ClearOne, Inc. 10-Q Summary
Business context and reporting period
ClearOne designs and sells conferencing, collaboration, and audiovisual streaming solutions, including audio conferencing systems, microphones, and video products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. ClearOne is a smaller reporting company listed on Nasdaq under CLRO.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $6.0 million | $6.7 million | $18.7 million | $20.9 million |
| Gross profit | $2.5 million | $3.0 million | $8.2 million | $10.3 million |
| Gross margin | 42% | 45% | 44% | 49% |
| Operating loss | $2.1 million | $2.3 million | $6.6 million | $7.7 million |
| Net loss | $2.0 million | $10.1 million | $6.4 million | $14.2 million |
| Loss per diluted share | $0.12 | $1.22 | $0.39 | $1.70 |
- Q3 revenue declined 10%; nine-month revenue declined 11%.
- Q3 product revenue was $2.9 million from audio conferencing, $2.2 million from microphones, and $0.9 million from video products. Nine-month revenue was $8.5 million, $6.5 million, and $3.7 million, respectively.
- Operating expenses decreased 12% in Q3 and 18% year to date, reflecting lower sales and marketing and research and development spending.
- The 2018 net loss included approximately $7.8 million of tax expense from a valuation allowance on deferred tax assets. Current-year losses did not generate a tax benefit because a full valuation allowance remains in place.
- Cash and cash equivalents were $2.0 million at September 30, 2019, compared with $11.2 million at December 31, 2018. Marketable securities totaled $3.9 million at fair value.
- Working capital was $22.5 million, down from $28.4 million at year-end 2018. Total inventory was $18.8 million, including $7.1 million classified as long-term.
- Net cash used in operating activities was $6.6 million for the nine months, versus $3.6 million in 2018. Investing activities used $2.6 million, including $3.4 million of capitalized patent-defense costs.
- The filing does not disclose conventional borrowings or funded debt. Reported liabilities primarily comprise operating lease liabilities of $2.7 million and current operating liabilities.
Material changes versus the prior comparable period
- Revenue decreased primarily because of lower audio conferencing and video sales in Q3; microphones increased approximately 3% in Q3. For the nine-month period, audio conferencing declined approximately 20%, microphones declined approximately 2%, and video increased approximately 3%.
- Management attributed significant revenue pressure in audio conferencing and microphones to alleged infringement of ClearOne patents and attributed video pressure partly to increased competition and partner attention being diverted to infringing alternatives.
- Gross margin declined because of higher material costs, increased inventory obsolescence costs, and a less favorable product mix with fewer higher-margin professional audio conferencing products.
- Management reduced sales and marketing, research and development, and other costs as part of company-wide cost-reduction measures.
- ClearOne adopted the new lease accounting standard on January 1, 2019, recognizing a $2.5 million operating lease right-of-use asset and $2.7 million of operating lease liabilities at September 30, 2019. The standard did not materially affect earnings.
- The company suspended its dividend program and allowed its share repurchase program to expire. No dividends or share repurchases were recorded during the 2019 nine-month period.
Guidance, outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management expects product innovation, cost reductions, intellectual-property enforcement, inventory reduction, and working-capital management to support a return to growth.
- Management believes available liquidity will fund operating needs through at least November 15, 2020, but states that additional financing may be required and may not be available on acceptable terms.
- ClearOne has spent approximately $11.9 million on patent litigation from 2016 through September 30, 2019 and expects additional legal expenditures. It capitalized $3.4 million of patent-defense costs during the first nine months of 2019.
- In August 2019, a federal court granted ClearOne a preliminary injunction restricting Shure from manufacturing, marketing, or selling its MXA910 microphone in a specified drop-ceiling configuration. The litigation remains ongoing, and the filing provides no assurance of a favorable final outcome.
- Shure separately sued ClearOne in July 2019, alleging that ClearOne’s BMA CT product infringes Shure’s patent and asserting related claims. ClearOne intends to defend the case.
- Key risks include continuing operating losses and cash burn, substantial litigation costs, potential inventory obsolescence or markdowns, intense competition, rapidly changing technology, customer and product concentration, international operations, foreign exchange exposure, and possible difficulty obtaining financing.
- Management reported that disclosure controls and procedures were not effective as of September 30, 2019 because of a material weakness involving accurate and timely financial reporting and control testing. A remediation plan with a third-party consultant is underway.
Important facts for investors to verify
- Whether the preliminary injunction against Shure remains in effect and the potential financial impact and duration of the related litigation.
- The pace of cash usage, remaining marketable securities, and the company’s ability to fund operations and litigation without external financing.
- Whether revenue returns to growth and whether audio conferencing and microphone sales recover after the intellectual-property actions.
- The realizability and aging of the $7.1 million of long-term inventory and the risk of further inventory write-downs.
- Progress in remediating the material weakness in internal control over financial reporting.
- The effect of continued cost reductions on product development, sales execution, and future revenue growth.