clro-20220930.htm
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period _______ to _______

 

Commission file number:001-33660

CLEARONE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

87-0398877

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. employer identification number)

 

 

 

5225 Wiley Post Way, Suite 500, Salt Lake City, Utah

 

84116

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (801) 975-7200

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Trading Symbol(s)

  

Name of each exchange on which registered

Common Stock, $0.001

 

CLRO

 

The NASDAQ Capital Market

 

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.  Yes  No 

 

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).  Yes No

 

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):

 

Larger Accelerated Filer

Accelerated Filer  

Non-Accelerated Filer

Smaller Reporting Company

 

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). Yes No

 

The number of shares of ClearOne common stock outstanding as of November 11, 2022 was 23,952,555


 CLEARONE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022

 

INDEX




PART I - FINANCIAL INFORMATION



Item 1. Financial Statements 3




Unaudited Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 3




Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021 4




Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 5




Unaudited Notes to Condensed Consolidated Financial Statements 7



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19



Item 3. Quantitative and Qualitative Disclosures About Market Risk 26



Item 4. Controls and Procedures 26




PART II - OTHER INFORMATION



Item 1. Legal Proceedings 27



Item 1A. Risk Factors 27



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28



Item 3. Defaults Upon Senior Securities 28



Item 4. Mine Safety Disclosures 28



Item 5. Other Information 28



Item 6. Exhibits 29

 

 

 

 

 

CLEARONE, INC

(Dollars in thousands, except par value)

 

 

 

September 30, 2022

 

 

December 31, 2021

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,450

 

 

$

1,071

 

Marketable securities

 

 

 

 

 

1,790

 

Receivables, net of allowance for doubtful accounts of $326

 

 

4,123

 

 

 

4,991

 

Inventories, net

 

 

9,708

 

 

 

10,033

 

Income tax receivable

7,535


7,535

Prepaid expenses and other assets

 

 

1,970

 

 

 

4,021

 

Total current assets

 

 

24,786

 

 

 

29,441

 

Long-term marketable securities

 

 

 

 

 

1,220

 

Long-term inventories, net

 

 

2,961

 

 

 

3,567

 

Property and equipment, net

 

 

552

 

 

 

744

 

Operating lease - right of use assets, net

 

 

1,088

 

 

 

1,537

 

Intangibles, net

 

 

23,783

 

 

 

25,086

 

Other assets

 

 

4,587

 

 

 

4,597

 

Total assets

 

$

57,757

 

 

$

66,192

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,052

 

 

$

5,388

 

Accrued liabilities

 

 

2,477

 

 

 

2,549

 

Deferred product revenue

 

 

73

 

 

 

54

 

Short-term debt

855


3,481

Total current liabilities

 

 

5,457

 

 

 

11,472

 

Long-term debt, net

 

 

1,008

 

 

 

1,535

 

Operating lease liability, net of current

 

 

559

 

 

 

1,026

 

Other long-term liabilities

 

 

655

 

 

 

655

 

Total liabilities

 

 

7,679

 

 

 

14,688

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, par value $0.001, 50,000,000 shares authorized, 23,952,555 and 22,410,126 shares issued and outstanding, respectively

 

 

24

 

 

 

22

 

Additional paid-in capital

 

 

74,886

 

 

 

72,795

 

Accumulated other comprehensive loss

 

 

(288

)

 

 

(241

)

Accumulated deficit

 

 

(24,544

)

 

 

(21,072

)

Total shareholders' equity

 

 

50,078

 

 

 

51,504

 

Total liabilities and shareholders' equity

 

$

57,757

 

 

$

66,192

 

 

See accompanying notes

 

 

CLEARONE, INC.

COMPREHENSIVE LOSS

(Dollars in thousands, except per share amounts)

 

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

2022

 

 

2021

 

2022

2021

Revenue

 

$

6,264

 

 

$

6,992

 

$ 21,184

$ 21,765

Cost of goods sold 

 

 

3,694

 

 

 

4,141

 


12,991


12,487

Gross profit

 

 

2,570

 

 

 

2,851

 


8,193


9,278

 

 

 

 

 

 

 

 

 








Operating expenses:

 

 

 

 

 

 

 

 








Sales and marketing

 

 

1,151

 

 

 

1,692

 


4,273


5,020

Research and product development

 

 

876

 

 

 

1,492

 


3,406


4,253

General and administrative

 

 

1,673

 

 

 

1,676

 


5,146


5,024

Total operating expenses

 

 

3,700

 

 

 

4,860

 


12,825


14,297

 

 

 

 

 

 

 

 

 








Operating loss

 

 

(1,130

)

 

 

(2,009

)


(4,632 )

(5,019 )

 

 

 

 

 

 

 

 

 








Interest expense

(90 )

(150 )
(285 )

(369 )

Other income (loss), net

 

 

(3

)

 

 

7


1,505


17

 

 

 

 

 

 

 

 

 








Loss before income taxes

 

 

(1,223

)

 

 

(2,152

)
(3,412 )

(5,371 )

 

 

 

 

 

 

 

 

 








Provision for income taxes

 

 

25

 

 

 

17

 


60


39

 

 

 

 

 

 

 

 

 








Net loss

 

$

(1,248

)

 

$

(2,169

) $ (3,472 )
$ (5,410 )

 

 

 

 

 

 

 

 

 








Basic weighted average shares outstanding

 

 

23,952,555

 

 

 

19,449,283

 


23,933,033


19,002,758

Diluted weighted average shares outstanding

 

 

23,952,555

 

 

 

19,449,283

 


23,933,033


19,002,758

 

 

 

 

 

 

 

 

 








Basic loss per share

 

$

(0.05

)

 

$

(0.11

) $ (0.15 )
$ (0.28 )

Diluted loss per share

 

$

(0.05

)

 

$

(0.11

)

$ (0.15 )
$ (0.28 )

 

 

 

 

 

 

 

 

 








 

 

 

 

 

 

 

 

 








Comprehensive loss:

 

 

 

 

 

 

 

 








Net loss

 

$

(1,248

)

 

$

(2,169

) $ (3,472 )
$ (5,410 )

Unrealized loss on available-for-sale securities, net of tax

 

 

 

 

(8

)
(2 )

(13 )

Change in foreign currency translation adjustment

 

 

(22

)

 

 

(4

)
(45 )

(26 )

Comprehensive loss

 

$

(1,270

)

 

$

(2,181

)

$ (3,519 )
$ (5,449 )

 

See accompanying notes

 

 

CLEARONE, INC.

(Dollars in thousands, except per share amounts)

 

 

 

Nine months ended September 30,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,472

)

 

$

(5,410

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

2,390

 

 

 

2,042

 

Amortization of right-of-use assets

 

 

449

 

 

 

458

 

Share-based compensation expense

 

 

90

 

 

 

100

 

 Provision for doubtful accounts, net




(1 )

Change of inventory to net realizable value

 

 

221

 

 

 

798

 

Gain recognized on Paycheck Protection Plan Loan forgiveness



(1,528 )


Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

868

 

 

(48

)

Inventories

 

 

710

 

 

 

1,724

 

Prepaid expenses and other assets 

 

 

2,051

 

 

(973

)

Accounts payable

 

 

(3,336

)

 

 

65

Accrued liabilities

 

 

(54

)

 

 

360

Income taxes receivable

 

 

 

 

(52

)

Deferred product revenue

 

 

19

 

 

(66

)

Operating lease liabilities

 

 

(468

)

 

 

(474

)

Net cash used in operating activities

 

 

(2,060

)

 

 

(1,477

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(17

)

 

 

(39

)

Purchase of intangibles

 

 

(93

)

 

 

(220

)

Capitalized patent defense costs

 

 

(642

)

 

 

(5,348

)

Proceeds from maturities and sales of marketable securities

 

 

3,008

 

 

 

1,971

 

Purchases of marketable securities

 

 

 

 

(526

)

Net cash provided by (used in) investing activities

 

 

2,256

 

 

(4,162

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds from issuance of common stock and warrants




9,288
Proceeds from issuance of short-term notes




2,000

Net proceeds from equity-based compensation programs 

 

 

3

 

 

 

12

 

Paycheck Protection Program loan refund upon full forgiveness net of loan payments

768



Principal payments of long-term debt

(540 )

(270 )

Net cash provided by financing activities

 

 

231

 

 

11,030

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(48

)

 

 

(33

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents 

 

 

379

 

 

5,358

Cash and cash equivalents at the beginning of the period

 

 

1,071

 

 

 

3,803

 

Cash and cash equivalents at the end of the period 

 

$

1,450

 

 

$

9,161

 

  

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:

 

 

 

Nine months ended September 30,

 

 

 

2022

 

 

2021

 

Cash paid for income taxes

 

$

68

 

 

$

91

 

Cash paid for interest 140 200

 

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 $1,450 compared to $1,071 as of December 31, 2021. Our working capital was $19,329 as of September 30, 2022. Net cash used in operating activities was $2,060 for the nine months ended September 30, 2022, an increase of $583 from $1,477 of cash used in operating activities in the nine months ended September 30, 2021. The Company is currently pursuing all reasonably available legal remedies to defend its strategic patents from infringement. The Company has already spent approximately $28,798 from 2016 through September 30, 2022 towards this litigation and may be required to spend more to continue its legal defense.  In order to maintain liquidity, the Company has been actively engaged in preserving cash by implementing company-wide cost reduction measures and raising additional capital. The company 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, the Company issued $2,000 in common stock as consideration for the cancellation and termination of the short-term notes. In October 2022, the Company issued short term notes to raise $2,000. In addition, the Company has been generating additional cash as our inventory levels are brought down to historical levels.  

 

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:

 

 

 

Three months ended September 30,

 


Nine months ended September 30,

 

 

2022

 

 

2021

 


2022

2021

Audio conferencing

 

$

3,201

 

 

$

2,916

 


$ 9,655

$ 8,847

Microphones

 

 

2,475

 

 

 

2,659

 



8,525


8,227

Video products

 

 

588

 

 

 

1,417

 



3,004


4,691

 

 

$

6,264

 

 

$

6,992

 


$ 21,184

$ 21,765

 

The following table disaggregates the Company’s revenue into major regions: 


 

 

Three months ended September 30,

 


Nine months ended September 30,

 

 

2022

 

 

2021

 


2022

2021

North and South America 

 

$

3,251

 

 

$

3,419

 


$ 10,211

$ 10,583

Asia Pacific (includes Middle East, India and Australia)

 

 

2,018

 

 

 

2,130

 



6,560


6,153

Europe and Africa

 

 

995

 

 

 

1,443

 



4,413


5,029

 

 

$

6,264

 

 

$

6,992

 


$ 21,184

$ 21,765

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:

 

 


Three months ended September 30,

 

Nine months ended September 30,

 

 


2022

2021

 

2022

 

 

2021

 

Numerator:









 

 

 

 

 

 

 

 

Net loss


$ (1,248)
$ (2,169 )

 

$

(3,472)

 

$

(5,410

)

Denominator:









 

 

 

 

 

 

 

 

Basic weighted average shares outstanding



23,952,555


19,449,283

 

 

23,933,033

 

 

 

19,002,758

 

Dilutive common stock equivalents using treasury stock method







 

 

 

 

 

 

Diluted weighted average shares outstanding



23,952,555


19,449,283

 

 

23,933,033

 

 

 

19,002,758

 

 









 

 

 

 

 

 

 

 

Basic loss per common share


$ (0.05)
$ (0.11 )

 

$

(0.15)

 

$

(0.28

)

Diluted loss per common share


$ (0.05)
$ (0.11 )

 

$

(0.15)

 

$

(0.28

)

 









 

 

 

 

 

 

 

 

Weighted average options, warrants and convertible portion of senior convertible notes outstanding



6,694,433


4,240,247

 

 

6,896,803

 

 

 

3,826,807

 

Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation



6,694,433


4,240,247

 

 

6,896,803

 

 

 

3,826,807

 

 


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.


 

 

Amortized cost

 

 

Gross unrealized holding gains

 

 

Gross unrealized holding losses

 

 

Estimated fair value

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds and notes

 

$

1,434

 

 

$

8

 

 

$

(2

)

 

$

1,440

 

Municipal bonds

 

 

1,573

 

 

 

 

 

 

(3

)

 

 

1,570

 

Total available-for-sale securities

 

$

3,007

 

 

$

8

 

 

$

(5

)

 

$

3,010

 


There were no available-for-sale securities as of September 30, 2022.



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:

 

 

 

Estimated useful lives (years)

 

 

September 30, 2022

 

 

December 31, 2021

 

Tradename

 

 5

to

7

 

 

$

555

 

 

$

555

 

Patents and technological know-how

 

10

to

20

 

 

 

34,288

 

 

 

33,553

 

Proprietary software

 

 3

to

15

 

 

 

2,981

 

 

 

2,981

 

Other

 

 3

to

5

 

 

 

323

 

 

 

323

 

Total intangible assets

 

 

 

 

 

 

 

38,147

 

 

 

37,412

 

Accumulated amortization

 

 

 

 

 

 

 

(14,364

)

 

 

(12,326

)

Total intangible assets, net

 

 

 

 

 

 

$

23,783

 

 

$

25,086

 

 

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


$ 686

$ 582

 

$

2,038

 

 

$

1,636

 

 

The estimated future amortization expense of intangible assets is as follows:

 

Years ending December 31,

 

Amount

 

2022 (Remainder)

 

$

689

 

2023

 

 

2,748

 

2024

 

 

2,484

 

2025

 

 

2,423

 

2026

 

 

2,423

 

Thereafter

 

 

13,016

 

Total

 

$  

23,783

 

 

 

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

 

$

4,835

 

 

$

4,085

 

Finished goods

 

 

4,873

 

 

 

5,948

 

 

 

$

9,708

 

 

$

10,033

 

 

 

 

 

 

 

 

 

 

Long-term:

 

 

 

 

 

 

 

 

Raw materials

 

$

1,380

 

 

$

1,980

 

Finished goods

 

 

1,581

 

 

 

1,587

 

 

 

$

2,961

 

 

$

3,567

 

  

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


$ 194

$ 116

 

$

221

 

 

$

798

 

 

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

 

$

169

 

 

$

181

 


$ 518

$ 540

The Company occupies a 1,350 square-foot facility in Gainesville, Florida under the terms of an operating lease expiring in February 2023The Gainesville facility is used primarily to support the Company's research and development activities. 

 

The Company occupies a 21,443 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in March 2024, with an option to extend for additional five years. The facility supports the Company's principal administrative, sales, marketing, customer support, and research and product development activities.  

 

The Company occupied a 950 square-foot facility in Austin, Texas under the terms of an operating lease that expired in October 2022. This facility supported the Company's sales, marketing, customer support, and research and development activities.

 


UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited - Dollars in thousands, except per share amounts)


The Company occupies a 6,175 square-foot facility in Chennai, India under the terms of an operating lease expiring in August 2023. This facility supports the Company's administrative, marketing, customer support, and research and product development activities.

 

The Company occupies a 40,000 square-foot warehouse in Salt Lake City, Utah under the terms of an operating lease expiring in April 2025, which serves as the Company's primary inventory fulfillment center.  


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
$ 531
$ 502
Right-of-use assets obtained in exchange for lease obligations:







Operating leases
$

$ 212

 

Supplemental balance sheet information related to leases was as follows:

 

 

 

September 30, 2022

 

 

December 31, 2021

 

Operating lease right-of-use assets

 

$

 1,088

 

 

 $

 1,537

 


 








Current portion of operating lease liabilities, included in accrued liabilities
$ 622

$ 623

Operating lease liabilities, net of current portion

 

 

559

 

 

 

1,026

 

Total operating lease liabilities

 

$

1,181

 

 

$

1,649

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term for operating leases (in years) 

1.83


2.64
Weighted average discount rate for operating leases

5.91 %

5.87 %

  

The following represents maturities of operating lease liabilities as of September 30, 2022:

 

Years ending December 31,

 

 

 

 

2022 (Remainder)

 

$

172

 

2023

 

 

671

 

2024

 

 

343

 

2025

 

 

69

 

2026

 

 

 

Total lease payments

 

 

1,255

 

Less: Imputed interest

 

 

(74

)

Total

 

$

1,181

 


 

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

 

$

74,885

 

 

$

63,450

 


$ 72,817

$ 63,378
Issuance of common stock and warrants, net

                


          9,288


2,000


9,288

Share-based compensation expense

 

 

24

 

 

 

35

 



90


100

Proceeds from employee stock purchase plan

 

 

1

 

 

 

5

 



3


12

Balance, end of period

 

$

74,910

 

 

$

72,778

 


$ 74,910

$ 72,778

 

 

 

 

 

 

 

 

 









Accumulated other comprehensive loss

 

 

 

 

 

 

 

 









Balance, beginning of period

 

$

(266

)

 

$

(213

)


$ (241 )
$ (186 )

Unrealized loss on available-for-sale securities, net of tax 

 

 

 

 

(8

)

(2 )

(13 )

Foreign currency translation adjustment

 

 

(22

)

 

 

(4

)

(45 )

(26 )

Balance, end of period

 

$

(288

)

 

$

(225

)


$ (288 )
$ (225 )

 

 

 

 

 

 

 

 

 









Accumulated deficit 

 

 

 

 

 

 

 

 









Balance, beginning of period

 

$

(23,296

)

 

$

(16,619

)
$ (21,072 )
$ (13,378 )

Net loss

 

 

(1,248

)

 

 

(2,169

)



(3,472 )

(5,410 )

Balance, end of period

 

$

(24,544

)

 

$

(18,788

)


$ (24,544 )
$ (18,788 )

 

 

 

 

 

 

 

 

 









Total shareholders' equity

 

$

50,078

 

 

$

53,765

 


$ 50,078

$ 53,765

 

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 2,116,050 shares of the Company's common stock, par value $0.001 per share at an offering price of $2.4925 per share. The Company received gross proceeds of approximately $5,275 and net proceeds $4,764 after deducting placement agent fees and related offering expenses. In a concurring private placement, the Company also issued to the same purchasers warrants exercisable for an aggregate of 1,058,025 shares of common stock at an exercise price of $2.43 per share. Each warrant became immediately exercisable and will expire five years from the issuance date.  


On  September 12, 2021, the Company entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued 3,623,189 shares of the Company's common stock, par value $0.001 per share at an offering price of $2.76 per share. The Company received gross proceeds of approximately $10,000 and net proceeds of $9,288 after deducting placement agent fees and related offering expenses. In a concurring private placement the Company also issued to the same purchasers warrants exercisable for an aggregate of 3,623,189 shares of common stock at an exercise price of $2.76 per share. Each warrant became immediately exercisable and will expire on March 15, 2027.


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 1,538,461 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.30 per share of Common Stock. The consideration for the Shares is the cancellation and termination of Mr. Bagley’s outstanding bridge loan to the Company in the principal amount of $2,000 originally issued on July 2, 2021 and amended and restated on September 11, 2021. Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder.  


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 $3,000 aggregate principal amount of secured convertible notes of the Company (the “Notes”) and warrants (the “Warrants”) to purchase 340,909 shares of common stock, par value $0.001 per share of the Company (the “Common Stock”), in a private placement transaction. The Notes and Warrants were issued and sold to Edward D. Bagley, an affiliate of the Company, on the terms and conditions of a Note Purchase Agreement dated December 8, 2019 between the Company, certain subsidiary guarantors of the Company, and Mr. Bagley. Mr. Bagley was the beneficial owner of approximately 46.6% of the Company’s issued and outstanding shares of Common Stock at the time that the Notes and Warrants were issued to him. 

 

The Notes will mature on December 17, 2023 (the “Maturity Date”) and will accrue interest at a variable rate adjusted on a quarterly basis and equal to two and one-half percent (2.5%) over the greater of (x) five and one-quarter percent (5.25%) and (y) the Prime Rate as published in the Wall Street Journal (New York edition) as of the beginning of such calendar quarter.  The Notes may be converted into shares of the Company’s Common Stock at any time at the election of Mr. Bagley at an initial conversion price of $2.11 per share (the “Conversion Price”), or 120% of the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market. Also, the Company can cause a mandatory conversion of the Notes if the volume weighted average closing price of the Common Stock over 90 consecutive trading days exceeds 200% of the Conversion Price. In addition, the Notes may be redeemed by the Company for cash at any time after December 17, 2020 upon payment of the outstanding principal balance of the Notes and any unpaid and accrued interest.  The Company also is required to redeem the Notes upon the occurrence of a change in control of the Company.

The Warrants have an initial exercise price equal to $1.76, the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market, and are exercisable until December 17, 2026.  The Warrants must be exercised for cash, unless at the time of exercise there is not a then effective registration statement for the resale of the shares of Common Stock issuable upon exercise of the Warrants, in which case the Warrants may be exercised via a cashless exercise feature that provides for net settlement of the shares of Common Stock issuable upon exercise. 

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 $346 were approximately $2,654. The Company expects to use the proceeds from the sale of the Notes and Warrants for general corporate purposes and working capital. 

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

1.82%

Expected life of warrants (years)

7

Expected price volatility

49.4%

Expected dividend yield

0%

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

 

$

2,100

 

 

$

2,640

 

Less: debt discount and issuance costs, net of amortization

 

 

(237

)

 

 

(385

Net carrying amount

 

$

1,863

 

 

$

2,255

 

Equity component(1):

 

 

 

 

 

 

 

 

Warrants

 

$

318

 

 

$

318

 

Conversion feature

 

122

 

 

122

 

Net carrying amount

 

$

440

 

 

$

440

 










Current portion of liability component included under short-term debt
$ 855

$ 720
Long-term portion of liability component included under long-term debt

1,245


1,920
Liability component total
$ 2,100

$ 2,640

(1) Recorded on the condensed consolidated balance sheets as additional paid-in capital. 


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 $49 and $147, respectively and for the three and nine months ended September 30, 2021, amortization of debt discount and issuance costs was $49 and $147, respectively. The following table represents schedule of maturities of principal amount contained in the Notes as of September 30, 2022:

Year ending December 31,

 

Principal Amount Maturing

 

2022 (Remainder)

 

$

180

 

2023

 

 

1,920

 

2024

 

 

 

2025

 

 

 

Total principal amount

 

$

2,100

 


Short-term Bridge Loan


On July 2, 2021, the Company obtained a bridge loan in the principal amount of $2,000 from Edward D. Bagley (the “Bridge Loan”), an affiliate of the Company. The Bridge Loan is evidenced by a promissory note dated July 2, 2021 (the “Note”) issued by the Company to Mr. Bagley.  The Note bears interests at a rate of 8.0% per annum, matures on the earlier to occur of (i) October 1, 2021 or (ii) within two business days of the Company’s receipt of its expected U.S. federal income tax refund, and contains other customary covenants and events of default. On September 11, 2021, the Company amended and restated the terms of the Bridge Loan to extend the latest maturity date from October 1, 2021 to January 3, 2022. All other terms and conditions of the Bridge Loan remained the same. This Bridge Loan of $2,000 is included under short-term debt as of December 31, 2021. On January 4, 2022, the Company entered into a Securities Purchase Agreement with Edward D. Bagley, pursuant to which the Company issued and sold to Mr. Bagley, in a private placement 1,538,461 shares (the “Shares”) of the Company’s common stock, par value $0.001 per share, at a purchase price of $1.30 per share of Common Stock. The consideration for the Shares was the cancellation and termination of Mr. Bagley’s outstanding bridge loan to the Company in the principal amount of $2,000 originally issued on July 2, 2021 and amended and restated on September 11, 2021. Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder.


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 $1,499 (“PPP Loan”) pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP Loan had a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for approximately sixteen months after the date of disbursement.  


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 $1,499 and the interest of $31. The Company received $953 back that it had already paid towards principal and interest payments toward the PPP Loan. The Company treated the forgiveness as extinguishment of debt in this quarter ended September 30, 2022 and reported the entire principal amount forgiven of $1,499 along with interest already accounted for of $29 as a gain on extinguishment of debt.


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
$

$ 761
Long-term portion of the PPP Loan included under long-term debt





Liability component total
$

$ 761

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

 

$

 

 

$

1,440

 

 

$

 

 

$

1,440

 

Municipal bonds

 

 

 

 

 

1,570

 

 

 

 

 

 

1,570

 

Total

 

$

 

 

$

3,010

 

 

$

 

 

$

3,010

 

 

There were no financial instruments that were re-measured by the Company as of September 30, 2022.


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 $895 of uncertain tax positions as of September 30, 2022. Due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability for any particular year.


17

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)


12. Subsequent events

 

On October 28, 2022 the Company obtained a bridge loan in the principal amount of $2,000 from Edward D. Bagley (the “2022 Bridge Loan”), an affiliate of the Company. The 2022 Bridge Loan is evidenced by a promissory note dated October 28, 2022 (the “2022 Note”) issued by the Company to Mr. Bagley.  The 2022 Note bears interest at a rate of 12.0% per annum and matures on October 28, 2023. Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder.


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 $2,226 as of September 30, 2022. 

 

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