What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-16 compared with 2020-08-13 · 76 added, 61 removed, 162 unchanged (46% of the section changed)

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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 I, Item 1 A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 .

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 1 A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 .

BUSINESS OVERVIEW

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A super-high signal-to-noise ratio and advanced 2 D and 3 D noise reduction provides superior desktop camera video quality.

During the first six months of 2020 , we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents.

During July 2020, we were awarded a significant new patent relating to beamforming microphone array technology by the US Patent and Trademark Office.

ClearOne’s innovative new patent, US Patent No.

10,728,653 (the “’653 Patent”), describes a ceiling tile microphone that includes beamforming, acoustic echo cancellation, and adaptive acoustic processing that automatically adjusts to a room configuration.

There is no language in the claims of the new patent limiting its scope to flush-mounted ceiling tile beamforming microphone arrays, as opposed to non-flush mounted ceiling tile beamforming microphone arrays.

The ’653 Patent is a member of a family of patents and applications that includes US Patent No.

That patent family includes issued patents and patent applications that cover ceiling tile and wall tile embodiments of beamforming microphone arrays, as well as augmentation of beamforming microphone arrays with non-beamforming microphones.

During the first nine months of 2020 , we continued our efforts, primarily through litigation, to stop the infringement of our strategic patents.

We also 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 declined by 1 % in the second quarter of 2020 when compared to the second quarter of 2019 , primarily due to a decline in audio conferencing products and microphones mostly offset by an increase in revenue from video products.

Despite the negative impact of COVID-19 and the infringement of our patents by Shure on all professional installed products our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") resulted in overall Beamforming Microphone Array ("BMA") revenue being significantly higher than last year.

Overall revenue increased by 40 % in the third quarter of 2020 when compared to the third quarter of 2019 , primarily due to an increase in revenue from video products, microphones and personal audio conferencing products offset partially by a decrease in revenue from our professional audio products.

Despite the negative impact of COVID- 19 and the infringement of our patents by Shure on all professional installed products our new solutions incorporating Beamforming Microphone Array Ceiling Tile ("BMA-CT") resulted in overall Beamforming Microphone Array ("BMA") revenue continued to be significantly higher than last year.

However, revenue from BMA products as well as from our pro audio products are far below the levels prior to infringement of our patents.

Our revenue performance reflects an impact of the on-going harm of infringement of ClearOne’s patents despite the preliminary injunction granted against Shure as we believe Shure continues to infringe our patents and violates the preliminary injunction.

The patent infringement also has negatively impacted directly the revenue from ClearOne’s other products not related to the infringed patents.

Our gross profit margin decreased to 41 % during the second quarter of 2020 from 46 % during the second quarter of 2019 .

Net loss decreased from $ 2.1 million in the second quarter of 2019 to $ 1.9 million in the second quarter of 2020 .

The decrease was mainly due to reduction in operating costs.

During the first six months ended June 30, 2020 our revenues decreased by 5 % when compared to the six months ended June 30, 2019 .

The decline was seen in all product categories.

Our gross profit margin increased to 45 % during the first six months of 2020 from 44 % during the same six months of 2019 .

Net loss decreased from $ 4.4 million in the first six months of 2019 to $ 3.8 million in the first six months of 2020 .

The patent infringement also has negatively impacted directly the revenue from ClearOne’s other products not related to the infringed patents not withstanding a significant growth in revenue from video products this quarter.

Our gross profit margin decreased to 41.8 % during the third quarter of 2020 from 42.3 % during the third quarter of 2019 .

Net loss decreased from $ 2.0 million in the third quarter of 2019 to $ 1.3 million in the third quarter of 2020 .

The decrease was mainly due to increase in gross margin through higher revenue and reduction in operating costs.

During the first nine months ended September 30, 2020 our revenues increased by 10 % when compared to the nine months ended September 30, 2019 .

The increase in revenues were largely due to increase in revenue from video products partially offset by declines in revenue from microphones and audio conferencing products.

Our gross profit margin increased to 43.8 % during the first nine months of 2020 from 43.7 % during the same nine months of 2019 .

Net loss decreased from $ 6.4 million in the first nine months of 2019 to $ 5.0 million in the first nine months of 2020 .

The decrease was mainly due to reduction in operating costs and increased gross margin.

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Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave the way for ClearOne’s recovery from the immense harm inflicted by Shure's infringement of our valuable patents.

However, we are not getting the full benefits of the Court’s extraordinary remedy in the form of the preliminary injunction granted against Shure with respect to infringement of our ’ 806 Patent as we believe that Shure, still infringes ClearOne’s patent.

We have sought a Court order holding Shure in contempt for marketing and selling their new design in violation of the preliminary injunction.

On September 1, 2020, the U.S.

District Court of Northern Illinois held that "Shure has violated the preliminary injunction order and is found in contempt because it designed the MXA910-A in such a way that allows it to be easily installed flush in most ceiling grids”.

The Court also opined that, “[t]he record is clear and convincing that Shure - through its design choices - violated the injunction order by allowing integrators to install the MXA910-A in the enjoined flush configuration.” Ultimately, the Court ordered that “Shure shall no longer manufacture, market, or sell the MXA910...” .

ClearOne’s motion to accuse Shure’s MXA910-US of infringing the ’806 Patent is still pending with the Court.

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

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Dollar denominated prices of our products less competitive.

In December 2019, a novel strain of coronavirus (“COVID- 19 ”) was first reported in Wuhan, China.

I n December 2019, a novel strain of coronavirus (“COVID- 19 ”) was first reported in Wuhan, China.

The COVID- 19 pandemic has continued to spread and has already caused severe global disruptions.

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If the pandemic continues to evolve into 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.

During the third quarter of 2020, we saw an increase in revenue in U.S.A.

that we believe a portion of which was attributable to government stimulus programs relating to COVID-19 and a utilization of our products by a growing remote workforce.

Given the uncertainty of the COVID-19 pandemic, the company does not believe these results were indicative of any trend, and there remains great uncertainty and unpredictability in how the COVID-19 pandemic and government responses to it will continue to impact our business.

Deferred Revenue

Deferred revenue remained almost the same at $ 0.20 million at June 30, 2020 compared to $ 0.17 million at December 31, 2019 .

Deferred revenue remained almost the same at $ 0.16 million at September 30, 2020 compared to $ 0.17 million at December 31, 2019 .

A detailed discussion of our results of operations follows below.

Results of Operations for the three and six months ended June 30, 2020

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2020 (“ 2020 - Q2 ”) (" 2020 -YTD") and 2019 (" 2019 - Q2 ") (" 2019 -YTD") , respectively, together with the percentage of total revenue which each such item represents:

Results of Operations for the three and nine months ended September 30, 2020

The following table sets forth certain items from our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2020 (“ 2020 - Q 3 ”) (" 2020 -YTD") and 2019 (" 2019 - Q 3 ") (" 2019 -YTD") , respectively, together with the percentage of total revenue which each such item represents:

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

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

(dollars in thousands)

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Provision for income taxes

Our revenue decreased to $ 6.36 million in 2020 -Q 2 compared to $ 6.42 million in 2019 -Q 2 primarily due to an 8% decline in audio conferencing products and 15% decline in microphones category offset mostly by 40% increase in revenue from video products.

Microphones category as a whole declined despite significant increase in revenues from BMA products.

During the second quarter of 2020, revenue from North America increased by 15% while revenues from Asia Pacific, including the Middle East declined by 20% and revenues from Europe and Africa declined by 19%.

Overall USA, Canada and Japan registered impressive growths, while China, India and the Middle East saw significant declines.

During the six months ended June 30, 2020 our revenues declined from $12.7 million to $12.1 million compared to same period in 2019 due to decline in all product categories, namely audio conferencing by 3%, microphones category by 7% and video products by 6%.

During the six months ended June 30, 2020 revenues in Americas increased by 1% compared to same period in 2019.

The Asia Pacific, including the Middle East declined by 22% and the Europe and Africa increased by 6%.

Our revenue increased to $8.4 million in 2020 -Q 3 compared to $6.0 million in 2019 -Q 3 primarily due to a 263% increase in video products revenue and 11% increase in microphones revenue partially offset by 5% decline in audio conferencing products revenue.

Audio Conferencing category as a whole declined despite significant increase in revenues from personal conferencing products.

Microphones growth continued to be led by our new solutions incorporating BMA-CT.

During the third quarter of 2020 , revenues from North America and Europe and Africa increased by 92% and 27%, respectively, while revenues from Asia Pacific, including the Middle East declined by 41%.

Overall USA, Canada and parts of Europe registered impressive growths, while the Middle East and Japan saw significant declines.

During the nine months ended September 30, 2020 our revenues increased from $ 18.7 million to $ 20.5 million to compared to the same period in 2019 due to an increase in video products by 59%, partially offset by decline in other product categories, namely audio conferencing by 4% and microphones category by 1%.

Even though m icrophones category declined in revenue our BMA products led by new solutions incorporating BMA-CT had significant growth compared to nine months ended September 2019.

During the nine months ended September 30, 2020 revenues in Americas increased by 29% compared to the same period in 2019 .

Revenues in the Asia Pacific, including the Middle East declined by 28% and the revenues in Europe and Africa increased by 13%.

We believe, although there can be no assurance, that we will return to a growth path if we are able to successfully implement our strategic initiatives focused on product innovation, cost reduction and defense of our intellectual property.

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 to 41 % during 2020 - Q2 from 46 % during 2019 - Q2 .

Gross profit declined due to increase in the share of lower margin products in the revenue mix, increased freight and tariff costs and increased inventory obsolescence costs, partially offset by a decrease in overhead costs.

Our gross profit margin decreased to 45 % during 2020 -H1 from 44 % during 2019 -H1.

The gross profit margin increased primarily due to increase of higher-margin professional audio conferencing products in the revenue mix and reduction in overhead costs, partially offset by increase in inventory obsolescence costs.

Our gross profit margin remained fairly consistent at 41.8 % during 2020 - Q3 compared to 42.3 % during 2019 - Q3 .

The gross profit margin was negatively impacted due to increase in share of lower margin products in the revenue mix, increased freight and tariff costs and increased inventory obsolescence costs, partially offset by a decrease in overhead costs as a percentage of revenue.

Our gr oss profit margin remained fairly consistent at 43.8 % during 2020 -YTD from 43.7 % during 2019 -YTD.

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

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Total operating expenses were $ 4.7 million for 2020 - Q3 compared to $ 4.6 million for 2019 - Q3 .

Total operating expenses were $ 9.0 million for 2020 - H1 compared to $ 10.1 million for 2019 - H1 .

Total operating expenses were $ 13.7 million for 2020 - YTD compared to $ 14.8 million for 2019 - 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.

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S&M expenses for 2020 - Q3 decreased to $ 1.7 million from $ 1.9 million for 2019 - Q3 .

The decrease was mainly due to decreases in trade-show related expenses, demonstration inventory costs, employee t ravel related expenses, and independent rep commissions, partially offset by an increase in employee benefits expenses.

S&M expenses for 2020 - H1 decreased to $ 3.2 million from $ 4.2 million for 2019 - H1 .

The decrease was mainly due to decreases in trade-show related expenses, demonstration inventory costs, employee related costs and commissions paid to independent reps.

The decrease was mainly due to decreases in trade-show related expenses, demonstration inventory costs and employee t ravel related expenses partially offset by an increase in sales commissions.

S&M expenses for 2020 - YTD decreased to $ 4.9 million from $ 6.1 million for 2019 - YTD .

The decrease was mainly due to decreases in trade-show related expenses, demonstration inventory costs and employee travel related expenses partially offset by an increase in sales commissions.

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 were approximately $ 1.5 million for 2020 - Q3 , as compared to $ 1.4 million for 2019 - Q3 .

The increase was primarily due to increases in employee-related costs .

R&D expenses remained fairly consistent with approximately $ 2.8 million for 2020 - H1 , as compared to $ 2.9 million for 2019 - H1 .

The increase was primarily due to increases in legal costs related to intellectual property .

R&D expenses remained consistent with approximately $ 4.3 million for 2020 - YTD , and 2019 - YTD .

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 financing and human resources.

G&A expenses remained consistent at $ 1.5 million in 2020 - Q2 and 2019-Q2.

G&A expenses remained consistent at $ 3.0 million in 2020 - H1 compared to $ 3.0 million in 2019 - H1 .

G&A expenses increased slightly from $1.3 million in 2019-Q3 to $ 1.4 million in 2020 - Q3 .

The increase was primarily due to increases in legal expenses and depreciation and amortization expenses.

G&A expenses increased slightly from $ 4.3 million in 2019 - YTD to $ 4.5 million in 2020 - YTD .

The increase was primarily due to increases in legal expenses and depreciation and amortization expenses partially offset by decline in audit and accounting fees.

Other income (expense), net

Other income (expense), net includes interest income and foreign currency changes.

Other income remained fairly consistent between the second quarter of 2020 and 2019 and between 2020-H1 and 2019-H1.

Interest expense in the second quarter of 2020 was $109 thousand compared to no interest expense in the second quarter of 2019 .

Other income remained immaterial during the third quarter of 2020 and 2019 as well as during 2020-YTD and 2019 - YTD.

Interest expense in the third quarter of 2020 was $108 thousand compared to no interest expense in the third quarter of 2019 .

Most of the interest expense was incurred due to issuance of senior convertibles notes with a face value of $ 3.0 million in December 2019.

Interest Expense in 2020-H1 was $217 thousand compared to no interest expense in 2019-H1.

Interest Expense in 2020 -YTD was $325 thousand compared to no interest expense in 2019 -YTD.

Most of the interest expense was incurred due to issuance of senior convertibles notes with a face value of $ 3.0 million in December 2019.

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Provision for income taxes

During 2020 - H1 , we did not recognize any benefit from the losses incurred due to setting up of full valuation allowance.

Provision for income taxes recognized for 2020 - Q2 and 2020 - H1 relates to foreign jurisdictions .

During 2020 - YTD , we did not recognize any benefit from the losses incurred due to setting up of full valuation allowance.

Provision for income taxes recognized for 2020 - Q3 and 2020 - YTD relates to foreign jurisdictions .

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2020 , our cash and cash equivalents were approximately $ 2.1 million compared to $ 4.1 million as of December 31, 2019 .

Our working capital was $ 13.8 million and $ 18.9 million as of June 30, 2020 and December 31, 2019 , respectively.

Net cash pro vided by opera ting activities was approximately $ 0.1 million in 2020 - H1 , an increase of cash provided of approximately $ 1.5 million from $ 1.4 million of cash used in operating activities in 2019 - H1 .

As of September 30, 2020 , our cash and cash equivalents were approximately $ 5.6 million compared to $ 4.1 million as of December 31, 2019 .

Our working capital was $ 15.6 million and $ 18.9 million as of September 30, 2020 and December 31, 2019 , respectively.

Net cash used by opera ting activities was approximately $ 0.3 million in 2020 - YTD , a decrease of cash used of approximately $ 6.3 million from $ 6.6 million of cash used in operating activities in 2019 - YTD .

The increase in cash inflow was due to positive change in operating assets and liabilities of $4.4 million, increase in non-cash charges by $0.5 million and a decrease in net loss by $1.4 million.

Net cash used in investing activities was $ 3.5 million for 2020 - Q2 compared to net cash used in investing activities of $ 7.5 million during the 2019 - Q2 , a decrease in cash used of $ 3.9 million.

The decrease in cash used in investing activities was primarily due to a decrease in net cash outflows from marketable securities of approximately $ 5.7 million partially offset by an increase in capitalized patent defense costs by $ 1.7 million.

Net cash used in investing activities was $ 4.4 million for 2020 - YTD compared to net cash used in investing activities of $ 2.6 million during the 2019 - YTD , an increase in cash used of $ 1.8 million.

The increase in cash used in investing activities was primarily due to an increase in capitalized patent defense costs by $2.4 million partially offset by a decrease in net cash outflows from marketable securities of approximately $ 0.6 million

Capitalization of patent defense costs .

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When we capitalize patent defense costs we amortize the costs over the remaining estimated useful life of the patent, which is 15 to 17 years.

During 2020 - Q2 we spent $ 2.1 million on legal costs related to the defense of our patents and capitalized the entire amount.

During 2020 - YTD we spent $5.6 million on legal costs related to the defense of our patents and capitalized the entire amount.

We are currently pursuing all available legal remedies to defend our strategic patents from infringement.

We have already spent approximately $ 17.4 million from 2016 through June 30, 2020 towards this litigation and may be required to spend more to continue our legal defense.

We have already spent approximately $19.2 million from 2016 through September 30, 2020 towards this litigation and may be required to spend more to continue our legal defense.

We believe the decision by the U.S.

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Although there can be no assurance of any outcome of a full trial, we believe this ruling will help pave way for ClearOne’s recovery from the immense harm inflicted by our competitor's infringement of our valuable patents.

We have sought a Court order holding Shure in contempt for marketing and selling their new design in violation of the preliminary injunction.

During September 2020, the U.S District Court of Northern Illinois held Shure in contempt for marketing and selling their new design in violation of the preliminary injunction.

We have been actively engaged in preserving cash by suspending our dividend program and allowing our share repurchase program to expire in 2018 and implementing company-wide cost reduction measures.

During 2018 , we raised additional proceeds of $ 9.9 million (net of issuance costs) from the Rights Offering.

During December 2019 we raised approximately $ 2.7 million (net of issuance costs) from the issue of senior convertible notes.

We also believe additional cash will be generated as we continue to consume our inventory and bring it down to historical levels.

We have also raised additional capital of - $9.9 million (net of issuance costs) in 2018 by issuing common stock, $2.7 million (net of issuances costs) in 2019 by issuing senior convertible notes, $1.5 million in April 2020 by borrowing through Paycheck Protection Program and $4.8 million in September 2020 by issuing common stock and warrants.

In addition, we expect to generate additional cash as our inventory levels are brought down to historical levels.

We also believe that the measures taken by us will yield higher revenues in the future.

We believe all of these and effective management of working capital will provide the liquidity needed to meet our operating needs through at least August 14, 2021.

We believe, although there can be no assurance, that all of these measures and effective management of working capital will provide the liquidity needed to meet our operating needs through at least through November 16, 2021.

We also believe that our strong portfolio of intellectual property and our solid brand equity in the market will enable us to raise additional capital if and when needed to meet our short and long-term financing needs;

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

At June 30, 2020 , we had open purchase orders of approximately $ 1.9 million for purchase of inventory.

At June 30, 2020 , we had inventory totaling $ 14.7 million, of which non-current inventory accounted for $ 6.5 million.

At September 30, 2020 , we had open purchase orders of approximately $ 3.8 million mostly for purchase of inventory.

At September 30, 2020 , we had inventory totaling $ 14.1 million, of which non-current inventory accounted for $ 6.3 million.

This compares to total inventories of $ 17.7 million and non-current inventory of $ 6.3 million as of December 31, 2019 .

Contractual Obligations and Commitments

The following table summarizes our contractual obligations as of June 30, 2020 (in millions):

The following table summarizes our contractual obligations as of September 30, 2020 (in millions):

Payment Due by Period

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis