Item 1. Financial Statements
Item 1 . FINANCIAL STATEMENTS
CLEARONE, INC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
September 30, 2020
December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
$
5,583
$
4,064
Marketable securities
1,622
3,026
Receivables, net of allowance for doubtful accounts of $ 506 and $ 424 , respectively
6,705
5,468
Inventories, net
7,838
11,441
Prepaid expenses and other assets
2,183
1,184
Total current assets
23,931
25,183
Long-term marketable securities
1,391
1,517
Long-term inventories, net
6,283
6,284
Property and equipment, net
995
1,044
Operating lease - right of use assets, net
2,082
2,459
Intangibles, net
18,494
14,009
Other assets
4,596
4,614
Total assets
$
57,772
$
55,110
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
4,355
$
2,871
Accrued liabilities
3,405
3,205
Deferred product revenue
159
173
Short-term debt
395
—
Total current liabilities
8,314
6,249
Long-term debt
3,474
2,222
Operating lease liability, net of current
1,623
2,021
Other long-term liabilities
111
140
Total liabilities
13,522
10,632
Shareholders' equity:
Common stock, par value $ 0.001 , 50,000,000 shares authorized, 18,771,257 and 16,650,725 shares issued and outstanding
19
17
Additional paid-in capital
63,348
58,520
Accumulated other comprehensive loss
( 190
)
( 176
)
Accumulated deficit
( 18,927
)
( 13,883
)
Total shareholders' equity
44,250
44,478
Total liabilities and shareholders' equity
$
57,772
$
55,110
See accompanying notes
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CLEARONE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(Dollars in thousands, except per share amounts)
Three months ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
Revenue
$
8,412
$
5,992
$
20,503
$
18,717
Cost of goods sold
4,892
3,455
11,527
10,537
Gross profit
3,520
2,537
8,976
8,180
Operating expenses:
Sales and marketing
1,736
1,907
4,932
6,121
Research and product development
1,501
1,428
4,319
4,322
General and administrative
1,443
1,300
4,475
4,330
Total operating expenses
4,680
4,635
13,726
14,773
Operating loss
( 1,160
)
( 2,098
)
( 4,750
)
( 6,593
)
Interest expense
( 108
)
—
( 325
)
—
Other income, net
19
142
70
235
Loss before income taxes
( 1,249
)
( 1,956
)
( 5,005
)
( 6,358
)
Provision for income taxes
11
20
39
65
Net loss
$
( 1,260
)
$
( 1,976
)
$
( 5,044
)
$
( 6,423
)
Basic weighted average shares outstanding
17,000,215
16,646,323
16,768,088
16,635,954
Diluted weighted average shares outstanding
17,000,215
16,646,323
16,768,088
16,635,954
Basic loss per share
$
( 0.07
)
$
( 0.12
)
$
( 0.30
)
$
( 0.39
)
Diluted loss per share
$
( 0.07
)
$
( 0.12
)
$
( 0.30
)
$
( 0.39
)
Comprehensive loss:
Net loss
$
( 1,260
)
$
( 1,976
)
$
( 5,044
)
$
( 6,423
)
Unrealized gain/(loss) on available-for-sale securities, net of tax
4
( 78
)
11
76
Change in foreign currency translation adjustment
17
( 50
)
( 25
)
( 67
)
Comprehensive loss
$
( 1,239
)
$
( 2,104
)
$
( 5,058
)
$
( 6,414
)
See accompanying notes
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CLEARONE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
Nine months ended September 30,
2020
2019
Cash flows from operating activities:
Net loss
$
( 5,044
)
$
( 6,423
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense
1,682
1,449
Amortization of right-of-use assets
417
419
Stock-based compensation expense
55
177
Provision for doubtful accounts, net
82
78
Change of inventory to net realizable value
937
537
Changes in operating assets and liabilities:
Receivables
( 1,319
)
368
Inventories
2,667
2,812
Prepaid expenses and other assets
( 985
)
( 4,186
)
Accounts payable
1,484
( 1,994
)
Accrued liabilities
179
863
Income taxes payable
—
359
Deferred product revenue
( 14
)
( 56
)
Operating lease liabilities
( 421
)
( 973
)
Other long-term lia bilities
( 29
)
—
Net cash used in operating activities
( 309
)
( 6,570
)
Cash flows from investing activities:
Purchase of property and equipment
( 266
)
( 106
)
Purchase of intangibles
( 140
)
( 43
)
Capitalized patent defense costs
( 5,565
)
( 3,371
)
Proceeds from maturities and sales of marketable securities
3,697
9,823
Purchases of marketable securities
( 2,155
)
( 8,913
)
Net cash used in investing activities
( 4,429
)
( 2,610
)
Ca sh flows from financing activitie s:
Issuance of common stock and warrants
4,764
—
Net proceeds from Paycheck Protection Program loan
1,499
—
Net proceeds from equity-based compensation programs
11
20
Net cash provided by financing activities
6,274
20
Effect of exchange rate changes on cash and cash equivalents
( 17
)
( 41
)
Net increase (decrease) in cash and cash equivalents
1,519
( 9,201
)
Cash and cash equivalents at the beginning of the period
4,064
11,211
Cash and cash equivalents at the end of the period
$
5,583
$
2,010
See accompanying notes
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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:
Nine Months Ended September 30,
2020
2019
Cash paid for income taxes
$
23
$
1
Cash paid for interest
189
—
See accompanying notes
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CLEARONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
1 . Business Description, Basis of Presentation and Significant Accounting Policies
Business Description:
ClearOne, Inc., together with its subsidiaries (collectively, “ClearOne” or the “Company”), is a global market leader enabling conferencing, collaboration, and AV streaming solutions for voice and visual communications. The performance and simplicity of our advanced, comprehensive solutions offer unprecedented levels of functionality, reliability and scalability.
Basis of Presentation:
The fiscal year for ClearOne is the twelve months ending on December 31 . The consolidated financial statements include the accounts of ClearOne and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.
These accompanying interim unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are not audited. Certain information and footnote disclosures that are usually included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been either condensed or omitted in accordance with SEC rules and regulations. The accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 2020 and December 31, 2019 , the results of operations for the three and nine months ended September 30, 2020 and 2019 , and the cash flows for the nine months ended September 30, 2020 and 2019 . The results of operations for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the results for a full-year period. These interim unaudited condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.
Significant Accounting Policies:
The significant accounting policies were described in Note 1 to the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2019 . There have been no changes to these policies during the nine months ended September 30, 2020 that are of significance or potential significance to the Company.
Recent accounting pronouncements: The Company has determined that recently issued accounting standards will not have a material impact on its consolidated financial position, results of operations or cash flows.
Liquidity:
As of September 30, 2020 , our cash and cash equivalents were approximately $ 5,583 compared to $ 4,064 as of December 31, 2019 . Our working capital was $ 15,617 as of September 30, 2020 . Net cash used in operating activities was $ 309 for the nine months ended September 30, 2020 , a decrease of $ 6,261 from $ 6,570 of cash used in operating activities in the nine months ended September 30, 2019 .
We are currently pursuing all available legal remedies to defend our strategic patents from infringement. We have already spent approximately $ 19,157 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. District Court in August 2019 granting our request for a preliminary injunction to prevent our competitor from manufacturing, marketing, and selling its competing ceiling microphone array in an infringing configuration is an incredibly valuable ruling for ClearOne and its business. We believe that the decision validates the strength and importance of ClearOne’s intellectual property rights, recognizes ClearOne’s innovations in this space, and stops our competitor from further infringing our Graham patent (U.S. Patent No. 9,813,806 ) pending a full trial. 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 our competitor's infringement of our valuable patents.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
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. We have also raised additional capital in 2018 by issuing common stock, in 2019 by issuing senior convertible notes and in 2020 by borrowing through Paycheck Protection Program and 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, 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 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; however, there can be no assurance that, if needed, we will be successful in obtaining the necessary funds through equity or debt financing. If we need additional capital and are unable to secure financing, we may be required to further reduce expenses, delay product development and enhancement, or revise our strategy regarding ongoing litigation.
2 . Revenue Information
The following table disaggregates the Company’s revenue into primary product groups:
Three months ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
Audio conferencing
$
2,766
$
2,920
$
8,201
$
8,520
Microphones
2,435
2,189
6,469
6,525
Video products
3,211
883
5,833
3,672
$
8,412
$
5,992
$
20,503
$
18,717
The following table disaggregates the Company’s revenue into major regions:
Three months ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
North and South America
$
6,215
$
3,235
$
13,570
$
10,488
Asia (including Middle East) and Australia
1,149
1,931
4,145
5,764
Europe and Africa
1,048
826
2,788
2,465
$
8,412
$
5,992
$
20,503
$
18,717
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
3 . Earnings (Loss) Per Share
Earnings (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 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 September 30,
Nine months ended September 30,
2020
2019
2020
2019
Numerator:
Net loss
$
( 1,260
)
$
( 1,976
)
$
( 5,044
)
$
( 6,423
)
De nominato r:
Basic weighted average shares outstanding
17,000,215
16,646,323
16,768,088
16,635,954
Dilutive common stock equivalents using treasury stock method
—
—
—
—
Diluted weighted average shares outstanding
17,000,215
16,646,323
16,768,088
16,635,954
Basic loss per common share
$
( 0.07
)
$
( 0.12
)
$
( 0.30
)
$
( 0.39
)
Diluted loss per common share
$
( 0.07
)
$
( 0.12
)
$
( 0.30
)
$
( 0.39
)
Weighted average options outstanding
511,332
561,634
528,107
572,845
Anti-dilutive options not included in the computations
511,332
561,634
528,107
572,845
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
4 . Marketable Securities
The Company has classified its marketable securities as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive income (loss) in stockholders’ equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of securities at September 30, 2020 and December 31, 2019 were as follows:
Amortized cost
Gross unrealized holding gains
Gross unrealized holding losses
Estimated fair value
September 30, 2020
Available-for-sale securities:
Corporate bonds and notes
$
1,714
$
32
$
( 5
)
$
1,741
Municipal bonds
1,266
6
—
1,272
Total available-for-sale securities
$
2,980
$
38
$
( 5
)
$
3,013
December 31, 2019
Available-for-sale securities:
Corporate bonds and notes
$
1,814
$
21
$
( 3
)
$
1,832
Municipal bonds
2,707
5
( 1
)
2,711
Total available-for-sale securities
$
4,521
$
26
$
( 4
)
$
4,543
Maturities of marketable securities classified as available-for-sale securities were as follows at September 30, 2020 :
Amortized cost
Estimated fair value
Due within one year
$
1,610
$
1,622
Due after one year through five years
1,370
1,391
Due after five years
—
—
Total available-for-sale securities
$
2,980
$
3,013
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
Debt securities in an unrealized loss position as of September 30, 2020 were not deemed impaired at acquisition and subsequent declines in fair value are not deemed attributed to declines in credit quality. Management believes that it is more likely than not that the securities will receive a full recovery of par value, although there can be no assurance that such recovery will occur. The available-for-sale marketable securities with continuous gross unrealized loss position for less than 12 months and 12 months or greater and their related fair values were as follows:
Less than 12 months
More than 12 months
Total
Estimated fair value
Gross unrealized holding losses
Estimated fair value
Gross unrealized holding losses
Estimated fair value
Gross unrealized holding losses
As of September 30, 2020
Corporate bonds and notes
$
192
$
5
$
—
$
—
$
192
$
5
Municipal bonds
—
—
—
—
—
—
Total
$
192
$
5
$
—
$
—
$
192
$
5
5 . Intangible Assets
Intangible assets as of September 30, 2020 and December 31, 2019 consisted of the following:
Estimated useful lives (years)
September 30, 2020
December 31, 2019
Tradename
5
to
7
$
555
$
555
Patents and technological know-how
10
to
20
24,199
18,494
Proprietary software
3
to
15
2,981
2,981
Other
3
to
5
323
323
Total intangible assets
28,058
22,353
Accumulated amortization
( 9,564
)
( 8,344
)
Total intangible assets, net
$
18,494
$
14,009
The amortization of intangible assets for the three months ended September 30, 2020 and 2019 was as follows:
Three months ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
Amortization of intangible assets
$
446
$
354
$
1,220
$
1,054
The estimated future amortization expense of intangible assets is as follows:
Years ending December 31,
Amount
2020 (Remainder)
$
464
2021
1,858
2022
1,858
2023
1,851
2024
1,587
Thereafter
10,876
Total
18,494
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
6 . Inventories
Inventories, net of reserves, as of September 30, 2020 and December 31, 2019 consisted of the following:
September 30, 2020
December 31, 2019
Current:
Raw materials
$
737
$
847
Finished goods
7,101
10,594
$
7,838
$
11,441
Long-term:
Raw materials
$
2,751
$
1,915
Finished goods
3,532
4,369
$
6,283
$
6,284
Long-term inventory represents inventory held in excess of our current (next 12 months) requirements based on our recent sales and forecasted level of sales. We expect to sell the above inventory, net of reserves, at or above the stated cost and believe that no loss will be incurred on its sale, although there can be no assurance of the timing or amount of any sales.
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory for the three months ended September 30, 2020 and 2019 was as follows:
Three months ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory
$
277
$
168
$
937
$
537
7 . Leases
Rent expense is recognized on a straight-line basis over the period of the lease taking into account future rent escalation and holiday periods.
Rent expense for the three months ended September 30, 2020 and 2019 was as follows:
Three months ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
Rent expense
$
175
$
147
$
534
$
510
W e occup y a 1,350 square-foot facility in Gainesville, Florida under the terms of an operating lease expiring in F ebruary 2023 . The Gainesville facility is used primarily to support our research and development activities.
We occupy a 21,443 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in March 2024 , with an option to extend for additional five years. The facility supports our principal administrative, sales, marketing, customer support, and research and product development activities.
We occupy a 950 square-foot facility in Austin, Texas - under the terms of an operating lease expiring in October 20 22 . This facility support s our sales, marketing, customer support, and research and development activities.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
We occupy a 3,068 square-foot facility in Zaragoza, Spain under the terms of an operating lease expiring in March 2022. This office supports our research and development and customer support activities.
We occupy a 6,175 square-foot facility in Chennai, India under the terms of an operating lease expiring in August 2021. This facility support s our administrative, marketing, customer support, and research and product development activities.
We occupy 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 our primary inventory fulfillment and repair center.
Supplemental cash flow information related to leases was as follows:
Nine months ended September 30,
2020
2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
537
$
504
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
97
$
—
Supplemental balance sheet information related to leases was as follows:
September 30, 2020
December 31, 2019
Operating lease right-of-use assets
$
2,082
$
2,459
Current portion of operating lease liabilities, included in accrued liabilities
$
594
$
577
Operating lease liabilities, net of current portion
1,623
2,021
Total operating lease liabilities
$
2,217
$
2,598
Weighted average remaining lease term for operating leases (in years)
3.8
4.4
Weighted average discount rate for operating leases
6.1
%
6.1
%
The following represents maturities of operating lease liabilities as of September 30, 2020 :
Years ending December 31,
2020 (Remainder)
$
182
2021
689
2022
634
2023
610
2024
306
Thereafter
69
Total lease payments
2,490
Less: Imputed interest
( 273
)
Total
$
2,217
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
8 . Shareholders' Equity
Three months ended September 30,
Nine months ended September 30,
2020
2019
2020
2019
Common stock and additional paid-in capital
Balance, beginning of period
$
58,597
$
58,002
$
58,537
$
57,857
Issue of common stock and warrants
4,764
—
4,764
—
Share-based compensation expense
1
48
55
177
Proceeds from employee stock purchase plan
5
4
11
20
Balance, end of period
$
63,367
$
58,054
$
63,367
$
58,054
Accumulated other comprehensive loss
Balance, beginning of period
$
( 211
)
$
( 44
)
$
( 176
)
$
( 181
)
Unrealized gain (loss) on available-for-sale securities, net of tax
4
( 78
)
11
76
Foreign currency translation adjustment
17
( 50
)
( 25
)
( 67
)
Balance, end of period
$
( 190
)
$
( 172
)
$
( 190
)
$
( 172
)
Accumulated deficit
Balance, beginning of period
$
( 17,667
)
$
( 9,922
)
$
( 13,883
)
$
( 5,475
)
Net loss
( 1,260
)
( 1,976
)
( 5,044
)
( 6,423
)
Balance, end of period
$
( 18,927
)
$
( 11,898
)
$
( 18,927
)
$
( 11,898
)
Total shareholders' equity
$
44,250
$
45,984
$
44,250
$
45,984
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
9 . Long-Term Debt
Senior Convertible Notes and Warrants
On December 17, 2019, the Company completed the issuance and sale of $ 3,000 aggregate principal amount of secured convertible notes of the Company (the “Notes”) and warrants (the “Warrants”) to purchase 340,909 shares of common stock, par value $ 0.001 per share of the Company (the “Common Stock”), in a private placement transaction. The Notes and Warrants were issued and sold to Edward D. Bagley, an affiliate of the Company, on the terms and conditions of a Note Purchase Agreement dated December 8, 2019 between the Company, certain subsidiary guarantors of the Company, and Mr. Bagley. Mr. Bagley is an affiliate of the Company and was the beneficial owner of approximately 46.6 % of the Company’s issued and outstanding shares of Common Stock at the time that the Notes and Warrants were issued to him.
The Notes will mature on December 17, 2023 (the “Maturity Date”) and will accrue interest at a variable rate adjusted on a quarterly basis and equal to two and one -half percent ( 2.5 %) over the greater of (x) five and one -quarter percent ( 5.25 %) and (y) the Prime Rate as published in the Wall Street Journal (New York edition) as of the beginning of such calendar quarter. The Notes may be converted into shares of the Company’s Common Stock at any time at the election of Mr. Bagley at an initial conversion price of $ 2.11 per share (the “Conversion Price”), or 120 % of the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market. Also, the Company can cause a mandatory conversion of the Notes if the volume weighted average closing price of the Common Stock over 90 consecutive trading days exceeds 200 % of the Conversion Price. In addition, the Notes may be redeemed by the Company for cash at any time after December 17, 2020 upon payment of the outstanding principal balance of the Notes and any unpaid and accrued interest. The Company also is required to redeem the Notes upon the occurrence of a change in control of the Company.
The Warrants have an initial exercise price equal to $ 1.76 , the closing price of the Common Stock on December 6, 2019 as reported on the Nasdaq Capital Market, and are exercisable until December 17, 2026. The Warrants must be exercised for cash, unless at the time of exercise there is not a then effective registration statement for the resale of the shares of Common Stock issuable upon exercise of the Warrants, in which case the Warrants may be exercised via a cashless exercise feature that provides for net settlement of the shares of Common Stock issuable upon exercise.
Concurrent with the issuance of the Notes and Warrants pursuant to the Note Purchase Agreement, the Company, the Guarantors and Mr. Bagley entered into a Guaranty and Collateral Agreement (the “Collateral Agreement”) pursuant to which the Company and the Guarantors granted Mr. Bagley a first priority lien interest in all of the Company’s assets as security for the Company’s performance of its obligations under the Notes and Warrants.
The net proceeds after original issue discount and issuance costs of $ 346 were approximately $ 2,654 . The Company expects to use the proceeds from the sale of the Notes and Warrants for general corporate purposes and working capital.
In accounting for the issuance of the Notes, the Company separated Notes and Warrants into liability and equity components. The carrying amount of Warrants, being an equity component, was first calculated using Black-Scholes method with the following assumptions:
Risk-free interest rate
1.82 %
Expected life of warrants (years)
7
Expected price volatility
49.94 %
Expected dividend yield
0 %
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
The carrying amount of the Notes was then determined by deducting the fair value of the Warrants from the principal amount of the Notes. The carrying amount of the Notes was further separated into equity and liability components after separating the value of the conversion feature into an equity component and leaving the remaining value as liability. The equity component is not remeasured while the Notes and Warrants continue to meet the conditions for equity classification for equity components.
The original issue discount and issuance costs are netted against the liability. The following table represents the carrying value of Notes and Warrants:
September 30, 2020
December 31, 2019
Liability component:
Principal
$
3,000
$
3,000
Less: debt discount and issuance costs, net of amortization
( 630
)
( 778
)
Net carrying amount
$
2,370
$
2,222
Equity component ( 1 ) :
Warrants
$
318
$
318
Conversion feature
122
122
Net carrying amount
$
440
$
440
( 1 ) Recorded on the condensed consolidated balance sheets as additional paid-in capital.
Debt discount and issuance costs are amortized over the life of the note to interest expense using the effective interest method. During the three and nine months ended September 30, 2020 , amortization of debt discount and issuance costs was $ 50 and $ 148 , respectively. The following table represents schedule of maturities of principal amount contained in the Notes as of September 30, 2020 :
Year ending December 31,
Principal Amount Maturing
2020
$
—
2021
360
2022
720
2023
1,920
Total principal amount
$
3,000
Paycheck Protection Program Loan
On April 18, 2020, the Company, entered into a loan agreement with U.S. Bank National Association Bank, which provided for a loan in the principal amount of $ 1,499 (“PPP Loan”) pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The PPP Loan has a two -year term and bears interest at a rate of 1.0 % per annum. Monthly principal and interest payments are deferred for approximately sixteen months after the date of disbursement.
The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The PPP Loan contains events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to use the entire PPP Loan amount for qualifying expenses and to apply for forgiveness of the PPP Loan in accordance with the terms of the CARES Act.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
10 . Fair Value Measurements
The fair value of the Company’s financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. This category generally includes U.S. Government and agency securities; municipal securities; mutual funds and securities sold and not yet settled.
Level 3 - Unobservable inputs.
The substantial majority of the Company’s financial instruments are valued using observable inputs. The following table sets forth the fair value of the financial instruments re-measured by the Company as of September 30, 2020 and December 31, 2019 :
Level 1
Level 2
Level 3
Total
September 30, 2020
Corporate bonds and notes
$
—
$
1,741
$
—
$
1,741
Municipal bonds
—
1,272
—
1,272
Total
$
—
$
3,013
$
—
$
3,013
December 31, 2019
Corporate bonds and notes
$
—
$
1,832
$
—
$
1,832
Municipal bonds
—
2,711
—
2,711
Total
$
—
$
4,543
$
—
$
4,543
11 . Income Taxes
The current year loss did not result in income tax benefit due to recording a full valuation allowance against expected benefits. The valuation allowance was recorded as we concluded that it was more likely than not that our deferred tax assets were not realizable primarily due to the Company's recent pre-tax losses. Provision for income taxes for the nine months ended September 30, 2020 represents income tax expense recorded for jurisdictions outside the United States.
12 . Subsequent events
None.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.