UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period _______ to _______ |
Commission file number:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. employer identification number) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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The |
Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Larger Accelerated Filer ☐ |
Accelerated Filer ☐ |
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☒ |
Smaller Reporting Company |
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Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Yes ☐ No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of ClearOne common stock outstanding as of November 11, 2022 was
CLEARONE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022
INDEX
CLEARONE, INC
(Dollars in thousands, except par value)
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September 30, 2022 |
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December 31, 2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Marketable securities |
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Receivables, net of allowance for doubtful accounts of $ |
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Inventories, net |
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| Income tax receivable | ||||||||
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Prepaid expenses and other assets |
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Total current assets |
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Long-term marketable securities |
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Long-term inventories, net |
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Property and equipment, net |
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Operating lease - right of use assets, net |
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Intangibles, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued liabilities |
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Deferred product revenue |
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| Short-term debt | ||||||||
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Total current liabilities |
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Long-term debt, net |
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Operating lease liability, net of current |
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Other long-term liabilities |
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Total liabilities |
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Shareholders' equity: |
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Common stock, par value $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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See accompanying notes
CLEARONE, INC.
COMPREHENSIVE LOSS
(Dollars in thousands, except per share amounts)
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Three months ended September 30, |
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Nine months ended September 30, | |||||||||||
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2022 |
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2021 |
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2022 | 2021 | |||||||
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Revenue |
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$ |
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$ |
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$ | $ | |||||
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Cost of goods sold |
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Gross profit |
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Operating expenses: |
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Sales and marketing |
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Research and product development |
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General and administrative |
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Total operating expenses |
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Operating loss |
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| Interest expense | ( |
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Other income (loss), net |
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Loss before income taxes |
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Provision for income taxes |
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Net loss |
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$ |
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$ |
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Basic weighted average shares outstanding |
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Diluted weighted average shares outstanding |
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Basic loss per share |
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$ |
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$ |
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Diluted loss per share |
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$ |
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$ |
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$ | ( |
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Comprehensive loss: |
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Net loss |
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$ |
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$ |
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Unrealized loss on available-for-sale securities, net of tax |
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Change in foreign currency translation adjustment |
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Comprehensive loss |
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$ |
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$ |
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$ | ( |
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See accompanying notes
CLEARONE, INC.
(Dollars in thousands, except per share amounts)
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Nine months ended September 30, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net loss |
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$ |
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$ |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization expense |
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Amortization of right-of-use assets |
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Share-based compensation expense |
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| Provision for doubtful accounts, net | ( |
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Change of inventory to net realizable value |
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Gain recognized on Paycheck Protection Plan Loan forgiveness |
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Changes in operating assets and liabilities: |
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Receivables |
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Inventories |
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Prepaid expenses and other assets |
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( |
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Accounts payable |
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( |
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Accrued liabilities |
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( |
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Income taxes receivable |
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Deferred product revenue |
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( |
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Operating lease liabilities |
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( |
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( |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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Purchase of intangibles |
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( |
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( |
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Capitalized patent defense costs |
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Proceeds from maturities and sales of marketable securities |
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Purchases of marketable securities |
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Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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| Net proceeds from issuance of common stock and warrants | ||||||||
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Net proceeds from equity-based compensation programs |
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| Paycheck Protection Program loan refund upon full forgiveness net of loan payments | ||||||||
| Principal payments of long-term debt | ( |
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Net cash provided by financing activities |
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Effect of exchange rate changes on cash and cash equivalents |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at the beginning of the period |
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Cash and cash equivalents at the end of the period |
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$ |
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$ |
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See accompanying notes
CLEARONE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
The following is a summary of supplemental cash flow activities:
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Nine months ended September 30, |
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2022 |
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2021 |
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Cash paid for income taxes |
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$ |
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$ |
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| Cash paid for interest | ||||||||
See accompanying notes
CLEARONE, INC.
(Unaudited - Dollars in thousands, except per share amounts)
1. Business Description, Basis of Presentation and Significant Accounting Policies
Business Description:
ClearOne, Inc., together with its subsidiaries (collectively, “ClearOne” or the “Company”), is a global market leader enabling conferencing, collaboration, and AV streaming solutions for voice and visual communications. The performance and simplicity of our advanced, comprehensive solutions offer unprecedented levels of functionality, reliability and scalability.
Basis of Presentation:
The fiscal year for ClearOne is the twelve months ending on December 31. The condensed consolidated financial statements include the accounts of ClearOne and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.
These accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are not audited. Certain information and footnote disclosures that are usually included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been either condensed or omitted in accordance with SEC rules and regulations. The accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 2022 and December 31, 2021, the results of operations for the three and nine months ended September 30, 2022 and 2021, and the cash flows for the nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September 30, 2022 and 2021 are not necessarily indicative of the results for a full-year period. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.
Significant Accounting Policies:
The significant accounting policies were described in Note 1 to the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2021. There have been no changes to these policies during the September 30, 2022 that are of significance or potential significance to the Company.
Recent accounting pronouncements: The Company has determined that recently issued accounting standards will not have a material impact on its consolidated financial position, results of operations or cash flows.
Liquidity:
As of September 30, 2022, our cash and cash equivalents were approximately $
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
The Company also believes that the Company's core strategies of product innovation and prudent cost management will bring the company back to profitability in the future. The Company believes, although there can be no assurance, that all of these measures and effective management of working capital, including collecting on the income taxes receivable balance, will provide the liquidity needed to meet our operating needs through at least November 14, 2023. The Company also believes that its strong portfolio of intellectual property and its solid brand equity in the market will enable it to raise additional capital if and when needed to meet its short and long-term financing needs; however, there can be no assurance that, if needed, the Company will be successful in obtaining the necessary funds through equity or debt financing. If the Company needs additional capital and is unable to secure financing, it may be required to further reduce expenses, delay product development and enhancement, or revise its strategy regarding ongoing litigation.
2. Revenue Information
The following table disaggregates the Company’s revenue into primary product groups:
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Three months ended September 30, |
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Nine months ended September 30, | ||||||||||||
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2022 |
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2021 |
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2022 | 2021 | ||||||||
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Audio conferencing |
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$ |
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$ |
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$ | $ | ||||||
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Microphones |
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Video products |
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$ |
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$ |
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$ | $ | ||||||
The following table disaggregates the Company’s revenue into major regions:
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Three months ended September 30, |
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Nine months ended September 30, | ||||||||||||
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2022 |
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2021 |
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2022 | 2021 | ||||||||
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North and South America |
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$ |
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$ |
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$ | $ | ||||||
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Asia Pacific (includes Middle East, India and Australia) |
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Europe and Africa |
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$ |
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$ |
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$ | $ | ||||||
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
3. Loss Per Share
Loss per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive potential common stock outstanding during the period. Stock options, warrants and the convertible portion of senior convertible notes are considered to be potential common stock. The computation of diluted earnings (loss) per share does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Basic earnings (loss) per common share is the amount of net earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted earnings (loss) per common share is the amount of earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period and to each share of potential common stock outstanding during the period, unless inclusion of potential common stock would have an anti-dilutive effect.
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
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Three months ended September 30, |
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Nine months ended September 30, |
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2022 | 2021 |
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2022 |
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2021 |
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Numerator: |
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Net loss |
$ | ( |
$ | ( |
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$ |
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Denominator: |
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Basic weighted average shares outstanding |
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Dilutive common stock equivalents using treasury stock method |
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Diluted weighted average shares outstanding |
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Basic loss per common share |
$ | ( |
$ | ( |
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$ |
( |
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$ |
( |
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Diluted loss per common share |
$ | ( |
$ | ( |
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$ |
( |
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$ |
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Weighted average options, warrants and convertible portion of senior convertible notes outstanding |
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Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation |
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
4. Marketable Securities
The Company has classified its marketable securities as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of securities at December 31, 2021 were as follows.
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Amortized cost |
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Gross unrealized holding gains |
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Gross unrealized holding losses |
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Estimated fair value |
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December 31, 2021 |
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Available-for-sale securities: |
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Corporate bonds and notes |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Municipal bonds |
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( |
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Total available-for-sale securities |
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$ |
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$ |
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$ |
( |
) |
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$ |
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
5. Intangible Assets
Intangible assets as of September 30, 2022 and December 31, 2021 consisted of the following:
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Estimated useful lives (years) |
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September 30, 2022 |
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December 31, 2021 |
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Tradename |
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to |
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$ |
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$ |
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Patents and technological know-how |
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to |
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|
Proprietary software |
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|
to |
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Other |
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to |
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Total intangible assets |
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|
|
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|
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|
Accumulated amortization |
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Total intangible assets, net |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
The amortization of intangible assets for the three and nine months ended September 30, 2022 and 2021 was as follows:
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||||||||
|
|
2022 | 2021 |
|
2022 |
|
|
2021 |
|
||||||||
|
Amortization of intangible assets |
$ | $ |
|
$ |
|
|
|
$ |
|
|
||||||
The estimated future amortization expense of intangible assets is as follows:
|
Years ending December 31, |
|
Amount |
|
|
|
2022 (Remainder) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total |
|
$ |
|
|
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
6. Inventories
Inventories, net of reserves, as of September 30, 2022 and December 31, 2021 consisted of the following:
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Current: |
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term: |
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Long-term inventory represents inventory held in excess of our current (next 12 months) requirements based on our recent sales and forecasted level of sales. We expect to sell the above inventory, net of reserves, at or above the stated cost and believe that no loss will be incurred on its sale, although there can be no assurance of the timing or amount of any sales.
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory for the three and nine months ended September 30, 2022 and 2021 was as follows:
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
||||||||||||
|
|
2022 | 2021 |
|
2022 |
|
|
2021 |
|
||||||||
|
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory |
$ | $ |
|
$ |
|
|
|
$ |
|
|
||||||
7. Leases
Rent expense is recognized on a straight-line basis over the period of the lease taking into account future rent escalation and holiday periods.
Rent expense for the three and nine months ended September 30, 2022 and 2021 was as follows:
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, | ||||||||||||
|
|
|
2022 |
|
|
2021 |
|
2022 | 2021 | ||||||||
|
Rent expense |
|
$ |
|
|
|
$ |
|
|
$ | $ | ||||||
The Company occupies a
The Company occupies a
The Company occupied a
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
The Company occupies a
The Company occupies a
Supplemental cash flow information related to leases was as follows:
|
|
|
Nine months ended September 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
|
|
|
||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Operating lease right-of-use assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|||||||
| Current portion of operating lease liabilities, included in accrued liabilities | $ | $ | ||||||
|
Operating lease liabilities, net of current portion |
|
|
|
|
|
|
|
|
|
Total operating lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average remaining lease term for operating leases (in years) | ||||||||
| Weighted average discount rate for operating leases | % | % | ||||||
The following represents maturities of operating lease liabilities as of September 30, 2022:
|
Years ending December 31, |
|
|
|
|
|
2022 (Remainder) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Total lease payments |
|
|
|
|
|
Less: Imputed interest |
|
|
( |
) |
|
Total |
|
$ |
|
|
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
8. Shareholders' Equity
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
||||||||||||
|
|
|
2022 |
|
|
2021 |
|
2022 | 2021 | ||||||||
|
Common stock and additional paid-in capital |
|
|
|
|
|
|
|
|
||||||||
|
Balance, beginning of period |
|
$ |
|
|
|
$ |
|
|
$ | $ | ||||||
| Issuance of common stock and warrants, net | |
|
||||||||||||||
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
||||||||
|
Proceeds from employee stock purchase plan |
|
|
|
|
|
|
|
|
||||||||
|
Balance, end of period |
|
$ |
|
|
|
$ |
|
|
$ | $ | ||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
||||||||
|
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) |
$ | ( |
) | $ | ( |
) | ||
|
Unrealized loss on available-for-sale securities, net of tax |
|
|
|
|
|
( |
) | ( |
) | ( |
) | |||||
|
Foreign currency translation adjustment |
|
|
( |
) |
|
|
( |
) | ( |
) | ( |
) | ||||
|
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
$ | ( |
) | $ | ( |
) | ||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Accumulated deficit |
|
|
|
|
|
|
|
|
||||||||
|
Balance, beginning of period |
|
$ |
( |
) |
|
$ |
( |
) | $ | ( |
) | $ | ( |
) | ||
|
Net loss |
|
|
( |
) |
|
|
( |
) |
( |
) | ( |
) | ||||
|
Balance, end of period |
|
$ |
( |
) |
|
$ |
( |
) |
$ | ( |
) | $ | ( |
) | ||
|
|
|
|
|
|
|
|
|
|
||||||||
|
Total shareholders' equity |
|
$ |
|
|
|
$ |
|
|
$ | $ | ||||||
Issue of Common Stock and Warrants
On September 13, 2020, the Company entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued and sold in a registered direct offering
On September 12, 2021, the Company entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued
On January 4, 2022, the Company entered into a Securities Purchase Agreement with Edward D. Bagley, an affiliate of the Company, pursuant to which the Company agreed to issue and sell, in a private placement
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
9. Debt
Senior Convertible Notes and Warrants
On December 17, 2019, the Company completed the issuance and sale of $
The Notes will mature on
The Warrants have an initial exercise price equal to $
Concurrent with the issuance of the Notes and Warrants pursuant to the Note Purchase Agreement, the Company, the Guarantors and Mr. Bagley entered into a Guaranty and Collateral Agreement (the “Collateral Agreement”) pursuant to which the Company and the Guarantors granted Mr. Bagley a first priority lien interest in all of the Company’s assets as security for the Company’s performance of its obligations under the Notes and Warrants.
The net proceeds after original issue discount and issuance costs of $
In accounting for the issuance of the Notes, the Company separated Notes and Warrants into liability and equity components. The carrying amount of Warrants, being an equity component, was first calculated using Black-Scholes method with the following assumptions:
|
Risk-free interest rate |
|
|
Expected life of warrants (years) |
|
|
Expected price volatility |
|
|
Expected dividend yield |
|
The carrying amount of the Notes was then determined by deducting the fair value of the Warrants from the principal amount of the Notes. The carrying amount of the Notes was further separated into equity and liability components after separating the value of the conversion feature into an equity component and leaving the remaining value as liability. The equity component is not remeasured while the Notes and Warrants continue to meet the conditions for equity classification for equity components.
The original issue discount and issuance costs are netted against the liability. The following table represents the carrying value of Notes and Warrants:
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
|
Liability component: |
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
|
|
|
$ |
|
|
|
Less: debt discount and issuance costs, net of amortization |
|
|
( |
) |
|
|
( |
) |
|
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
|
Equity component(1): |
|
|
|
|
|
|
|
|
|
Warrants |
|
$ |
|
|
|
$ |
|
|
|
Conversion feature |
|
|
|
|
|
|
||
|
Net carrying amount |
|
$ |
|
|
|
$ |
|
|
| Current portion of liability component included under short-term debt | $ | $ | ||||||
| Long-term portion of liability component included under long-term debt | ||||||||
| Liability component total | $ | $ | ||||||
(1)
Debt discount and issuance costs are amortized over the life of the note to interest expense using the effective interest method. During the three and nine months ended September 30, 2022, amortization of debt discount and issuance costs was $
|
Year ending December 31, |
|
Principal Amount Maturing |
|
|
|
2022 (Remainder) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
| Total principal amount |
|
$ |
|
|
Short-term Bridge Loan
On July 2, 2021, the Company obtained a bridge loan in the principal amount of $
Paycheck Protection Program Loan
On April 18, 2020, the Company, entered into a loan agreement with U.S. Bank National Association Bank, which provided for a loan in the principal amount of $
The Company's Paycheck Protection Program Loan ("PPP Loan") under the CARES Act was forgiven by Small Business Administration effective April 29, 2022. With this forgiveness, the Company is not required to repay the principal amount of $
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
| Current portion of the PPP Loan included under short-term debt | $ | $ | ||||||
| Long-term portion of the PPP Loan included under long-term debt | ||||||||
| Liability component total | $ | $ | ||||||
10. Fair Value Measurements
The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. This category generally includes U.S. Government and agency securities; municipal securities; mutual funds and securities sold and not yet settled.
Level 3 - Unobservable inputs.
The Company’s financial instruments are valued using observable inputs. The following table sets forth the fair value of the financial instruments re-measured by the Company as of September 30, 2022 and December 31, 2021:
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and notes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
There were
11. Income Taxes
The current year loss did not result in income tax benefit due to recording a full valuation allowance against expected benefits. The valuation allowance was recorded as we concluded that it was more likely than not that our deferred tax assets were not realizable primarily due to the Company's recent pre-tax losses. Provision for income taxes for the nine months ended September 30, 2022 mostly represents income tax expense recorded for jurisdictions outside the United States.
The Company had approximately $
12. Subsequent events
On October 28, 2022 the Company obtained a bridge loan in the principal amount of $
13. Commitments
We have manufacturing agreements with electronics manufacturing service (“EMS”) providers related to the outsourced manufacturing of our products. Certain manufacturing agreements establish annual volume commitments. We are also obligated to repurchase the Company-forecasted but unused materials. The Company has non-cancellable, non-returnable, and long-lead time commitments with its EMS providers and certain suppliers for inventory components that will be used in production. The Company’s purchase commitments under such agreements are approximately $
This report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are based upon reasonable assumptions at the time made, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not anticipate, including, without limitation, product recalls and product liability claims; infringement of our technology or assertion that our technology infringes the rights of other parties; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth; delays in obtaining regulatory approvals or the failure to maintain such approvals; concentration of our revenue among a few customers, products or procedures; development of new products and technology that could render our products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition, availability of labor and materials, cost increases, and fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; integration of business acquisitions; and other factors referred to in our reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2021. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are discussed in Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021.
BUSINESS OVERVIEW
ClearOne is a global Company that designs, develops and sells conferencing, collaboration, and AV networking solutions for voice and visual communications. The performance and simplicity of our advanced, comprehensive solutions offer a high level of functionality, reliability and scalability. We derive a major portion of our revenue from audio conferencing products and microphones by promoting our products in the professional audio-visual channel. We have extended our total addressable market from the installed audio conferencing market to adjacent complementary markets – microphones, video collaboration and AV networking. We have achieved this through strategic technological acquisitions as well as by internal product development.
In early January 2022, we introduced DIALOG® 10 USB, the industry's only pro-quality, single-channel wireless USB microphone system offering professional-quality audio with USB connectivity for webcasting and cloud-based collaboration. In March 2022, this new USB wireless mic system won the 2022 NSCA Excellence in Product Innovation Award. One of only seven winners in this prestigious award program, the DIALOG 10 USB is the industry’s only pro-quality single-channel wireless microphone system with USB connectivity for webcasting and cloud-based collaboration such as Microsoft Teams, Zoom, WebEx, and GotoMeeting. DIALOG 10 USB won its second award in May 2022 by winning the 2022 Top New Technology (TNT) Award in the Microphone category. In June 2022, at Infocomm 2022 in Las Vegas, Nevada, DIALOG 10 USB won two additional awards - Commercial Integrator 2022 BEST Award in the Microphones category and 2022 Sound & Video Contractor Magazine Infocomm Best in Market Award.
During January, at the Las Vegas Customer Electronics Show, CES 2022, the world’s most influential annual tech event, our home office Aura™ Xceed™ BMA was singled out for exceptional innovation with a CES Picks Award, presented by Residential Systems magazine.
In early February 2022, our Versa Lite CT, a USB audio-enabled Beamforming Ceiling Tile Microphone that brings cost-effective and superb professional conferencing audio to small- and mid-sized spaces received Google Meet certification. Google Meet ranks among the top 5 for growth in the cloud meetings and team collaboration market according to Frost & Sullivan.
In early February 2022, we were awarded a new patent for a beamforming microphone array system with distributed processing. This patent claims a ceiling tile microphone array that can be physically separated from the processors running the beamforming algorithm. It enables a single computing engine to run multiple beamforming algorithms for multiple microphone arrays, which can lower the overall system cost compared to an integrated design that is limited to a single computing engine with a single microphone array. Later in the same month another ClearOne patent was granted which is related to beamforming microphone arrays with acoustic echo cancellation. The patent, titled “Band-Limited Beamforming Microphone Array with Acoustic Echo Cancellation," describes, among other things, a microphone array with one set of microphones used for beamforming, and one or more additional microphones that are not used for beamforming, but instead are used to enhance the audio performance of the microphone array.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In early March 2022, we were awarded a new patent titled “Conferencing Apparatus”, that describes, among other things, a beamforming microphone array with acoustic echo cancellation and a set of configurable fixed beams. The patent goes on to describe performing a direction of arrival determination, and in response to that determination, selecting one or more of those fixed beams for audio transmission.
In early April 2022, a ClearOne patent issued titled “Ceiling Tile Microphone,” that claims, among other things, a ceiling tile beamforming microphone that is powered through Power over Ethernet (PoE). Later in the same month another ClearOne patent was granted, also titled “Ceiling Tile Microphone,” that claims, among other things, a ceiling tile microphone that includes beamforming, acoustic echo cancellation, and auto voice tracking.
In May 2022, for the sixth time since its groundbreaking debut in 2020, the ClearOne BMA 360 microphone has been recognized by the world’s most discerning AV buyers with the prestigious Best in Market Award at ISE 2022. The microphone was one of only three winners in this year’s award program. The Best in Market Award program is presented by leading industry publication Sound & Video Contractor at Integrated Systems Europe (ISE), the world’s largest AV and systems integration show. The program recognizes the most innovative technology within the AV industry, and the judges include respected AV and IT managers, directors, engineers, industry consultants and integrators.
Throughout 2022, we have continued our efforts to protect our intellectual property rights, primarily through litigation. See Part II, Item 1. Legal Proceedings.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We also continued our programs to cut costs and to speed up product development that we believe will enable us to get back to a growth path.
Overall revenue decreased by 10% in the third quarter of 2022 when compared to the third quarter of 2021, primarily due to a significant decrease in revenues from video products and a further decrease in revenues from microphones, which were partially offset by an increase in revenues from audio conferencing products. Overall revenue decreased by 3% during the first nine months of 2022 when compared to revenue in the first nine months of 2021 due to decrease in revenue from video products, which was largely offset by an increase in revenues from audio conferencing products and microphones. Despite the negative consequences of global supply chain issues and the infringement of our patents on professional installed products, our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") continued to result in overall Beamforming Microphone Array ("BMA") revenue being higher than last year. However, revenue from BMA products as well as from our pro audio products are still far below the levels prior to infringement of our patents. Our revenue performance in 2022-Q3 was also impacted negatively due to our inability to source adequate inventory to meet the demand for professional audio products and BMA due to the ongoing transition of manufacturing of our products from China to Singapore by our EMS provider and the increased costs associated with the electronic raw material supply shortages that have affected the global manufacturing of high tech products. We expect these supply shortages and associated increased costs to continue through at least the end of 2022.
Our gross profit margin increased modestly to 41.0% during the third quarter of 2022 from 40.8% during the third quarter of 2021. Our gross profit margin decreased to 38.7% during the first nine months of 2022 compared to 42.6% during the first nine months of 2021.
Net loss decreased from $2.2 million in the third quarter of 2021 to $1.2 million in the third quarter of 2022. Our net loss decreased from $5.4 million in the first nine-month of 2021 to $3.5 million in the first nine-month of 2022. The decrease in net loss was mainly due to (a) the recognition of $1.5 million in gain from the forgiveness of CARES Act Paycheck Protection Program Loan and (b) a decrease of $1.9 million in operating expenses after excluding amortization costs relating to our capitalized patent defense costs, which were partially offset by (c) decrease in absolute gross profit dollars as a result of reduced gross margin, and (d) increased amortization costs relating to our capitalized patent defense costs.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Industry conditions
We operate in a very dynamic and highly competitive industry which is dominated on the one hand by a few players with respect to certain products like video conferencing appliances while on the other influenced heavily by a fragmented reseller market consisting of numerous regional and local players. The industry is also characterized by venture capitalist funded start-ups and private companies willing to fund cumulative cash losses in order to gain market share and achieve certain non-financial goals.
Economic conditions, challenges and risks
The audio-visual products market is characterized by intense competition and rapidly evolving technology. Our competitors vary within each product category. Our installed professional audio conferencing products, which are our flagship product category, continue to be ahead of the competition despite the reduction in revenues. Our strength in this space is largely due to our fully integrated suite of products consisting of DSP mixers, a wide range of professional microphone products and video collaboration products. Despite our strong leadership position in the installed professional audio conferencing market, we face challenges to revenue growth due to the limited size of the market and pricing pressures from new competitors attracted to the commercial market due to higher margins.
Our video products and beamforming microphone arrays, especially the BMA 360, are critical to our long term growth. We face intense competition in this market from well-established market leaders as well as emerging players rich with marketing funds. We expect our strategy of combining curated audio solutions with our high quality professional cameras, and our high-end audio conferencing technology will generate high growth in the near future.
We derive a major portion of our revenue (approximately 51% for the year ended December 31, 2021) from international operations and expect this trend to continue in the future. Most of our revenue from outside the U.S. is billed in U.S. dollars and is not exposed to any significant currency risk. However, we are exposed to foreign exchange risk if the U.S. dollar is strong against other currencies as it will make U.S. Dollar denominated prices of our products less competitive.
The COVID-19 pandemic caused severe global disruptions and had varying impact on our business. The installed audio conferencing market was negatively impacted due to lockdowns, postponement of projects and restrictions on the ability of installers to visit commercial sites. On the other hand, COVID-19 generated higher than normal demand for our video products and personal conferencing products due to the significant expansion of the work-from-home market. The extent of COVID-19’s effect on our operational and financial performance keeps evolving and depends on multiple factors including the severity and infectiousness of current and future virus strains, the effectiveness of vaccines especially on novel strains of COVID-19, government regulations, etc., all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Supply chain disruptions primarily resulting from COVID-19 have caused significant fluctuations in our costs of goods resulting in a reduction of our gross margins in the first nine months of 2022. We expect these fluctuations to continue through at least the end of 2022. If the global economy’s recovery from the pandemic continues to experience supply chain disruptions, it could have a material adverse effect on our business, results of operations, financial condition and cash flows and adversely impact the trading price of our common stock.
Deferred Product Revenue
Deferred product revenue increased to $73 thousand on September 30, 2022 compared to $54 thousand on December 31, 2021.
A detailed discussion of our results of operations follows below.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations for the three and nine months ended September 30, 2022
The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2022 (“2022-Q3”) ("2022-YTD") and 2021 ("2021-Q3") ("2021-YTD"), respectively, together with the percentage of total revenue which each such item represents:
|
Three months ended September 30, |
Nine months ended September 30, | |||||||||||||||||||||||
| (dollars in thousands) |
2022 |
2021 |
Change Favorable (Adverse) in % | 2022 |
2021 |
Change Favorable (Adverse) in % |
||||||||||||||||||
|
Revenue |
$ | 6,264 | $ | 6,992 | (10 | ) | $ | 21,184 | $ | 21,765 | $ | (3 | ) | |||||||||||
|
Cost of goods sold |
3,694 | 4,141 | 11 | 12,991 | 12,487 | (4 | ) | |||||||||||||||||
|
Gross profit |
2,570 | 2,851 | (10 | ) | 8,193 | 9,278 | (12 | ) | ||||||||||||||||
|
Sales and marketing |
1,151 | 1,692 | 32 | 4,273 | 5,020 | 15 | ||||||||||||||||||
|
Research and product development |
876 | 1,492 | 41 | 3,406 | 4,253 | 20 | ||||||||||||||||||
|
General and administrative |
1,673 | 1,676 | 0 | 5,146 | 5,024 | (2 | ) | |||||||||||||||||
|
Total operating expenses |
3,700 | 4,860 | 24 | 12,825 | 14,297 | 10 | ||||||||||||||||||
|
Operating loss |
(1,130 | ) | (2,009 | ) | 44 | (4,632 | ) | (5,019 | ) | 8 | ||||||||||||||
|
Other income (expense), net |
(93 | ) | (143 | ) | 35 | 1,220 | (352 | ) | 447 | |||||||||||||||
|
Loss before income taxes |
(1,223 | ) | (2,152 | ) | 43 | (3,412 | ) | (5,371 | ) | 36 | ||||||||||||||
|
Provision for income taxes |
25 | 17 | (47 | ) | 60 | 39 | (54 | ) | ||||||||||||||||
|
Net loss |
$ | (1,248 | ) | $ | (2,169 | ) | 42 | (3,472 | ) | (5,410 | ) | 36 | ||||||||||||
Revenue
Our revenue decreased to $6.3 million in 2022-Q3 compared to $7.0 million in 2021-Q3 primarily due to a 59% decline in video products and a 7% decline in microphones, which were partially offset by a 10% increase in audio conferencing. Our revenues, especially with respect to BMA and professional audio conferencing products were negatively impacted by our inability to source adequate inventory to meet the demand for professional audio products and BMA due to the ongoing transition of manufacturing of our products from China to Singapore by our EMS provider. Our wireless mics and traditional ceiling mics registered significant revenue increases in 2022-Q3. The audio conferencing category as a whole increased mainly due to a significantly strong revenue performance of our professional mixers while other categories declined in revenues. Video products suffered declines in 2022-Q3 compared to 2021-Q3 due to lack of demand for video cameras as well as video conferencing equipment. During the third quarter of 2022, revenues from Americas declined by 5% primarily due to decreased revenues from Latin America. During 2022-Q3 revenues from the Asia Pacific, including the Middle East, India and Australia decline by 5% primarily due to declines in revenues from all sub-markets except the Middle East, Japan and Korea, with the Middle East showing significant increase in revenues. Finally, revenues from Europe and Africa decreased significantly by 31% in 2022-Q3 primarily due to decreases across all the sub-markets except Southern Europe.
During the nine months ended September 30, 2022 our revenues decreased from $21.8 million to $21.2 million compared to the same period in 2021 due to revenue from video products decreasing by 36%, microphones increasing by 4%, and audio conferencing increasing by 9%. The increase in revenue from microphones was due to growth in revenues from all categories of microphones. The audio conferencing category as a whole increased mainly due to a strong revenue performance by our professional mixers. During 2022-YTD Americas declined by 4%, Asia Pacific, including the Middle East and India increased by 7% and Europe and Africa declined by 12%. India, the Middle East and Northern Europe led in revenue growth while Latina America, China and Southern Europe suffered major revenue decreases.
We believe, although there can be no assurance, that we can return to generating operating profits through our strategic initiatives namely product innovation, cost reduction and defense of our intellectual property.
Costs of Goods Sold and Gross Profit
Cost of goods sold includes expenses associated with finished goods purchased from outsourced manufacturers, the repackaging of our products, our manufacturing and operations organization, property and equipment depreciation, warranty expense, freight expense, royalty payments, and the allocation of overhead expenses.
Our gross profit margin increased from 40.8% during 2021-Q3 to 41.0% during 2022-Q3. The gross profit margin was negatively impacted due to increases in material costs due to continuing supply chain constraints and an increase in inventory obsolescence, which were partially offset by reduced freight, tariff costs and overhead costs.
Our gross profit margin decreased from 42.6% during 2021-YTD to 38.7% during 2022-YTD. The gross profit margin decreased primarily due to increases in material costs due to continuing supply chain constraints, which was partially offset by reduced inventory obsolescence costs, freight, tariff costs and overhead costs in 2022-YTD.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our profitability in the near-term continues to depend significantly on our revenues from professional installed audio-conferencing products. We hold long-term inventory and if we are unable to sell our long-term inventory, our profitability might be affected by inventory write-offs and price mark-downs. Our long-term inventory includes approximately $0.5 million of wireless microphone-related finished goods and assemblies, $0.2 million of Converge Pro and Beamforming microphone array products, $0.8 million of video products, and $1.3 million of raw materials that will be used primarily for manufacturing professional audio conferencing products and BMA microphones. Any business changes that are adverse to these product lines could potentially impact our ability to sell our long-term inventory in addition to our current inventory.
Operating Expenses
Operating expenses include sales and marketing (“S&M”) expenses, research and product development (“R&D”) expenses and general and administrative (“G&A”) expenses. Total operating expenses were $3.7 million in 2022-Q3 compared to $4.9 million in 2021-Q3. Total operating expenses were $12.8 million for 2022-YTD compared to $14.3 million for 2021-YTD. The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items.
Sales and Marketing - S&M expenses include selling, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses.
S&M expenses in 2022-Q3 decreased to $1.2 million from $1.7 million for 2021-Q3. The decrease was primarily due to decreases in employment expenses and consultant expenses due to a reduction in the headcount and due to decrease in commissions paid to employees and consultants.
S&M expenses for 2022-YTD decreased to $4.3 million from $5.0 million for 2021-YTD. The decrease was primarily due to decreases in employment expenses and consultant expenses due to a reduction in the headcount and due to decrease in commissions paid to employees and consultants. This overall decrease was partially offset by increase in trade-show related costs.
Research and Product Development - R&D expenses include research and development, product line management, engineering services, and test and application expenses, including employee-related costs, outside services, expensed materials, depreciation, and an allocation of overhead expenses.
R&D expenses decreased to $0.9 million in 2022-Q3 compared to $1.5 million for 2021-Q3. The decrease was primarily due to reduction in employment expenses due to reduction in the headcount and a decrease in project-related expenses.
R&D expenses decreased to $3.4 million in 2022-YTD, from $4.3 million in 2021-YTD. The decrease was primarily due to reduction in employment expenses due to reduction in the headcount and a decrease in project-related expenses.
General and Administrative - G&A expenses include employee-related costs, professional service fees, allocations of overhead expenses, litigation costs, and corporate administrative costs, including costs related to finance and human resources teams.
G&A expenses remained almost the same at $1.7 million in 2021-Q3 and 2022-Q3. The reduction in employee related expenses were partially offset by an increase in amortization costs relating to our capitalized patent defense costs.
G&A expenses increased from $5.0 million in 2021-YTD to $5.1 million in 2022-YTD. The increases in amortization costs relating to our capitalized patent defense costs and insurance costs were partially offset by decreases in employee-related expenses, legal expenses and consulting expenses.
Other income (expense), net
Other income (expense), net includes interest income and foreign currency changes. Other income during the first nine months of 2022 includes $1.5 million recognized on the gain arising from the CARES Act Paycheck Protection Program loan forgiveness. Other items remained immaterial during the third quarter of 2022 and 2021.
Interest expense decreased to $0.1 million in 2022-Q3 compared to $0.2 million in 2021-Q3. Interest expense decreased to $0.3 million in 2022-YTD compared to $0.4 million in 2021-YTD.
Provision for income taxes
During the nine months ended of 2022 and 2021, we did not recognize any benefit from the losses incurred due to setting up a full valuation allowance. Provision for income taxes recognized for 2022-Q3 and 2022-YTD primarily relates to foreign jurisdictions.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2022, our cash and cash equivalents were approximately $1.5 million compared to $1.1 million as of December 31, 2021. Our working capital was $19.3 million and $18.0 million as of September 30, 2022 and December 31, 2021, respectively.
Net cash used in operating activities was approximately $2.1 million in 2022-YTD, an increase of cash used in operating activities of approximately $0.6 million from $1.5 million of cash provided by operating activities in 2021-YTD. The increase in cash outflow was due to a negative change in operating assets and liabilities of $0.7 million, partially offset by a decrease in net loss by $0.2 million after adjusting for non-cash charges.
Net cash provided by investing activities were $2.3 million in 2022-YTD compared to net cash used in investing activities of $4.2 million in 2021-YTD, a change in cash flow of $6.4 million. The change in cash flow was primarily due to (a) an increase in proceeds from sale of marketable securities net of any purchases in 2021-YTD to $1.5 million, and (b) a decrease in capitalized patent defense costs by $4.9 million.
Net cash provided by financing activities in 2022-YTD was $0.2 million, comprised primarily of a $0.8 million refund of the CARES Act Paycheck Protection Program Loan with interest offset by $0.5 million repayment of principal amounts due on senior convertible notes. In comparison, cash provided by financing activities was $11.0 million in 2021-YTD, which consisted primarily of issuance of common stock and borrowing through issuance of short-term notes partially offset by repayment of a portion of senior convertible debt.
Capitalization of patent defense costs. We capitalize external legal costs incurred in the defense of our patents when we believe that a significant, discernible increase in value will result from the defense and a successful outcome of the legal action is probable. When we capitalize patent defense costs we amortize the costs over the remaining estimated useful life of the patents, which is 15 to 17 years. During the nine months ended September 30, 2022 we spent $0.6 million on legal costs related to the defense of our patents and capitalized the entire amount.
We are currently pursuing all reasonably available legal remedies to defend our strategic patents from infringement. See Part II, Item1. Legal Proceedings. We have already spent approximately $28.8 million from 2016 through September 30, 2022 towards this litigation and may be required to spend more to continue our legal defense.
As of September 30, 2022, our cash and cash equivalents were approximately $1.5 million compared to $1.1 million as of December 31, 2021. Our working capital was $19.3 million as of September 30, 2022. Net cash used in operating activities was $2.1 million for the nine months ended September 30, 2022, an increase of $0.6 million from $1.5 million of cash used in operating activities in the nine months ended September 30, 2021. In order to maintain liquidity, we have been actively engaged in preserving cash by implementing company-wide cost reduction measures and raising additional capital. We raised additional capital in 2019 by issuing senior convertible notes, in 2020 by borrowing through the CARES Act Paycheck Protection Program and issuing common stock and warrants and in 2021 by issuing short-term notes and issuing common stock and warrants. In January 2022, we issued $2,000 in common stock as consideration for the cancellation and termination of the short-term notes. In addition, we have been generating additional cash as our inventory levels are brought down to historical levels.
We also believe that our core strategies of product innovation and prudent cost management will bring us back to profitability in the future. We believe, although there can be no assurance, that all of these measures and effective management of working capital, including collecting on the income tax receivable balance, will provide the liquidity needed to meet our operating needs through at least November 14, 2023. We also believe that our strong portfolio of intellectual property and our solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs; however, there can be no assurance that, if needed, we will be successful in obtaining the necessary funds through equity or debt financing. If we need additional capital and are unable to secure financing, we may be required to further reduce expenses, delay product development and enhancement, or revise our strategy regarding ongoing litigation.
As of September 30, 2022, we had open purchase orders of approximately $2.2 million mostly for purchase of inventory.
As of September 30, 2022, we had inventory totaling $12.7 million, of which non-current inventory accounted for $3.0 million. This compares to total inventories of $13.6 million and non-current inventory of $3.6 million as of December 31, 2021.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Contractual Obligations and Commitments
The following table summarizes our contractual obligations as of September 30, 2022 (in millions):
|
|
|
Payment Due by Period |
|
|||||||||||||||||
|
|
|
Total |
|
|
Less Than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More than 5 years |
|
|||||
|
Senior convertible notes |
|
$ |
2.1 |
|
|
$ |
0.9 |
|
|
$ |
1.2 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Operating lease obligations |
|
|
1.2 |
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
— |
|
|
|
— |
|
|
Purchase obligations |
|
|
2.2 |
|
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
5.5 |
|
|
$ |
3.7 |
|
|
$ |
1.8 |
|
|
$ |
— |
|
|
$ |
— |
|
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance-sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, results of operations or liquidity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our results of operations and financial position are based upon our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q, which have been prepared in conformity with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. There have been no changes to the critical accounting policies as explained in our Annual Report on Form 10-K for the year ended December 31, 2021.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements, see Note 1: “Business Description, Basis of Presentation and Significant Accounting Policies” in the notes to our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q.
Not applicable.
An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2022 was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Financial and Accounting Officer. Based upon this evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are effective at a reasonable assurance level as of September 30, 2022.
There has been no change in the Company's internal control over financial reporting as of September 30, 2022, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company is involved in litigation against Shure Incorporated (“Shure”) as further described in Part I, Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), which information is incorporated herein by reference. The following recent developments amend and supplement the disclosure of the ongoing litigation proceedings against Shure as of September 30, 2022 as follows:
Shure, Incorporated v. ClearOne, Inc., 17-cv-3078 (N.D. of Illinois)
The Company filed a motion asking the Court to schedule a trial date, but the Court denied that request without prejudice on April 7, 2022.
On September 26, 2022, the Court granted the parties’ joint request to stay the proceedings to engage in settlement negotiations until November 22, 2022. The Court also terminated the pending motions without prejudice to be reinstated immediately if settlement negotiations are unsuccessful.
On October 3, 2022, the Executive Committee of the Northern District of Illinois reassigned this case from Judge Chang to Judge Maldonado to form the initial calendar of Judge Maldonado.
ClearOne, Inc. v. Shure, Incorporated, 19-cv-02421 (N.D. of Illinois)
The Company filed a motion asking the Court to schedule a trial date, but the Court denied that request without prejudice on April 7, 2022.
On September 26, 2022, the Court granted the parties’ joint request to stay the proceedings to engage in settlement negotiations until November 22, 2022. The Court also terminated the pending motions without prejudice to be reinstated immediately if settlement negotiations are unsuccessful.
On October 3, 2022, the Executive Committee of the Northern District of Illinois reassigned this case from Judge Chang to Judge Maldonado to form the initial calendar of Judge Maldonado.
Shure, Incorporated v. ClearOne, Inc., 19-cv-1343 (D. of Delaware)
On August 15, 2022, the Court granted the Company’s request to set a trial date on its counterclaims of unfair competition and tortious interference with business relations, scheduling trial for July 5, 2023. The Court also denied Shure’s motion to stay proceedings on ClearOne’s counterclaims.
The risk factor set forth below supplements and should be read in conjunction with the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021:
Our common stock trades at prices less than $1.00 which is the minimum bid price requirement under Nasdaq’s continued listing standards, as such our common stock may be subject to delisting from the Nasdaq Capital Market.
On March 22, 2022, we received a letter (the “Notice”) from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) informing us that because the closing bid price for the Company’s common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, we are not in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Marketplace Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we were granted a period of 180 calendar days from March 22, 2022, or until September 19, 2022, to regain compliance with the Minimum Bid Price Requirement. Our common stock has continued to trade below $1.00 per share, and the closing price of our common stock on November 8, 2022 was $0.53.
On September 20, 2022, the Company received a letter from Nasdaq advising that the Company has been granted a 180-day extension to March 20, 2023 to regain compliance with the Minimum Bid Price Requirement, in accordance with Nasdaq Listing Rule 5810(c)(3)(A). If compliance is not achieved within the 180-day extension period, Nasdaq would provide written notification to us that our common stock is subject to delisting. In the event that we fail to regain compliance with Nasdaq continued listing standards by March 20, 2023, Nasdaq will commence suspension and delisting procedures with respect to our common stock, which could impair the value of your investment.
If our common stock is delisted from Nasdaq Capital Market in the future, such securities may be traded on the over-the-counter markets. Such alternative markets, however, are generally considered to be less efficient than, and not as broad as, Nasdaq. Accordingly, delisting of our common stock from Nasdaq could have a significant negative effect on the trading volume, liquidity and market price of our common stock. In addition, the delisting of our common stock could adversely affect our ability to raise capital on terms acceptable to us or at all and could reduce the number of investors willing to hold or acquire our common stock.
We are subject to governmental export and import requirements that could subject us to liability and restrict our ability to sell our products and services, which could impair our ability to compete in international markets.
We are subject to export controls and economic sanctions laws and regulations that restrict selling, shipping or transmitting our products and services and transferring our technology outside the United States. These requirements also restrict domestic release of software and technology to foreign nationals. In addition, we are subject to customs and other import requirements that regulate imports that are important for our business. If we fail to comply with the U.S. Export Administration Regulations or other U.S. or non-U.S. export requirements (collectively, the “Export Regulations”), we could be subject to substantial civil and criminal penalties, including fines for the Company and the possible loss of the ability to engage in exporting and other international transactions. Due to the nature of our business and technology, the Export Regulations may also subject us to governmental inquiries regarding transactions between us and certain foreign entities.
In October 2022 the U.S. Bureau of Industry and Security (the “BIS”) promulgated broad, novel restrictions that could cover supply of our products and other aspects of our business in connection with China. Also, BIS has placed certain entities on its entity list (the “Entity List”), which restricts supply of items to or in connection with the named entities. Further, in some circumstances the Export Administration Regulations require a license to export an item if the recipient will use the item to design or produce an item for organizations on the Entity List. These regulations can also require licenses for exports that involve Chinese military or intelligence-related end users or end uses. We are evaluating the potential direct impact of the restrictions adopted by the BIS in October 2022, including the classification of our component parts that we ship to China and any necessary modifications to our business policies and practices in China. We believe that current Export Regulations do not materially impact our business at this time, but we cannot predict the impact that additional regulatory changes may have on our business in the future.
Future changes in the Export Regulations, including changes in the enforcement and scope of such regulations, may create delays in the introduction of our products or services in international markets or could delay or prevent our customers with international operations from deploying our products or services globally. In some cases, such changes could delay or prevent the export or import of our products or services to certain countries, governments or persons altogether. Any such delays or restrictions could adversely affect our business, financial condition and results of operations.
(a) None.
(b) Not applicable.
(c) None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ClearOne, Inc., (Registrant) |
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By: |
/s/ Derek L. Graham |
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November 14, 2022 |
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Derek L. Graham Interim Chief Executive Officer (Principal Executive Officer) |
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By: |
/s/ Narsi Narayanan |
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November 14, 2022 |
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Narsi Narayanan Chief Financial Officer (Principal Accounting and Principal Financial Officer) |
| 30 |
EXHIBIT 31.1
CERTIFICATION
I, Derek L. Graham, certify that:
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1. |
I have reviewed this quarterly report of ClearOne, Inc. on Form 10-Q; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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By: |
/s/ Derek L. Graham |
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November 14, 2022 |
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Derek L. Graham Interim Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, Narsi Narayanan, certify that:
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1. |
I have reviewed this quarterly report of ClearOne, Inc. on Form 10-Q; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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By: |
/s/ Narsi Narayanan |
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November 14, 2022 |
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Narsi Narayanan Chief Financial Officer (Principal Accounting and Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Derek L. Graham, certify, to my best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of ClearOne, Inc. on Form 10-Q for the quarter ended September 30, 2022 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ClearOne, Inc.
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By: |
/s/ Derek L. Graham |
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November 14, 2022 |
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Derek L. Graham Interim Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Narsi Narayanan, certify, to my best knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of ClearOne, Inc. on Form 10-Q for the quarter ended September 30, 2022, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ClearOne, Inc.
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By: |
/s/ Narsi Narayanan |
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November 14, 2022 |
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Narsi Narayanan Chief Financial Officer (Principal Accounting and Principal Financial Officer) |