ClearOne, Inc. — Q2 2019 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 related software. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the same periods in 2018. ClearOne was a smaller reporting company with 16.6 million shares outstanding as of August 14, 2019.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $6.4 million | $7.0 million | $12.7 million | $14.3 million |
| Gross profit | $2.9 million | $3.3 million | $5.6 million | $7.3 million |
| Gross margin | 46% | 47% | 44% | 52% |
| Operating expenses | $5.0 million | $6.2 million | $10.1 million | $12.8 million |
| Operating loss | $2.1 million | $3.0 million | $4.5 million | $5.4 million |
| Net loss | $2.1 million | $2.2 million | $4.4 million | $4.0 million |
| Loss per diluted share | $0.13 | $0.26 | $0.27 | $0.48 |
- Q2 revenue declined 8%; first-half revenue declined 11%. Q2 audio conferencing revenue fell 20%, microphones declined 1%, and video revenue increased 16%. For the first half, audio conferencing declined 23%, microphones declined 5%, and video increased 14%.
- Operating expense reductions improved the operating loss, but lower gross profit and the absence of a prior-year tax benefit contributed to the first-half net loss increasing 11% year over year.
- Cash and cash equivalents were $2.4 million at June 30, 2019, down from $11.2 million at December 31, 2018. Marketable securities totaled $9.9 million, including $3.1 million classified as current and $6.9 million long term.
- Working capital was $20.4 million versus $28.4 million at year-end 2018. The filing does not disclose traditional interest-bearing debt; liabilities included $2.8 million of operating lease obligations.
- Operating cash flow was negative $1.4 million in the first half, compared with negative $1.9 million in the prior-year period. Investing cash flow was negative $7.5 million, primarily due to $7.1 million of marketable-security purchases and $2.3 million of capitalized patent-defense costs.
- Total inventory was $20.0 million, including $7.7 million classified as long term. Open purchase orders were approximately $1.5 million.
Material changes versus the prior comparable period
- Revenue mix shifted away from audio conferencing, which represented 45% of Q2 revenue versus 52% in the prior-year quarter, toward video products, which represented 20% versus 16%.
- Gross margin fell eight percentage points in the first half, primarily because of higher material costs and a lower mix of higher-margin professional installed audio products.
- Sales and marketing expense fell 25% in the first half, research and product development expense fell 27%, and total operating expenses fell 21%.
- Management attributed much of the audio and microphone revenue decline to alleged infringement of ClearOne patents and cited increased competition as a factor affecting video products.
- ClearOne adopted the lease accounting standard effective January 1, 2019, recognizing approximately $3.0 million of right-of-use assets and $3.1 million of lease liabilities. The filing states that the income-statement impact was not material.
Guidance, outlook, risks, and unusual items
- No formal quantitative revenue or earnings guidance is provided. Management expects a return to growth based on product innovation, cost reduction, intellectual-property enforcement, inventory reduction, and improved working-capital management.
- New or highlighted offerings included the Beamforming Microphone Array Ceiling Tile and the COLLABORATE Space collaboration suite.
- ClearOne capitalized approximately $1.1 million of patent-defense legal costs in Q2 and approximately $10.8 million from 2016 through June 30, 2019. Additional litigation spending may be required.
- On August 5, 2019, a federal court issued a preliminary injunction restricting Shure’s manufacture, marketing, and sale of the MXA910 ceiling-array microphone in a drop-ceiling configuration based on likely infringement of ClearOne’s patent. The outcome of the full litigation is uncertain.
- Shure separately sued ClearOne on July 18, 2019, alleging that the BMA CT infringes Shure’s patent and asserting related business tort and advertising claims. ClearOne intends to defend the action.
- Management recorded a full valuation allowance against deferred tax assets; consequently, current losses did not generate a U.S. tax benefit. Q2 and first-half tax expense was $45,000.
- Disclosure controls were not effective as of June 30, 2019 because of a material weakness involving timely and accurate financial reporting and disclosure controls. Management is implementing a remediation plan with a third-party consultant.
- Key risks include intense competition, rapidly changing technology, dependence on professional audio products, potential inventory write-downs, patent litigation outcomes, supplier and product risks, international operations, foreign exchange exposure, and continued operating losses.
Important facts for investors to verify
- Whether the preliminary injunction against Shure produces a sustained recovery in ClearOne’s audio and microphone revenue and whether it survives further proceedings.
- The potential financial exposure and business impact of Shure’s Delaware lawsuit against the BMA CT.
- Whether cash consumption stabilizes given $2.4 million of cash, negative operating cash flow, ongoing patent-defense spending, and substantial inventory.
- Whether gross margins recover from 44% in the first half and whether long-term inventory can be sold without material markdowns or write-offs.
- Progress and timing of remediation of the material weakness in internal controls.
- Whether management’s product launches, cost reductions, and intellectual-property strategy restore revenue growth; the filing provides no quantitative forecast to test against.