10-Q 1 MainDocument.htm FORM 10-Q

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 March 31, 2021

☐	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 ☐

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 May 12, 2021 was 18,775,773.

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CLEARONE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2021

INDEX


	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	2

	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	2

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2021 and 2020	3

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020	4

	Unaudited Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Mine Safety Disclosures	24

Item 5.	Other Information	24

Item 6.	Exhibits	25

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CLEARONE, INC

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

	March 31, 2021			December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	2,034		$	3,803
Marketable securities		967			1,117
Receivables, net of allowance for doubtful accounts of $506		4,930			5,194
Inventories, net		9,816			10,463
Income tax receivable		7,212			7,169
Prepaid expenses and other assets		1,271			1,536
Total current assets		26,230			29,282
Long-term marketable securities		1,807			1,762
Long-term inventories, net		4,126			4,590
Property and equipment, net		812			906
Operating lease - right of use assets, net		1,787			1,936
Intangibles, net		20,486			19,248
Other assets		4,600			4,599
Total assets	$	59,848		$	62,323
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,907		$	3,950
Accrued liabilities		2,775			2,352
Deferred product revenue		78			123
Short-term debt		950			672
Total current liabilities		6,710			7,097
Long-term debt, net		2,927			3,245
Operating lease liability, net of current		1,353			1,489
Other long-term liabilities		678			678
Total liabilities		11,668			12,509

Shareholders' equity:
Common stock, par value $0.001, 50,000,000 shares authorized, 18,775,773 shares issued and outstanding		19			19
Additional paid-in capital		63,394			63,359
Accumulated other comprehensive loss		(200	)		(186	)
Accumulated deficit		(15,033	)		(13,378	)
Total shareholders' equity		48,180			49,814
Total liabilities and shareholders' equity	$	59,848		$	62,323

See accompanying notes

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CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE LOSS

(Dollars in thousands, except per share amounts)

	Three months ended March 31,
	2021			2020
Revenue	$	7,038		$	5,734
Cost of goods sold		4,035			2,896
Gross profit		3,003			2,838

Operating expenses:
Sales and marketing		1,573			1,739
Research and product development		1,274			1,344
General and administrative		1,680			1,506
Total operating expenses		4,527			4,589

Operating loss		(1,524	)		(1,751	)

Interest expense		(112	)		(108	)
Other income (expense), net		(5	)		35

Loss before income taxes		(1,641	)		(1,824	)

Provision for income taxes		14			23

Net loss	$	(1,655	)	$	(1,847	)

Basic weighted average shares outstanding		18,775,773			16,650,725
Diluted weighted average shares outstanding		18,775,773			16,650,725

Basic loss per share	$	(0.09	)	$	(0.11	)
Diluted loss per share	$	(0.09	)	$	(0.11	)


Comprehensive loss:
Net loss	$	(1,655	)	$	(1,847	)
Unrealized loss on available-for-sale securities, net of tax		(2	)		(23	)
Change in foreign currency translation adjustment		(12	)		(34	)
Comprehensive loss	$	(1,669	)	$	(1,904	)

See accompanying notes

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CLEARONE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share amounts)

	Three months ended March 31,
	2021			2020
Cash flows from operating activities:
Net loss	$	(1,655	)	$	(1,847	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		661			522
Amortization of right-of-use assets		149			143
Stock-based compensation expense		31			37
Provision for doubtful accounts, net		—			15
Change of inventory to net realizable value		375			201
Changes in operating assets and liabilities:
Receivables		264			878
Inventories		736			1,428
Prepaid expenses and other assets		265			110
Accounts payable		(1,043	)		(396	)
Accrued liabilities		446			(458	)
Income taxes payable		(43	)		10
Deferred product revenue		(45	)		34
Operating lease liabilities		(154	)		(146	)
Other long-term liabilities		—			—
Net cash provided by (used in) operating activities		(13	)		531

Cash flows from investing activities:
Purchase of property and equipment		(7	)		(30	)
Purchase of intangibles		(71	)		(48	)
Capitalized patent defense costs		(1,678	)		(1,722	)
Proceeds from maturities and sales of marketable securities		413			1,208
Purchases of marketable securities		(310	)		(1,124	)
Net cash used in investing activities		(1,653	)		(1,716	)

Cash flows from financing activities:
Net proceeds from equity-based compensation programs		4			3
Principal payments of long-term debt		(90	)		—
Net cash provided by (used in) financing activities		(86)			3

Effect of exchange rate changes on cash and cash equivalents		(17	)		(27	)

Net decrease in cash and cash equivalents		(1,769	)		(1,209	)
Cash and cash equivalents at the beginning of the period		3,803			4,064
Cash and cash equivalents at the end of the period	$	2,034		$	2,855

See accompanying notes

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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:

	Three months ended March 31,
	2021		2020
Cash paid for income taxes	$	43	$	8
Cash paid for interest		50		76

See accompanying notes

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CLEARONE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 March 31, 2021 and December 31, 2020, the results of operations for the three months ended March 31, 2021 and 2020, and the cash flows for the three months ended March 31, 2021 and 2020. The results of operations for the three months ended March 31, 2021 and 2020 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, 2020 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, 2020. There have been no changes to these policies during the three months ended March 31, 2021 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 March 31, 2021, our cash and cash equivalents were approximately $2,034 compared to $3,803 as of December 31, 2020. Our working capital was $19,520 as of March 31, 2021. Net cash used in operating activities was $13 for the three months ended March 31, 2021, a decrease of $544 from $531 of cash provided by operating activities in the three months ended March 31, 2020.

We are currently pursuing all available legal remedies to defend our strategic patents from infringement. We have already spent approximately $21,985 from 2016 through March 31, 2021 towards this litigation and may be required to spend more to continue our legal defense. We believe the decision by the U.S. District Court in August 2019 granting our request for a preliminary injunction to prevent our competitor from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. We believe that the decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from further infringing our Graham patent (U.S. Patent No. 9,813,806) pending a full trial. Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave the way for ClearOne’s recovery from the immense harm inflicted by our competitor's infringement of our valuable patents. For more information about our intellectual property litigation, See Note 8. Commitments and Contingencies - Legal Proceedings, in our annual report on Form 10-K for the year ended December 31, 2020 and Part II, Item 1. Legal Proceedings in this quarterly report.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

We have been actively engaged in preserving cash by suspending our dividend program and allowing our share repurchase program to expire in 2018 and implementing company-wide cost reduction measures. We have also raised additional capital in 2019 by issuing senior convertible notes and in 2020 by borrowing through the CARES Act Paycheck Protection Program and issuing common stock and warrants. In addition, we expect to generate additional cash as our inventory levels are brought down to historical levels.

We also believe that the measures taken by us will yield higher revenues in the future. We believe, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet our operating needs through at least May 14, 2022. 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.

2. Revenue Information

The following table disaggregates the Company’s revenue into primary product groups:

	Three months ended March 31,
	2021		2020
Audio conferencing	$	2,835	$	2,787
Microphones		2,350		2,143
Video products		1,853		804
	$	7,038	$	5,734

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

	Three months ended March 31,
	2021		2020
North and South America	$	3,524	$	3,352
Asia (including Middle East) and Australia		2,226		1,416
Europe and Africa		1,288		966
	$	7,038	$	5,734

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

3. Earnings (Loss) Per Share

Earnings (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 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 March 31,
	2021			2020
Numerator:
Net loss	$	(1,655	)	$	(1,847	)
Denominator:
Basic weighted average shares outstanding		18,775,773			16,650,725
Dilutive common stock equivalents using treasury stock method		—			—
Diluted weighted average shares outstanding		18,775,773			16,650,725

Basic loss per common share	$	(0.09	)	$	(0.11	)
Diluted loss per common share	$	(0.09	)	$	(0.11	)

Weighted average options, warrants and convertible portion of senior convertible notes outstanding		3,636,117			542,818
Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation		3,636,117			542,818

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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 March 31, 2021 and December 31, 2020 were as follows:

	Amortized cost		Gross unrealized holding gains		Gross unrealized holding losses		Estimated fair value
March 31, 2021
Available-for-sale securities:
Corporate bonds and notes	$	1,008	$	20	$	—	$	1,028
Municipal bonds		1,743		3		—		1,746
Total available-for-sale securities	$	2,751	$	23	$	—	$	2,774

December 31, 2020
Available-for-sale securities:
Corporate bonds and notes	$	1,312	$	26	$	—	$	1,338
Municipal bonds		1,536		5		—		1,541
Total available-for-sale securities	$	2,848	$	31	$	—	$	2,879

Maturities of marketable securities classified as available-for-sale securities were as follows at March 31, 2021:

	Amortized cost		Estimated fair value
Due within one year	$	960	$	967
Due after one year through five years		1,791		1,807
Due after five years		—		—
Total available-for-sale securities	$	2,751	$	2,774

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Debt securities in an unrealized loss position as of March 31, 2021 were not deemed impaired at acquisition and subsequent declines in fair value are not deemed attributed to declines in credit quality. Management believes that it is more likely than not that the securities will receive a full recovery of par value, although there can be no assurance that such recovery will occur. The available-for-sale marketable securities with continuous gross unrealized loss position for less than 12 months and 12 months or greater and their related fair values were as follows:

Less than 12 months

More than 12 months

Total

Estimated fair value

Gross unrealized holding losses

Estimated fair value

Gross unrealized holding losses

Estimated fair value

Gross unrealized holding losses

As of March 31, 2021

Corporate bonds and notes

—

Municipal bonds

—

Total

—

5. Intangible Assets

Intangible assets as of March 31, 2021 and December 31, 2020 consisted of the following:

	Estimated useful lives (years)			March 31, 2021			December 31, 2020
Tradename	5	to	7	$	555		$	555
Patents and technological know-how	10	to	20		27,176			25,427
Proprietary software	3	to	15		2,981			2,981
Other	3	to	5		323			323
Total intangible assets					31,035			29,286
Accumulated amortization					(10,549	)		(10,038	)
Total intangible assets, net				$	20,486		$	19,248

The amortization of intangible assets for the three months ended March 31, 2021 and 2020 was as follows:

	Three months ended March 31,
	2021		2020
Amortization of intangible assets	$	511	$	368

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

Years ending December 31,	Amount
2021 (Remainder)	$	1,580
2022		2,107
2023		2,101
2024		1,837
2025		1,776
Thereafter		11,085
Total		20,486

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

6. Inventories

Inventories, net of reserves, as of March 31, 2021 and December 31, 2020 consisted of the following:

	March 31, 2021		December 31, 2020
Current:
Raw materials	$	1,140	$	1,182
Finished goods		8,676		9,281
	$	9,816	$	10,463

Long-term:
Raw materials	$	2,031	$	1,977
Finished goods		2,095		2,613
	$	4,126	$	4,590

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 months ended March 31, 2021 and 2020 was as follows:

	Three months ended March 31,
	2021		2020
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory	$	375	$	201

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 months ended March 31, 2021 and 2020 was as follows:

	Three months ended March 31,
	2021		2020
Rent expense	$	184	$	187

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

We occupy 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 our principal administrative, sales, marketing, customer support, and research and product development activities.

We occupy a 950 square-foot facility in Austin, Texas under the terms of an operating lease expiring in October 2022. This facility supports our sales, marketing, customer support, and research and development activities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

We occupy a 3,068 square-foot facility in Zaragoza, Spain under the terms of an operating lease expiring in March 2022. This office supports our research and development and customer support activities.

We occupy a 6,175 square-foot facility in Chennai, India under the terms of an operating lease expiring in August 2021. This facility supports our administrative, marketing, customer support, and research and product development activities.

We occupy 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 our primary inventory fulfillment and repair center.

Supplemental cash flow information related to leases was as follows:

	Three months ended March 31,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	184	$	180
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	—	$	63

Supplemental balance sheet information related to leases was as follows:

	March 31, 2021			December 31, 2020
Operating lease right-of-use assets	$	1,787		$	1,936

Current portion of operating lease liabilities, included in accrued liabilities	$	561		$	579
Operating lease liabilities, net of current portion		1,353			1,489
Total operating lease liabilities	$	1,914		$	2,068

Weighted average remaining lease term for operating leases (in years)		3.33			3.54
Weighted average discount rate for operating leases		6.1	%		6.1	%

The following represents maturities of operating lease liabilities as of March 31, 2021:

Years ending December 31,
2021 (Remainder)	$	504
2022		634
2023		610
2024		306
2025		69
Thereafter		—
Total lease payments		2,123
Less: Imputed interest		209
Total	$	1,914

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

8. Shareholders' Equity

	Three months ended March 31,
	2021			2020
Common stock and additional paid-in capital
Balance, beginning of period	$	63,378		$	58,537
Share-based compensation expense		31			37
Proceeds from employee stock purchase plan		4			3
Balance, end of period	$	63,413		$	58,577

Accumulated other comprehensive loss
Balance, beginning of period	$	(186	)	$	(176	)
Unrealized loss on available-for-sale securities, net of tax		(2	)		(23	)
Foreign currency translation adjustment		(12	)		(34	)
Balance, end of period	$

SEC Form 10-Q filed by ClearOne, Inc.