ClearOne, Inc. 2018 Q2 Form 10-Q Summary
Business Context and Reporting Period
ClearOne provides conferencing, collaboration, professional audio, video, software, and network streaming solutions. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
The company introduced additions to its CONVERGE 2 audio platform, ceiling and wireless microphone products, VIEW AV Networking platform, and COLLABORATE Space video solution. Management also initiated company-wide cost reductions and continued patent-enforcement litigation.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $7.0 million | $10.3 million | $14.3 million | $22.0 million |
| Gross profit | $3.3 million | $6.1 million | $7.3 million | $12.7 million |
| Gross margin | 47% | 59% | 52% | 58% |
| Operating loss | $(3.0) million | $(1.1) million | $(5.4) million | $(1.6) million |
| Net loss | $(2.2) million | $(0.8) million | $(4.0) million | $(1.3) million |
| Loss per diluted share | $(0.26) | $(0.09) | $(0.48) | $(0.15) |
- Product revenue for Q2 consisted of professional audio products of $4.9 million, unified communications endpoints of $1.0 million, and video products of $1.1 million.
- Operating expenses were $6.2 million in Q2 and $12.8 million in the first half, compared with $7.2 million and $14.4 million, respectively, in the prior-year periods. Q2 sales and marketing expense increased 4%, while research and development declined 17% and general and administrative expense declined 30%.
- Net cash used in operating activities was $1.9 million in the first half of 2018, compared with $4.7 million in the first half of 2017.
- Investing activities provided $1.1 million, including proceeds from marketable securities, partially offset by $2.4 million of capitalized patent-defense costs.
- Financing activities used $0.7 million, including $0.6 million of dividend payments and $0.1 million of stock repurchases.
- Cash and cash equivalents were $4.1 million at June 30, 2018, compared with $5.6 million at December 31, 2017. Marketable securities totaled $9.2 million at fair value, producing cash and marketable securities of approximately $13.3 million.
- Working capital was $23.2 million at June 30, 2018, compared with $23.3 million at year-end 2017.
- The filing reports no debt or borrowings; total liabilities were $6.5 million, primarily current liabilities.
- Total inventory was $22.7 million, including $8.4 million classified as long-term inventory. The company recorded $0.4 million of inventory valuation and obsolescence losses during the first half.
Material Changes Versus the Prior Comparable Period
- Revenue declined 32% in Q2 and 35% in the first half. Management attributed the decline to weaker professional audio demand, slower adoption of CONVERGE 2, lower licensing revenue, patent-infringing competitive products, pricing pressure, and broader competitive conditions.
- Revenue declined across all product categories in Q2: professional audio conferencing declined 35%, unified communications endpoints declined 15%, and video products declined 30%. Revenue declined in most regions, although China and Latin America increased.
- Gross margin fell 12 percentage points in Q2 and six percentage points in the first half, primarily because of higher inventory obsolescence costs, lower licensing revenue, and reduced overhead absorption resulting from lower inventory purchases.
- Despite lower revenue, operating expenses declined because of lower research and development, general and administrative, legal, and employee-related costs. Approximately $1.1 million of Q2 and $2.4 million of first-half patent-defense costs were capitalized rather than expensed.
- The company adopted the new revenue standard on January 1, 2018 using the modified retrospective method. The adoption increased retained earnings by $2.8 million, reduced deferred product revenue by $4.3 million, and eliminated $1.6 million of distributor channel inventory. The standard increased Q2 revenue by $0.3 million and reduced first-half revenue by $0.6 million.
- The dividend program was suspended on June 13, 2018, and the share-repurchase program expired in March 2018 without renewal.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide quantitative revenue or earnings guidance. Management expects cost reductions, inventory reductions, working-capital management, and new products to support liquidity and future performance, but provides no assurance of improved revenue or profitability.
- Management stated that near-term revenue may be materially adversely affected by the resignation of a large U.S. distributor in June 2018.
- The company is pursuing legal remedies concerning alleged infringement of strategic patents. It had incurred approximately $6.2 million in related litigation costs from 2016 through June 30, 2018 and expects additional costs.
- Long-term inventory includes approximately $2.7 million of wireless microphone finished goods and assemblies, $2.7 million of CONVERGE 2 products, and $1.1 million of related raw materials. Failure to sell these products could result in additional write-downs or price reductions.
- Open purchase orders with electronics manufacturing service providers totaled approximately $2.0 million at June 30, 2018.
- The company identified a material weakness in internal control over financial reporting involving the accurate and timely reporting of financial results and disclosures and timely testing and assessment of controls. Management is implementing a remediation plan with a third-party consultant.
- A $64,000 discrete tax expense related primarily to changes in reserves associated with a Hong Kong tax audit affected the quarter. The forecasted effective tax benefit rate was 26.8%, while the quarter’s effective tax benefit rate after the discrete item was 24.9%.
- Management identifies competition, rapidly changing technology, patent litigation, customer and distributor concentration, supplier performance, inventory obsolescence, foreign currency movements, pricing pressure, and market acceptance of new products as material risks.
- The company reports no material off-balance-sheet arrangements and no material changes to the risk factors disclosed in its 2017 Form 10-K.
Important Facts for Investors to Verify
- Whether revenue stabilizes following the U.S. distributor resignation and whether adoption of CONVERGE 2 and newer video and microphone products improves.
- The outcome, timing, and future cash cost of patent-enforcement litigation, including the basis for capitalizing patent-defense expenditures.
- The recoverability and aging of the $22.7 million inventory balance, particularly the $8.4 million long-term component.
- Progress in remediating the material weakness in internal control over financial reporting.
- Liquidity after recurring operating losses, litigation spending, capital requirements, and the suspension of dividends.
- The effect of the new revenue-recognition standard on reported revenue, deferred product revenue, distributor inventories, and comparability with 2017.