Clearone Inc: Form 10-Q for the period ended Sep 30, 2024

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; our expectations regarding the ongoing transition of manufacturing of our products from China to Singapore by our electronics manufacturing services provider; 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, 2023. 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 for the period ended September 30, 2024 and in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023.

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 March 11, 2024, we announced a one-time special cash dividend of $0.50 per share of ClearOne common stock, paid on April 10, 2024 to shareholders of record on April 2, 2024.

On January 23, 2024 we launched the DIALOG® 20 USB wireless microphone system at Integrated Systems Europe (ISE) 2024, a major global audiovisual expo. ClearOne’s booth at ISE 2024 recorded a 319% increase in unique visitors compared to the number of unique visitors the Company’s booth recorded in 2023. The DIALOG® UVHF Wireless Microphone System also received AV Technology Magazine’s Best in Show award at ISE 2024, having previously garnered other notable industry awards in 2023.

On August 8, 2024, the DIALOG® UVHF wireless Microphone system was named a winner of the 2024 Communications Solutions products of the year award.

On September 9, 2024, ClearOne recorded a 31% increase in unique visitors at our 2024 Infocomm India trade show booth, while the overall annual increase of all attendees at that trade show was only 17%.

Overall revenue decreased by 49% in the third quarter of 2024 when compared to the third quarter of 2023, primarily due to a significant decrease in revenues from the audio-conferencing category. The revenue decline was also caused by significantly reduced demand for our products in many regions including USA, Europe and China when compared to 2023-Q3 revenues. We believe this revenue decline was primarily due to the cumulative impact of past production shortages. We believe that lack of product availability has caused some of our channel partners to purchase and install competing brands. Historically, we have seen a lag of several months between the time that our professional conferencing products are specified for installation and the date when those products are installed. Since our product availability was constrained through a significant part of Q4 2023, we believe our revenue was impacted negatively by these market dynamics through much of Q3 2024. We have also faced sales headwinds from our products’ lack of Microsoft Teams certification, despite their longtime functional compatibility with this platform. Our work through the first nine months of 2024 has focused on mitigating these impacts through maintaining consistent dialogues, product demonstrations, and feedback cycles with end users and channel partners, along with improving our visibility at key industry events. In addition, we saw a reduction in sales in the Middle East region, where we had previously experienced consistent sales growth, as we transitioned to a new distributor for the Middle East region. We believe our revenue performance in 2024-Q3 compared to 2023-Q3 also was to a small extent impacted negatively due to increased costs associated with electronic raw materials that have affected the global manufacturing of high tech products. We expect these increased costs in various degrees to continue through the remainder of 2024 and 2025.

Our gross profit margin decreased to 24.4% during the third quarter of 2024 from 33.1% during the third quarter of 2023. Our gross profit margin decreased to 20.7% during the first nine months of 2024 compared to 32.8% during the first nine months of 2023. This is due to scrapping of inventory items and selling aged inventory at larger discounts.

Net loss increased from $(1.4) million in the third quarter of 2023 to $(2.1) million in the third quarter of 2024. The increase in net loss was mainly due to (a) decrease in revenues and decrease in gross margin from purchase price variances from increasing vendor costs and sales price discounts. Net loss increased from $(3.2) million for the first nine months of 2023 to $(6.8) million for the first nine months of 2024. The increase was mainly due to (a) decrease in revenue by $6.1 million, (b) significant decrease in Gross margin from 32.8% to 20.7% and (c) decrease in interest income.

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.

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 certifications from 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 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 lack of component availability to build our products in 2023 driving growth to competitors, pricing pressures from new competitors attracted to the commercial market due to higher margins, and the lack of certifications from Microsoft. Notably, the Microsoft Teams device certification program is closed to new meeting room devices and solutions. Although we have requested admission into this certification program on multiple occasions ClearOne has been denied admission by Microsoft so far.

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 growth in the near future.

We derive a significant portion of our revenue (approximately 61.6% in the first nine months of 2024) from operations outside North and South America 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.

Deferred Product Revenue

Deferred product revenue decreased to $22 thousand on September 30, 2024 compared to $30 thousand on December 31, 2023.

A detailed discussion of our results of operations follows below.

Results of Operations for the three and nine months ended September 30, 2024

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2024 (“2024-Q3”) ("2024-YTD") and 2023 ("2023-Q3") ("2023-YTD"), respectively, together with the percentage of total revenue which each such item represents:

(dollars in thousands)

Revenue

Our revenue decreased to $2.5 million in 2024-Q3 compared to $4.9 million in 2023-Q3 due to a 50% decline in audio conferencing, a 40% decline in video products, and a 50% decrease in microphones. Our traditional ceiling mics, personal audio-conferencing products, and video cameras suffered revenue declines due to lack of demand and the loss of the major customer. When comparing 2024-Q3 to 2023-Q3, all sales regions suffered revenue loss. Revenues from Americas declined by 61%, from Europe and Africa by 50%, and from Asia Pacific (including Middle East, India and Australia) by 34%.

Our revenues decreased to $8.4 million in 2024-YTD compared to $14.6 million 2023-YTD due to a 48% decline in audio conferencing, a 30% decline in video products, and a 39% decrease in microphones. Our traditional ceiling mics, personal audio-conferencing products. and video cameras suffered revenue declines due to lack of demand. When comparing 2024-YTD to 2023-YTD, all sales regions suffered revenue loss. Revenues from Americas decline by 56%, from Europe and Africa by 44%, and from Asia Pacific (including Middle east, India and Australia) by 23%.

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 33.1% during 2023-Q3 to 24.4% during 2024-Q3.

The decline was due to discounting products to close sales and an increase in purchase price variances from increasing vendor costs.

Our gross profit margin decreased from 32.8% during 2023-YTD to 20.7% during 2024-YTD.

The decline was due to increased inventory scrap and write-off costs, discounting products to close sales, and an increase in purchase price variance from increasing vendor costs.

Our profitability in the near term continues to depend significantly on our revenues from professionally 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 consists primarily of three product categories. These categories are as follows: Converge Pro and Beamforming microphone array products, cameras, and 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 2024-Q3 were $2.8 million compared to $3.1 million in 2023-Q3. Total operating expenses were $8.9 million for 2024-YTD compared to $9.8 million for 2023-YTD. The following contains a more detailed discussion of expenses related to sales and marketing, research and product development, general and administrative, and other items.

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

S&M expenses remained consistent in 2024-Q3 , $1.1 million compared to $1.1 million in 2023-Q3.

S&M expenses remained consistent in 2024-YTD $3.6 million compared to $3.6 million in 2023-YTD.

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 remained consistent in 2024-Q3, $0.8 million compared to $0.8 million in 2023-Q3.

R&D expenses decreased to $2.5 million in 2024-YTD compared to $2.8 million for 2023- YTD. The reduction was primarily due to a reduction in personnel.

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 $1.0 million in 2024-Q3 compared to $1.1 million in 2023-Q3. The reduction was primarily due to (a) decrease in insurance expenses, (b) and a reduction in amortization expense.

G&A expenses decreased to $2.8 million in 2024-YTD compared to $3.4 million in 2023-YTD. The reduction was primarily due to (a) a decrease in legal expenses, (b) and a decrease in insurance expenses, (c) reduction in employee-related expenses, (d) and a reduction in amortization expense.

Interest Expense

Interest expense was $0 in 2024-Q3 compared to $0.1 million in 2023-Q3. Interest expense decreased to $0.3 million in 2024-YTD compared to $0.5 million in 2023-YTD. The interest expense was $0.0 due to repayment of all the debts in full in 2023.

Other income (expense), net

Other income (expense), net includes interest income, foreign currency changes and gain or loss on disposal of assets. Other income for 2024-Q3 included $0.03 million of interest income received on marketable securities compared to $0.24 million in 2023-Q3

Other income of 2024-Q3 includes $0.087 million of gain on disposal of inventory compared to $(0.08) million of interest expense on debt in 2023-Q3.

Provision for income taxes

During each of the nine months ended September 30, 2024 and 2023, we did not recognize any benefit from the losses incurred due to setting up a full valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2024, our cash and cash equivalents were approximately $1.7 million compared to $17.8 million as of December 31, 2023. Our working capital was $19.7 million and $39.1 million as of September 30, 2024 and December 31, 2023, respectively.

Cash used in operating activities was approximately $4.6 million in the nine months ended September 30, 2024, a decrease of approximately $55.7 million from $51.1 million of cash provided by operating activities in the nine months ended September 30, 2023. The decrease in cash inflow was primarily due to the difference between $55 million in receipts from legal settlements received in first half of 2023 and $0 received in first nine months of 2024.

Cash provided by investing activities in the nine months ended September 30, 2024 was $2.9 million compared to $6.8 million of cash used in investing activities in the nine months ended September 30, 2023. The increase in cash provided by investing activities was primarily due to proceeds from sale of marketable securities of $7.9 million offset by purchases of marketable securities of $(4.7) million in the nine months ended September 30, 2024 compared to $3 million and $(9.3) million respectively for the nine months ended September 30, 2023.

Cash used in financing activities in the nine months ended September 30, 2024 was $(14.5) million compared to $(31.7) million of cash being used in the nine months ended September 30, 2023. This was comprised primarily of dividend distributions payments made.

The Company believes, although there can be no assurance, that the current cash position and effective management of working capital, will provide the liquidity needed to meet our operating needs through at least November 14, 2025. 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 on favorable terms or at all. 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 September 30, 2024, we had open purchase orders of approximately $3.5 million, mostly for the purchase of inventory.

As of September 30, 2024, we had inventory totaling $16.5 million, of which non-current inventory accounted for $2.2 million. This compares to total inventories of $13.8 million, which includes non-current inventory of $3.1 million as of December 31, 2023.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of September 30, 2024 (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, 2023.

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.

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2024 was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Financial and Accounting Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls and procedures are effective at a reasonable assurance level as of September 30, 2024.

There has been no change in the Company's internal control over financial reporting as of September 30, 2024, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

The risk factors under Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2023 are hereby supplemented with the following additional risk factor:

Our common stock trades at prices less than $1.00 which is the minimum bid price requirement under Nasdaq’s continued listing standards, as such our common stock may be subject to delisting from the Nasdaq Capital Market.

On June 20, 2024, we received a letter (the “Notice”) from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) informing us that because the closing bid price for the Company’s common stock listed on Nasdaq was below $1.00 for 30 consecutive trading days, we are not in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Marketplace Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The last reported closing price of our common stock on the Nasdaq Capital Market on August 13, 2024 was $0.6411 per share and has been below the $1.00 closing bid price since May 6, 2024. In accordance with Nasdaq Marketplace Rule 5810(c)(3)(A), we have a period of 180 calendar days from June 20, 2024, or until December 17, 2024, to regain compliance with the Minimum Bid Price Requirement. If at any time before December 17, 2024, the closing bid price of our common stock closes at or above $1.00 per share for a minimum of 10 consecutive trading days (which number days may be extended by Nasdaq), Nasdaq will provide written notification that we have achieved compliance with the Minimum Bid Price Requirement, and the matter would be resolved. If compliance is not achieved within the 180-day period, Nasdaq would provide written notification to us that our common stock is subject to delisting. In the event that we fail to regain compliance with Nasdaq continued listing standards by the expiration of the applicable cure period or any extension period, Nasdaq will commence suspension and delisting procedures with respect to our common stock, which could impair the value of your investment.

If our common stock is delisted from Nasdaq Capital Market in the future, such securities may be traded on the over-the-counter markets. Such alternative markets, however, are generally considered to be less efficient than, and not as broad as, Nasdaq. Accordingly, delisting of our common stock from Nasdaq could have a significant negative effect on the trading volume, liquidity and market price of our common stock. In addition, the delisting of our common stock could adversely affect our ability to raise capital on terms acceptable to us or at all and could reduce the number of investors willing to hold or acquire our common stock.