CLEARONE INC - Quarter Report: 2022 March (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, 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 May 18, 2022 was 23,948,587. 

 CLEARONE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2022

 

INDEX​

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	28

 

 

 

 

 

CLEARONE, INC

(Dollars in thousands, except par value)

 

 

See accompanying notes

 

 

CLEARONE, INC.

COMPREHENSIVE LOSS

(Dollars in thousands, except per share amounts)

 

 

See accompanying notes

 

 

CLEARONE, INC.

(Dollars in thousands, except per share amounts)

 

  

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:

 

 

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 March 31, 2022 and December 31, 2021, the results of operations for the three months ended March 31, 2022 and 2021, and the cash flows for the three months ended March 31, 2022 and 2021. The results of operations for the three months ended March 31, 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.

 

2. Revenue Information 

 

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

 

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 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 March 31,
		2022				2021
Numerator:
Net loss		$	(1,967	)		$	(1,655	)
Denominator:
Basic weighted average shares outstanding			23,897,305				18,775,773
Dilutive common stock equivalents using treasury stock method			—				—
Diluted weighted average shares outstanding			23,897,305				18,775,773
Basic loss per common share		$	(0.08	)		$	(0.09	)
Diluted loss per common share		$	(0.08	)		$	(0.09	)
Weighted average options, warrants and convertible portion of senior convertible notes outstanding			7,062,673				3,636,117
Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation			7,062,673				3,636,117

 

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 as of March 31, 2022 and December 31, 2021 were as follows:

 

		Amortized cost				Gross unrealized holding gains				Gross unrealized holding losses				Estimated fair value
March 31, 2022
Available-for-sale securities:
Corporate bonds and notes		$	511			$	1			$	(13)			$	499
Municipal bonds			454				—				(13)				441
Total available-for-sale securities		$	965			$	1			$	(26)			$	940
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

 

 Maturities of marketable securities classified as available-for-sale securities were as follows as of March 31, 2022:

 

		Amortized cost				Estimated fair value
Due within one year		$	402			$	398
Due after one year through five years			563				542
Due after five years			—				—
Total available-for-sale securities		$	965			$	940

UNAUDITED 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, 2022 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, 2022
Corporate bonds and notes		$	254			$	8			$	144			$	5			$	398			$	13
Municipal bonds			292				11				150				2				442				13
Total		$	546			$	19			$	294			$	7			$	840			$	26

 

Debt securities in an unrealized loss position as of March 31, 2022 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.

5. Intangible Assets

 

Intangible assets as of March 31, 2022 and December 31, 2021 consisted of the following:

 

		Estimated useful lives (years)					March 31, 2022				December 31, 2021
Tradename		5	to	7			$	555			$	555
Patents and technological know-how		10	to	20				33,812				33,553
Proprietary software		3	to	15				2,981				2,981
Other		3	to	5				323				323
Total intangible assets								37,671				37,412
Accumulated amortization								(12,996	)			(12,326	)
Total intangible assets, net							$	24,675			$	25,086

 

The amortization of intangible assets for the three months ended March 31, 2022 and 2021 was as follows: 

 

		Three months ended March 31,
		2022				2021
Amortization of intangible assets		$	670			$	511

 

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

 

Years ending December 31,		Amount
2022 (Remainder)		$	2,030
2023			2,700
2024			2,436
2025			2,375
2026			2,375
Thereafter			12,759
Total		$	24,675

 

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

6. Inventories

 

Inventories, net of reserves, as of March 31, 2022 and December 31, 2021 consisted of the following:

 

		March 31, 2022				December 31, 2021
Current:
Raw materials		$	3,821			$	4,085
Finished goods			6,044				5,948
		$	9,865			$	10,033
Long-term:
Raw materials		$	1,576			$	1,980
Finished goods			1,634				1,587
		$	3,210			$	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 months ended March 31, 2022 and 2021 was as follows:

 

		Three months ended March 31,
		2022				2021
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory		$	—			$	375

 

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, 2022 and 2021 was as follows: 

 

 

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

 

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 and repair center.  

Supplemental cash flow information related to leases was as follows: 

 

 

Supplemental balance sheet information related to leases was as follows:

 

  

The following represents maturities of operating lease liabilities as of March 31, 2022:

 

Years ending December 31,
2022 (Remainder)		$	520
2023			671
2024			343
2025			69
2026			—
Total lease payments			1,603
Less: Imputed interest			(114	)
Total		$	1,489

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

8. Shareholders' Equity

 

		Three months ended March 31,
		2022				2021
Common stock and additional paid-in capital
Balance, beginning of period		$	72,818			$	63,378
Issuance of common stock and warrants, net			2,000				—
Share-based compensation expense			35				31
Proceeds from employee stock purchase plan			2				4
Balance, end of period		$	74,855			$	63,413
Accumulated other comprehensive loss
Balance, beginning of period		$	(241	)		$	(186	)
Unrealized loss on available-for-sale securities, net of tax			(28	)			(2	)
Foreign currency translation adjustment			(11	)			(12	)
Balance, end of period		$	(280	)		$	(200	)
Accumulated deficit
Balance, beginning of period		$	(21,072	)		$	(13,378	)
Net loss			(1,967	)			(1,655	)
Balance, end of period		$	(23,039	)		$	(15,033	)
Total shareholders' equity		$	51,536			$	48,180

 

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 $2,000,000 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 CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except share and per share amounts)

		March 31, 2022				December 31, 2021
Liability component:
Principal		$	2,460			$	2,640
Less: debt discount and issuance costs, net of amortization			(450	)			(385	)
Net carrying amount		$	2,010			$	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		$	765			$	720
Long-term portion of liability component included under long-term debt			1,695				1,920
Liability component total		$	2,460			$	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 months ended March 31, 2022 and March 31, 2021 amortization of debt discount and issuance costs was $49 and $49, respectively. The following table represents schedule of maturities of principal amount contained in the Notes as of March 31, 2022: