ClearOne, Inc. Form 10-Q Summary
Business context and reporting period
ClearOne designs and sells conferencing, collaboration, audio-visual networking, microphones, audio conferencing, and video products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. ClearOne is a smaller reporting company and its common stock trades on the Nasdaq Capital Market under CLRO.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $7.0 million | $8.4 million | $21.8 million | $20.5 million |
| Gross profit | $2.9 million | $3.5 million | $9.3 million | $9.0 million |
| Gross margin | 40.8% | 41.8% | 42.6% | 43.8% |
| Operating loss | $2.0 million | $1.2 million | $5.0 million | $4.8 million |
| Net loss | $2.2 million | $1.3 million | $5.4 million | $5.0 million |
| Loss per share | $0.11 | $0.07 | $0.28 | $0.30 |
| Net cash used in operating activities | Not provided for the quarter | Not provided for the quarter | $1.5 million | $0.3 million |
Q3 revenue declined 17%, while nine-month revenue increased 6%. Q3 revenue by product was audio conferencing $2.9 million, microphones $2.7 million, and video products $1.4 million. Nine-month revenue was audio conferencing $8.8 million, microphones $8.2 million, and video products $4.7 million.
At September 30, 2021, cash and cash equivalents were $9.2 million, marketable securities were $1.4 million, working capital was $23.7 million, and total assets were $68.2 million. Total debt was approximately $5.8 million, consisting primarily of the senior convertible notes, the $2.0 million bridge loan, and the $1.5 million PPP loan. Total shareholders’ equity was $53.8 million.
Cash used in investing activities was $4.2 million for the first nine months, including $5.3 million of capitalized patent-defense costs. Cash provided by financing activities was $11.0 million, including $9.3 million of net proceeds from common stock and warrants and $2.0 million from the bridge loan. Cash increased by $5.4 million to $9.2 million during the period.
Material changes versus the prior comparable period
- Q3 revenue decreased $1.4 million, primarily because video-product revenue fell 55%; microphone revenue increased 9% and audio-conferencing revenue increased 4%.
- Nine-month revenue increased $1.3 million, led by 27% growth in microphones and 7% growth in audio conferencing, partially offset by a 19% decline in video products.
- Gross margin declined by 100 basis points in Q3 and 120 basis points year to date, reflecting higher freight, tariff, material, inventory-obsolescence, and scrap costs.
- Operating expenses increased 4% in both Q3 and the nine-month period. General and administrative expense increased primarily because of amortization of capitalized patent-defense costs and higher insurance expense.
- Net losses increased despite higher nine-month gross profit, principally because of lower Q3 revenue, higher patent-defense amortization, and increased interest expense.
- Common shares outstanding increased to 22.4 million from 18.8 million at December 31, 2020, following the September 2021 equity and warrant issuance.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide quantified revenue or earnings guidance. Management expects product innovation, cost reduction, working-capital management, and intellectual-property enforcement to support a return to revenue growth and operating profitability, but states that there can be no assurance.
Management believes existing measures and working-capital management will provide liquidity through at least November 12, 2022. However, the company may need additional financing. If financing is unavailable, it may need to reduce expenses, delay product development, or revise its litigation strategy.
- Supply shortages and logistics bottlenecks negatively affected Q3 results. COVID-19 reduced installed-market activity while earlier stimulus-driven work-from-home demand for video and personal conferencing products subsided.
- ClearOne has spent approximately $25.7 million on patent litigation from 2016 through September 30, 2021 and capitalized $2.1 million of related legal costs during Q3. Additional litigation costs are expected.
- ClearOne is litigating against Shure. A July 2021 Federal Circuit dismissal left a contempt ruling in place, while supplemental briefing remained pending. In November 2021, a Delaware jury found that ClearOne did not infringe Shure’s ’723 patent and found that patent invalid. Other claims and appeals remain pending.
- The $2.0 million bridge loan bears 8% interest and was extended to January 3, 2022. The senior convertible notes have $2.7 million of principal outstanding and mature in December 2023. The company also has $6.0 million of open purchase orders, primarily for inventory.
- Long-term inventory was $3.3 million. Management expects to sell it at or above cost, but timing and realized amounts are uncertain.
- U.S. deferred tax assets remain subject to a full valuation allowance because of recent losses; current income-tax expense primarily relates to foreign jurisdictions.
Important facts for investors to verify
- Whether video-product demand recovers and whether microphone and audio-conferencing growth offsets continued video declines.
- The timing, cost, and outcomes of the Shure litigation and the recoverability of capitalized patent-defense costs.
- Repayment or refinancing of the bridge loan and other near-term debt obligations.
- Whether cash resources can support operations and litigation through management’s stated November 2022 liquidity horizon.
- The effect of supply-chain constraints, freight and tariff costs, inventory levels, and potential inventory write-downs on future margins.
- The dilution and potential future dilution associated with the September 2021 stock issuance, warrants, and convertible notes.