ClearOne, Inc. 10-Q Summary
Business context and reporting period
ClearOne designs and sells conferencing, collaboration, video, audio, microphone, and AV networking solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The company reported 18,779,781 common shares outstanding as of August 10, 2021.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Revenue | $7.735 million | $6.357 million | $14.773 million | $12.091 million |
| Gross profit | $3.424 million | $2.618 million | $6.427 million | $5.456 million |
| Gross margin | 44.3% | 41.2% | 43.5% | 45.1% |
| Operating loss | $(1.486) million | $(1.839) million | $(3.010) million | $(3.590) million |
| Net loss | $(1.586) million | $(1.937) million | $(3.241) million | $(3.784) million |
| Loss per diluted share | $(0.08) | $(0.12) | $(0.17) | $(0.23) |
- Q2 revenue increased 22%, led by microphones revenue growth of 70% and audio conferencing growth of 17%; video products declined 22%.
- H1 revenue increased 22%, with microphones up 38%, video products up 25%, and audio conferencing up 9%.
- Operating expenses increased 10% in Q2 to $4.910 million and 4% in H1 to $9.437 million. Q2 sales and marketing expense rose primarily from higher commissions and one-time termination costs.
- Cash provided by operating activities was $985,000 in H1 2021, compared with $113,000 in H1 2020.
- Cash used in investing activities was $2.501 million, including $3.206 million of capitalized patent defense costs. Cash used in financing activities was $173,000, primarily from debt principal payments.
- Cash and cash equivalents were $2.088 million at June 30, 2021, versus $3.803 million at December 31, 2020. Marketable securities totaled $1.997 million, resulting in cash and marketable securities of approximately $4.085 million.
- Working capital was $17.567 million, compared with $22.2 million at December 31, 2020.
- Total debt was approximately $3.836 million, consisting of $2.337 million of senior convertible note liability and $1.499 million of PPP debt. The senior notes mature in December 2023 and are secured by a first-priority lien on company assets.
- Inventory totaled $13.182 million, including $3.979 million classified as long-term inventory. Open purchase orders totaled approximately $1.8 million.
Material changes versus the prior comparable period
- Revenue growth improved gross profit dollars and reduced the Q2 net loss by $351,000 and the H1 net loss by $543,000.
- Q2 gross margin expanded by 310 basis points, primarily from lower freight, tariff, and inventory-obsolescence costs as a percentage of revenue. H1 gross margin declined by 160 basis points because of higher material and freight costs.
- Regional Q2 revenue declined 9% in the Americas but increased 14% in Asia-Pacific, including the Middle East and India, and 197% in Europe and Africa.
- Cash declined by $1.715 million during H1, despite positive operating cash flow, primarily because of patent litigation expenditures and other investing activity.
- Intangible assets increased to $21.547 million from $19.248 million, reflecting capitalized patent defense costs. The company capitalized approximately $23.6 million of patent litigation costs from 2016 through June 30, 2021.
Guidance, outlook, commentary, risks, and unusual items
- Management expects product innovation, cost reductions, working-capital management, and intellectual-property enforcement to support revenue growth and a return to operating profitability, but provides no quantitative revenue or earnings guidance.
- Management believes current measures will provide liquidity through at least August 10, 2022, although it cautions that additional financing may be required and may not be available on acceptable terms.
- On July 2, 2021, after quarter-end, ClearOne obtained a $2.0 million bridge loan from Edward D. Bagley, an affiliate and holder of approximately 46.7% of the company’s common stock. The loan bears 8% interest and matures on the earlier of October 1, 2021 or receipt of the expected federal income-tax refund.
- ClearOne continues extensive litigation against Shure concerning alleged patent infringement. A preliminary injunction remains significant to management’s strategy; the company believes Shure continues to infringe and has spent substantial amounts defending its patents. Litigation outcomes and future expenditures remain uncertain.
- Shure’s appeal of the contempt ruling was dismissed by the Federal Circuit on July 21, 2021. Other summary judgment, claim construction, and related motions remained pending as of the filing.
- COVID-19 reduced demand for installed professional audio products through lockdowns and delayed commercial projects, while increasing demand for video and personal conferencing products. Future effects remain uncertain.
- The company carries substantial long-term inventory that may require write-downs or price reductions if demand or product mix changes. H1 inventory valuation and obsolescence losses were $682,000.
- Deferred product revenue declined to $56,000 from $123,000 at December 31, 2020. The company recorded no U.S. tax benefit from current losses because of a full valuation allowance against deferred tax assets.
- The company reported no material changes in internal control over financial reporting and no off-balance-sheet arrangements expected to have a material effect.
Important facts for investors to verify
- Whether revenue growth, particularly in BMA microphone products, is sustainable and sufficient to restore operating profitability.
- The timing, amount, and outcome of the Shure litigation, including any damages, injunction enforcement, appeals, and continuing legal costs.
- Liquidity after the $2.0 million bridge loan maturity and the company’s ability to obtain additional financing if needed.
- Recoverability of $3.979 million of long-term inventory and the risk of additional obsolescence charges or price concessions.
- The effect of material, freight, tariff, and supply-chain costs on future gross margins.
- The potential dilution and control implications of the senior convertible notes, warrants, and other potentially dilutive securities.
- The accuracy of management’s liquidity assessment through August 10, 2022, given continuing losses, litigation spending, debt obligations, and working-capital requirements.