22% |
| Operating loss | $2.391 million | $2.442 million | Improved 2% |
| Net loss | $2.349 million | $1.846 million | Loss increased 27% |
| Basic and diluted loss per share | $0.14 loss | $0.22 loss | Improved per share |
| Cash used in operating activities | $1.294 million | $0.299 million | Higher cash use |
Revenue by product was $2.711 million from audio conferencing, $2.106 million from microphones, and $1.488 million from video products. Audio conferencing revenue declined 26%, microphone revenue declined 9%, and video revenue increased 13% based on the reported product figures.
As of March 31, 2019, cash and cash equivalents were $4.326 million, compared with $11.211 million at December 31, 2018. Marketable securities totaled $9.123 million at fair value, including $2.888 million due within one year. Working capital was $22.9 million, compared with $28.3 million at year-end 2018.
The company reported no conventional debt. Balance-sheet obligations included operating lease liabilities of $2.954 million, of which $548 thousand was classified as current. Total assets were $57.936 million and shareholders’ equity was $49.979 million at March 31, 2019.
Total inventory was $20.812 million, including $8.481 million classified as long-term. Open purchase orders with electronics manufacturing service providers totaled approximately $2.1 million. The company recorded $185 thousand of inventory valuation and obsolescence losses in the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined $984 thousand, primarily from audio conferencing and microphone products; management attributed these declines in part to alleged ongoing infringement of ClearOne patents.
- Gross profit declined $1.395 million, and gross margin fell to 43% from 56%, primarily because of reduced overhead absorption into inventory as the company reduced inventory purchasing.
- Sales and marketing expense declined to $1.953 million from $2.868 million, principally due to lower employee-related, trade-show, demonstration inventory, and commission costs.
- Research and product development expense declined to $1.587 million from $2.056 million, primarily due to lower employee-related and overhead costs.
- Net loss increased because the lower gross profit and the absence of a tax benefit more than offset operating-expense reductions. The prior-year quarter included a $572 thousand tax benefit; no tax benefit was recognized in Q1 2019 because of a full valuation allowance.
- Cash used in operating activities increased to $1.294 million from $299 thousand. Investing activities used $5.591 million, primarily reflecting $4.764 million of marketable-security purchases and $1.221 million of capitalized patent-defense costs.
- Financing activities provided $9 thousand in Q1 2019, compared with $719 thousand of cash used in Q1 2018, when the company paid dividends and repurchased stock. The dividend program has been suspended and the share-repurchase program expired.
- On January 1, 2019, the company adopted the new lease standard, recognizing a $2.818 million operating lease right-of-use asset and $2.954 million of operating lease liabilities at March 31, 2019. The adoption did not materially affect operating results.
Outlook, Commentary, Risks, and Unusual Items
Management stated that it is pursuing product innovation, cost reduction, inventory reduction, and patent enforcement to return to growth. No specific revenue, earnings, or cash-flow guidance was provided. During the quarter, ClearOne began shipping its patented Beamforming Microphone Array Ceiling Tile and introduced the COLLABORATE Space collaboration suite.
Management expects video products to be important to long-term growth and cited growth in videoconferencing appliances, cameras, and cloud-based videoconferencing services. The company faces intense competition, rapidly changing technology, pricing pressure, potential product obsolescence, international and foreign-exchange exposure, supplier and inventory risks, and reliance on market acceptance of new products.
ClearOne capitalized $1.221 million of external legal costs related to patent-defense litigation during Q1 2019. The company reported approximately $9.7 million of patent-litigation spending from 2016 through March 31, 2019 and expects that additional spending may be required. The filing states that there were no material developments in previously disclosed legal proceedings.
Management identified a material weakness in internal control over financial reporting involving the accurate and timely reporting of financial results and disclosures and the timely testing and assessment of controls. Disclosure controls and procedures were therefore not effective at a reasonable assurance level as of March 31, 2019. The company is working with a third-party internal-controls consultant on remediation, including personnel assessment, additional training, and process improvements.
The company stated that it believes existing cash, marketable securities, inventory reduction, working-capital management, cost reductions, and potential future capital raising will provide liquidity for operating needs and growth plans. However, continued operating losses, litigation costs, inventory exposure, and revenue declines could pressure liquidity.
Important Facts for Investors to Verify
- Whether revenue declines in audio conferencing and microphones stabilize and whether new products, including the Beamforming Microphone Array Ceiling Tile and COLLABORATE Space, generate sustained growth.
- Whether gross margin recovers from 43%, particularly as inventory levels and overhead absorption change.
- The timing and cost of ongoing patent litigation, the treatment of capitalized patent-defense costs, and the probability of successful outcomes.
- Whether the $20.8 million inventory balance, including $8.5 million of long-term inventory, can be sold without additional write-downs or markdowns.
- The company’s ability to fund continuing losses and litigation after cash and cash equivalents declined to $4.3 million during the quarter.
- Progress toward remediation of the material weakness in internal control over financial reporting.
- The lack of current tax benefits due to the full valuation allowance and the potential effect of future profitability on deferred tax assets.