CLEARONE INC - Quarter Report: 2023 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, 2023
☐	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 12, 2023 was 23,955,767. 

 CLEARONE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2023

 

INDEX​

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022	5
	Unaudited Notes to Condensed Consolidated Financial Statements	7
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

 

 

 

 

 

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)

  

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 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 March 31,
		2023				2022
Numerator:
Net loss		$	(832	)		$	(1,967	)
Denominator:
Basic weighted average shares outstanding			23,955,767				23,897,305
Dilutive common stock equivalents using treasury stock method			—				—
Diluted weighted average shares outstanding			23,955,767				23,897,305
Basic loss per common share		$	(0.03	)		$	(0.08	)
Diluted loss per common share		$	(0.03	)		$	(0.08	)
Weighted average options, warrants and convertible portion of senior convertible notes outstanding			6,368,420				7,062,673
Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation			6,368,420				7,062,673

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

 

4. Intangible Assets

 

Intangible assets as of March 31, 2023 and December 31, 2022 consisted of the following:

 

		Estimated useful lives (years)					March 31, 2023				December 31, 2022
Tradename		5	to	7			$	555			$	555
Patents and technological know-how		10	to	20				7,094				7,053
Proprietary software		3	to	15				2,981				2,981
Other		3	to	5				323				323
Total intangible assets								10,953				10,912
Accumulated amortization								(8,958	)			(8,841	)
Total intangible assets, net							$	1,995			$	2,071

 

The amortization of intangible assets for the three months ended March 31, 2023 and 2022 was as follows: 

 

		Three months ended March 31,
		2023				2022
Amortization of intangible assets		$	118			$	670

 

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

 

Years ending December 31,		Amount
2023 (Remainder)		$	398
2024			253
2025			192
2026			191
2027			61
Thereafter			900
Total		$	1,995

 

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts) 

5. Inventories

 

Inventories, net of reserves, as of March 31, 2023 and December 31, 2022 consisted of the following:  

 

		March 31, 2023				December 31, 2022
Current:
Raw materials		$	4,552			$	4,499
Finished goods			3,843				4,462
		$	8,395			$	8,961
Long-term:
Raw materials		$	928			$	1,068
Finished goods			1,957				1,639
		$	2,885			$	2,707

  

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 three months ended March 31, 2023 and 2022 was as follows:   

 

		Three months ended March 31,
		2023				2022
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory		$	23			$	—

 

6. 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 three months ended March 31, 2023 and 2022 was as follows: 

 

 

The Company occupies a 9,402 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in February 2028. The facility supports the Company's principal administrative, sales, marketing, customer support, and research and product 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 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, 2023:

 

Years ending December 31,
2023 (Remainder)		$	341
2024			439
2025			272
2026			210
2027			216
Thereafter			37
Total lease payments			1,515
Less: Imputed interest			(184	)
Total		$	1,331

 

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

 

7. Shareholders' Equity

 

		Three months ended March 31,
		2023				2022
Common stock and additional paid-in capital
Balance, beginning of period		$	74,934			$	72,818
Issuance of common stock and warrants, net			—				2,000
Share-based compensation expense			22				35
Proceeds from employee stock purchase plan			1				2
Balance, end of period		$	74,957			$	74,855
Accumulated other comprehensive loss
Balance, beginning of period		$	(288	)		$	(241	)
Unrealized loss on available-for-sale securities, net of tax			—				(28	)
Foreign currency translation adjustment			5				(11	)
Balance, end of period		$	(283	)		$	(280	)
Accumulated deficit
Balance, beginning of period		$	(516	)		$	(21,072	)
Net loss			(832	)			(1,967	)
Balance, end of period		$	(1,348	)		$	(23,039	)
Total shareholders' equity		$	73,326			$	51,536

 

Issue of Common Stock and Warrants

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

(Dollars in thousands, except per share amounts)

 

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, 2022. 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, 2022.

 

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. 

 

On January 30, 2023, we introduced the new CHAT® 150 BT group speakerphone with USB and Bluetooth connectivity that enhances the conferencing experience for the ultimate in business class performance. With simple, instant connection to personal computers, mobile devices or Bluetooth-enabled desk phones, the CHAT® 150 BT group speakerphone provides users with an affordable way to upgrade home offices, executive offices, and mid-size meeting rooms with BYOD convenience and superior audio clarity for audio conferences and video meetings. The CHAT® 150 BT speakerphone also has an audio bridging feature that allows far end conference participants connected via a software conferencing application through USB, local users of the speakerphone, and far end callers on a mobile call connected through Bluetooth to all join the same call and hear each other clearly. Featuring a steerable microphone array with first-mic priority, the CHAT® 150 BT speakerphone intelligently activates the microphone closest to the person speaking, reducing interference from ambient noise. Like all ClearOne microphone products, the CHAT® 150 BT speakerphone is compatible with popular collaboration platforms including Microsoft® Teams, Zoom™, WebEx™, Google® Meet™, and many more. The new BT model retains all the class-leading features of the original CHAT® 150 speakerphone, including Advanced Noise Cancellation, Full Duplex Distributed Echo Cancellation™ and Automatic Level Control algorithms, to ensure highly intelligible, natural audio capture and playback. It also supports NFC tap-to-pair and includes a wired USB connection for compatibility with the full variety of modern devices.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On January 16, 2023, we introduced UNITE 260 Pro camera, a professional grade 4K Ultra HD camera featuring both a 20X optical zoom and 16X digital zoom that allows users to capture every participant in all meeting, training, and learning environments it is deployed in. Compatible with all popular meeting applications like Microsoft® Teams, Zoom™, WebEx™, and Google® Meet™, the new camera features an AI-based smart face tracking mode that keeps a selected presenter in the frame as they move about the room. Alternatively, the camera’s AI-based auto framing mode always keeps an entire group in perfect view. With dual video outputs HDMI and IP, the UNITE 260 Pro Camera is an excellent choice for a hybrid environment: streaming content while simultaneously showing it live where the presentation is occurring.

We 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 45% in the first quarter of 2023 when compared to the first quarter of 2022, primarily due to a significant decrease in revenues from all product categories, especially microphones. The revenue decline was primarily due to our continued 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 electronics manufacturing services provider and due to the decline in demand for video products. We expect the challenges with the manufacturing transition from China to Singapore to ease in the second half of 2023.  Our revenue performance in 2023-Q1 was also partially impacted negatively due to 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 2023.

Our gross profit margin decreased to 31.5% during the first quarter of 2023 from 37.3% during the first quarter of 2022. Gross Profit margin decreased year over year mainly due to increase in administration and overhead costs as a percentage of revenue and increase in inventory obsolescence costs.

Net loss decreased from $2.0 million in the first quarter of 2022 to $0.8 million in the first quarter of 2023. The decrease in net loss was mainly due to a receipt of $1.35 million from a one-time legal settlement of a contract dispute. This receipt, included in other income was partially offset by an increase in operating losses of $0.3 million. 

 

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 traditional video conferencing appliances while on the other hand 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. It has become increasingly important to have higher interoperability with other products in the audio visual market as well as with leading video conferencing service providers like Microsoft and Zoom. 

 

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 is 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, 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, pricing pressures from new competitors attracted to the commercial market due to higher margins, our limited ability to be interoperable with other audio visual products in the market, and the lack of certifications from Microsoft.

Our video products and beamforming microphone arrays, especially highly advanced BMA 360 and BMA-CT 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 making our products more interoperable with other audio-visual products, continuing to improve the quality of our high-end audio conferencing products and microphones, and offering a wide range of innovative professional cameras will generate high growth in the near future. 

 

We derive a significant portion of our revenue (approximately 52% in 2022) 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.

 

In December 2019, a novel strain of coronavirus (“COVID-19”) started spreading from China and was declared a pandemic. 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 installers to visit commercial sites. On the other hand, COVID-19 generated higher than normal demand in 2020 for our video products and personal conferencing products due to the significant expansion of 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, 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 resulting from COVID-19 have caused significant fluctuations in our costs of goods resulting in a reduction of our gross margins in 2021 and 2022. We expect these fluctuations to continue in 2023. If the pandemic continues to be a severe worldwide health crisis, the disease 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 $71 thousand on March 31, 2023 compared to $63 thousand on December 31, 2022.

 

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 months ended March 31, 2023

 

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three months ended March 31, 2023 (“2023-Q1”) ("2023-YTD") and 2022 ("2022-Q1") ("2022-YTD"), respectively, together with the percentage of total revenue which each such item represents:    

 

Revenue

 

Our revenue decreased to $4.2 million in 2023-Q1 compared to $7.5 million in 2022-Q1 due to a 59% decline in microphones, a 55% decline in video products, and a 27% decline in audio conferencing. Except for wireless mics and premium audio conferencing, both of which constitute a small percentage of our revenue all other product categories suffered revenue declines year over year. Revenues from BMA and professional audio conferencing products were negatively impacted by our inability to source adequate inventory to meet the demand for professional audio products and BMA due to the ongoing transition of manufacturing of our products from China to Singapore by our electronics manufacturing services provider.  Our traditional ceiling mics, personal audio conferencing products, video cameras and video conferencing equipment suffered revenue declines due to lack of demand. During the first quarter of 2023, revenues from Americas declined by 58% primarily due to decreased revenues from all the regions. During 2023-Q1 revenues from the Asia Pacific, including the Middle East, India and Australia decline by 18% primarily due to declines in revenues from all sub-markets except India and Australia. Finally, revenues from Europe and Africa decreased significantly by 46% in 2023-Q1 primarily due to decreases across all the sub-markets except Central Europe. 

We believe, although there can be no assurance, that we can return to generating operating profits through our strategic initiatives namely product innovation and cost reduction. 

 

Costs of Goods Sold and Gross Profit  

 

Cost of goods sold includes expenses associated with finished goods purchased from outsourced manufacturers, the repackaging of our products, our manufacturing and operations organization, property and equipment depreciation, warranty expense, freight expense, royalty payments, and the allocation of overhead expenses.

Our gross profit margin decreased from 37.3% during 2022-Q1 to 31.5% during 2023-Q1. The gross profit margin was negatively impacted due to increases in material costs due to mainly due to increase in administration and overhead costs as a percentage of revenue and increase in inventory obsolescence costs. 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our profitability in the near-term continues to depend significantly on our revenues from professional installed audio-conferencing products. We hold long-term inventory and if we are unable to sell our long-term inventory, our profitability might be affected by inventory write-offs and price mark-downs. Our long-term inventory includes approximately $0.5 million of wireless microphone-related finished goods and assemblies, $0.3 million of Converge Pro and Beamforming microphone array products, $1.0 million of video products, and $0.9 million of raw materials that will be used primarily for manufacturing professional audio conferencing products and BMA microphones. Any business changes that are adverse to these product lines could potentially impact our ability to sell our long-term inventory in addition to our current inventory.

 

Operating Expenses

 

Operating expenses include sales and marketing (“S&M”) expenses, research and product development (“R&D”) expenses and general and administrative (“G&A”) expenses. Total operating expenses in 2023-Q1  was $3.5 million compared to $4.7 million in 2022-Q1. The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items. 

Sales and Marketing - S&M expenses include selling, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses.

 

S&M expenses in 2023-Q1 decreased to $1.2 million from $1.6 million for 2022-Q1. The decrease was primarily due to decreases in employment expenses and consultant expenses due to a reduction in the headcount and due to decrease in commissions paid to employees and consultants.  

Research and Product Development - R&D expenses include research and development, product line management, engineering services, and test and application expenses, including employee-related costs, outside services, expensed materials, depreciation, and an allocation of overhead expenses.

 

R&D expenses decreased to $1.0 million in 2023-Q1 compared to $1.4 million for 2022-Q1. The decrease was primarily due to reduction in employment expenses due to reduction in the headcount and a decrease in project-related expenses.

  

General and Administrative - G&A expenses include employee-related costs, professional service fees, allocations of overhead expenses, litigation costs, and corporate administrative costs, including costs related to finance and human resources teams.

 

G&A expenses decreased to $1.3 million in 2023-Q1 compared to $1.8 million in 2022-Q1. The reduction was primarily due to (i) a decrease in amortization costs relating to our capitalized patent defense costs, which was fully amortized in 2022-Q4, (ii) a decline in audit fees, (iii) and a decline in employment-related expenses, partially offset by (iv) increase in legal expenses, and (v) insurance expenses.

 

Other income (expense), net

 

Other income (expense), net includes interest income, foreign currency changes and gain or loss on disposal of assets. Other income in 2023-Q1 included a receipt of $1.35 million from a one-time legal settlement of a contract dispute. Other items included in other income remained immaterial during 2023-Q1 and 2022-Q1.

 

Interest expense increased to $0.3 million in 2023-Q1 compared to $0.1 million in 2022-Q1. primarily due to interest associated with the prepayment of the $2 million bridge loan in January 2023.

Provision for income taxes

 

During each of the three months ended March 31, 2023 and 2022, we did not recognize any benefit from the losses incurred due to setting up a full valuation allowance.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of March 31, 2023, our cash and cash equivalents were approximately $59.0 million compared to $1.0 million as of December 31, 2022. Our working capital was $68.7 million and $69.3 million as of March 31, 2023 and December 31, 2022, respectively. 

 

Net cash provided by operating activities was approximately $60.3 million in 2023-Q1, an increase of cash provided by operating activities of approximately $61.4 million from $1.0 million of cash used by operating activities in 2022-Q1. The increase in cash inflow was primarily due to $56.4 million in receipts from legal settlements, the receipt of $4.5 million from the return of a bond deposited with a court, and a $1.3 million refund of income taxes with interest. These receipts were partially offset by operating losses.  

 

Net cash used in investing activities in 2023-Q1 was $0.1 million compared to $1.8 million of net cash provided by investing activities in 2022-Q1. In 2022-Q1 cash provided by investing activities primarily consisted of $2.0 million in proceeds from sale of marketable securities, partially offset by capitalized patent defense costs of $0.2 million. 

Net cash used in financing activities in 2023-Q1 was $2.2 million, comprised primarily of repayment of the bridge loan of $2.0 million and $0.2 million payments of principal amounts due on senior convertible debt. This compares to $0.4 million used in principal amounts due on senior convertible debt in 2022-Q1 . 

 

As of March 31, 2023, our cash and cash equivalents were approximately $59.0 million compared to $1.0 million as of December 31, 2022. Our working capital was $68,7 million as of March 31, 2023. Net cash provided by operating activities was $60.3 million for the three months ended March 31, 2023, an increase of $61.4 million compared to $1.0 million of cash used in operating activities for the three months ended March 31, 2022. The company announced a special one-time cash dividend of $1.00 per share or eligible warrant (please see Note 10 - Subsequent events) which will be paid on May 31, 2023 and is expected to generate cash outflows of approximately $29.0 million. The Company also paid approximately $6.6 million towards income taxes in April 2023. The Company 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 the current cash position and all of these measures and effective management of working capital, will provide the liquidity needed to meet our operating needs through at least May 15, 2024. 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, or delay product development and enhancement.

As of March 31, 2023, we had open purchase orders of approximately $1.6 million mostly for the purchase of inventory.  

 

As of March 31, 2023, we had inventory totaling $11.3 million, of which non-current inventory accounted for $2.9 million. This compares to total inventories of $11.7 million and non-current inventory of $2.7 million as of December 31, 2022.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Contractual Obligations and Commitments

 

The following table summarizes our contractual obligations as of March 31, 2023 (in millions): 

 

  

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no off-balance-sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, results of operations or liquidity.   

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our discussion and analysis of our results of operations and financial position are based upon our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q, which have been prepared in conformity with accounting principles generally accepted in the United States. We review the accounting policies used in reporting our financial results on a regular basis. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. There have been no changes to the critical accounting policies as explained in our Annual Report on Form 10-K for the year ended December 31, 2022.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

For a discussion of recent accounting pronouncements, see Note 1: “Business Description, Basis of Presentation and Significant Accounting Policies” in the notes to our unaudited condensed consolidated financial statements included under Item 1 of this Form 10-Q.