ClearOne(CLRO) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements The company's financial statements for H1 2019 reflect decreased assets and equity, ongoing net losses, negative operating cash flow, and the adoption of new lease accounting standards Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Data (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $2,352 | $11,211 | | Total current assets | $25,395 | $34,365 | | Total assets | $55,907 | $58,915 | | Total current liabilities | $5,031 | $6,008 | | Total liabilities | $7,871 | $6,714 | | Total shareholders' equity | $48,036 | $52,201 | - The company adopted a new lease accounting standard in 2019, resulting in the recognition of $2.7 million in 'Operating lease - right of use assets' and $2.3 million in 'Operating lease liability' which were not present on the 2018 balance sheet[7][16] Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $6,420 | $6,971 | $12,725 | $14,260 | | Gross Profit | $2,939 | $3,250 | $5,643 | $7,349 | | Operating Loss | $(2,104) | $(2,972) | $(4,495) | $(5,414) | | Net Loss | $(2,098) | $(2,163) | $(4,447) | $(4,009) | | Diluted Loss Per Share | $(0.13) | $(0.26) | $(0.27) | $(0.48) | Unaudited Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,398) | $(1,865) | | Net cash provided by (used in) investing activities | $(7,471) | $1,114 | | Net cash provided by (used in) financing activities | $16 | $(710) | | Net decrease in cash and cash equivalents | $(8,859) | $(1,492) | - Investing activities in H1 2019 included $2.3 million in capitalized patent defense costs and a net purchase of marketable securities of $5.1 million ($7.1M purchases vs $2.0M proceeds)[9] - The company did not pay dividends or repurchase stock in H1 2019, compared to paying $583 thousand in dividends and repurchasing $147 thousand of stock in H1 2018[9] Notes to Condensed Consolidated Financial Statements Revenue by Product Group for Six Months Ended June 30 (in thousands) | Product Group | 2019 | 2018 | | :--- | :--- | :--- | | Audio Conferencing | $5,600 | $7,252 | | Microphones | $4,336 | $4,565 | | Video products | $2,789 | $2,443 | - Intangible assets related to 'Patents and technological know-how' increased from $13.4 million to $15.7 million between Dec 31, 2018, and June 30, 2019, reflecting capitalized patent defense costs[30] - Subsequent to the quarter's end, on August 5, 2019, a U.S. District Court granted ClearOne a preliminary injunction against Shure Incorporated, prohibiting Shure from manufacturing, marketing, and selling its competing MXA910 microphone in a drop-ceiling configuration[51] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 11% revenue decline to patent infringement and product mix, while reducing operating expenses by 21% and implementing cash preservation strategies despite significant cash reserve decreases Business Overview and Results of Operations - Management states that the major cause of revenue decline in its core audio conferencing and microphone categories is the ongoing infringement of ClearOne's patents by competitors[60][61][71] - The company began shipping its new patented Beamforming Microphone Array Ceiling Tile (BMA CT) in Q1 2019 and introduced COLLABORATE Space, a unified communication and collaboration software suite[55][56] Financial Performance Comparison (in thousands) | Metric | H1 2019 | H1 2018 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $12,725 | $14,260 | -11% | | Gross Profit | $5,643 | $7,349 | -23% | | Operating Expenses | $10,138 | $12,763 | -21% | | Net Loss | $(4,447) | $(4,009) | 11% | - Gross profit margin for the first six months of 2019 decreased to 44% from 52% in the same period of 2018, primarily due to increased material costs and a lower mix of high-margin professional audio products[61][77] Liquidity and Capital Resources - Cash and cash equivalents decreased significantly from $11.2 million at year-end 2018 to $2.4 million as of June 30, 2019[88] - The company is capitalizing external legal costs for patent defense, spending $1.1 million in Q2 2019 and a total of $10.8 million from 2016 through June 30, 2019[91][92] - To preserve cash, the company has suspended its dividend program, allowed its share repurchase program to expire, and implemented company-wide cost reductions[93] - Total inventory was $20.0 million, with $7.7 million classified as long-term inventory, a reduction from $22.2 million and $9.0 million respectively at year-end 2018[94] Quantitative and Qualitative Disclosures About Market Risk The company has determined that this section is not applicable for the reporting period - This item is marked as 'Not applicable'[99] Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2019, due to a material weakness in financial reporting, with a remediation plan underway - Management concluded that disclosure controls and procedures were not effective as of June 30, 2019[100] - A material weakness was identified in the operating effectiveness of internal control over financial reporting, specifically concerning the accurate and timely reporting of financial results[101] - A remediation plan is being implemented with a third-party consultant to address the material weakness, focusing on personnel levels, training, and processes for public company reporting[102] PART II - OTHER INFORMATION Legal Proceedings The company is engaged in active patent litigation with Shure, Inc., securing a preliminary injunction against Shure's MXA910 while facing a new infringement claim from Shure - On August 5, 2019, a court granted ClearOne a preliminary injunction against Shure Inc., prohibiting the sale of Shure's MXA910 microphone in a drop-ceiling configuration due to likely infringement of ClearOne's U.S. Patent No. 9,813,806[107] - On July 18, 2019, Shure, Inc. filed a lawsuit against ClearOne, alleging patent infringement and unfair competition related to ClearOne's BMA CT product. ClearOne intends to vigorously defend against this suit[106] - In February 2019, ClearOne filed a petition for inter partes review of Shure's U.S. Patent No. 9,565,493, arguing its claims should be cancelled[105] Risk Factors No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2018 - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2018[108] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None[109] Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and XBRL data files - The report includes CEO and PFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, as well as XBRL filings[114]