Item 1. Financial Statements
Item 1 . FINANCIAL STATEMENTS
CLEARONE, INC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
September 30, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
$
1,450
$
1,071
Marketable securities
—
1,790
Receivables, net of allowance for doubtful accounts of $ 326
4,123
4,991
Inventories, net
9,708
10,033
Income tax receivable
7,535
7,535
Prepaid expenses and other assets
1,970
4,021
Total current assets
24,786
29,441
Long-term marketable securities
—
1,220
Long-term inventories, net
2,961
3,567
Property and equipment, net
552
744
Operating lease - right of use assets, net
1,088
1,537
Intangibles, net
23,783
25,086
Other assets
4,587
4,597
Total assets
$
57,757
$
66,192
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
2,052
$
5,388
Accrued liabilities
2,477
2,549
Deferred product revenue
73
54
Short-term debt
855
3,481
Total current liabilities
5,457
11,472
Long-term debt, net
1,008
1,535
Operating lease liability, net of current
559
1,026
Other long-term liabilities
655
655
Total liabilities
7,679
14,688
Shareholders' equity:
Common stock, par value $ 0.001 , 50,000,000 shares authorized, 23,952,555 and 22,410,126 shares issued and outstanding, respectively
24
22
Additional paid-in capital
74,886
72,795
Accumulated other comprehensive loss
( 288
)
( 241
)
Accumulated deficit
( 24,544
)
( 21,072
)
Total shareholders' equity
50,078
51,504
Total liabilities and shareholders' equity
$
57,757
$
66,192
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,
2022
2021
2022
2021
Revenue
$
6,264
$
6,992
$
21,184
$
21,765
Cost of goods sold
3,694
4,141
12,991
12,487
Gross profit
2,570
2,851
8,193
9,278
Operating expenses:
Sales and marketing
1,151
1,692
4,273
5,020
Research and product development
876
1,492
3,406
4,253
General and administrative
1,673
1,676
5,146
5,024
Total operating expenses
3,700
4,860
12,825
14,297
Operating loss
( 1,130
)
( 2,009
)
( 4,632
)
( 5,019
)
Interest expense
( 90
)
( 150
)
( 285
)
( 369
)
Other income (loss), net
( 3
)
7
1,505
17
Loss before income taxes
( 1,223
)
( 2,152
)
( 3,412
)
( 5,371
)
Provision for income taxes
25
17
60
39
Net loss
$
( 1,248
)
$
( 2,169
)
$
( 3,472
)
$
( 5,410
)
Basic weighted average shares outstanding
23,952,555
19,449,283
23,933,033
19,002,758
Diluted weighted average shares outstanding
23,952,555
19,449,283
23,933,033
19,002,758
Basic loss per share
$
( 0.05
)
$
( 0.11
)
$
( 0.15
)
$
( 0.28
)
Diluted loss per share
$
( 0.05
)
$
( 0.11
)
$
( 0.15
)
$
( 0.28
)
Comprehensive loss:
Net loss
$
( 1,248
)
$
( 2,169
)
$
( 3,472
)
$
( 5,410
)
Unrealized loss on available-for-sale securities, net of tax
—
( 8
)
( 2
)
( 13
)
Change in foreign currency translation adjustment
( 22
)
( 4
)
( 45
)
( 26
)
Comprehensive loss
$
( 1,270
)
$
( 2,181
)
$
( 3,519
)
$
( 5,449
)
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,
2022
2021
Cash flows from operating activities:
Net loss
$
( 3,472
)
$
( 5,410
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense
2,390
2,042
Amortization of right-of-use assets
449
458
Share-based compensation expense
90
100
Provision for doubtful accounts, net
—
( 1
)
Change of inventory to net realizable value
221
798
Gain recognized on Paycheck Protection Plan Loan forgiveness
( 1,528
)
—
Changes in operating assets and liabilities:
Receivables
868
( 48
)
Inventories
710
1,724
Prepaid expenses and other assets
2,051
( 973
)
Accounts payable
( 3,336
)
65
Accrued liabilities
( 54
)
360
Income taxes receivable
—
( 52
)
Deferred product revenue
19
( 66
)
Operating lease liabilities
( 468
)
( 474
)
Net cash used in operating activities
( 2,060
)
( 1,477
)
Cash flows from investing activities:
Purchase of property and equipment
( 17
)
( 39
)
Purchase of intangibles
( 93
)
( 220
)
Capitalized patent defense costs
( 642
)
( 5,348
)
Proceeds from maturities and sales of marketable securities
3,008
1,971
Purchases of marketable securities
—
( 526
)
Net cash provided by (used in) investing activities
2,256
( 4,162
)
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants
—
9,288
Proceeds from issuance of short-term notes
—
2,000
Net proceeds from equity-based compensation programs
3
12
Paycheck Protection Program loan refund upon full forgiveness net of loan payments
768
—
Principal payments of long-term debt
( 540
)
( 270
)
Net cash provided by financing activities
231
11,030
Effect of exchange rate changes on cash and cash equivalents
( 48
)
( 33
)
Net increase in cash and cash equivalents
379
5,358
Cash and cash equivalents at the beginning of the period
1,071
3,803
Cash and cash equivalents at the end of the period
$
1,450
$
9,161
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,
2022
2021
Cash paid for income taxes
$
68
$
91
Cash paid for interest
140
200
See accompanying notes
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CLEARONE, INC.
UNAUIDTED 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 condensed 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, 2022 and December 31, 2021, the results of operations for the three and nine months ended September 30, 2022 and 2021, and the cash flows for the nine months ended September 30, 2022 and 2021. The results of operations for the three and nine months ended September 30, 2022 and 2021 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, 2021 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, 2021. There have been no changes to these policies during the September 30, 2022 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, 2022, our cash and cash equivalents were approximately $ 1,450 compared to $ 1,071 as of December 31, 2021. Our working capital was $ 19,329 as of September 30, 2022. Net cash used in operating activities was $ 2,060 for the nine months ended September 30, 2022, an increase of $ 583 from $ 1,477 of cash used in operating activities in the nine months ended September 30, 2021. The Company is currently pursuing all reasonably available legal remedies to defend its strategic patents from infringement. The Company has already spent approximately $ 28,798 from 2016 through September 30, 2022 towards this litigation and may be required to spend more to continue its legal defense. In order to maintain liquidity, the Company has been actively engaged in preserving cash by implementing company-wide cost reduction measures and raising additional capital. The company raised additional capital in 2019 by issuing senior convertible notes, in 2020 by borrowing through the CARES Act Paycheck Protection Program and issuing common stock and warrants and in 2021 by issuing short-term notes and issuing common stock and warrants. In January 2022, the Company issued $ 2,000 in common stock as consideration for the cancellation and termination of the short-term notes. In October 2022, the Company issued short term notes to raise $ 2,000 . In addition, the Company has been generating additional cash as our inventory levels are brought down to historical levels.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
The Company also believes that the Company's core strategies of product innovation and prudent cost management will bring the company back to profitability in the future. The Company believes, although there can be no assurance, that all of these measures and effective management of working capital, including collecting on the income taxes receivable balance, will provide the liquidity needed to meet our operating needs through at least November 14, 2023. The Company also believes that its strong portfolio of intellectual property and its solid brand equity in the market will enable it to raise additional capital if and when needed to meet its short and long-term financing needs; however, there can be no assurance that, if needed, the Company will be successful in obtaining the necessary funds through equity or debt financing. If the Company needs additional capital and is unable to secure financing, it may be required to further reduce expenses, delay product development and enhancement, or revise its 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,
2022
2021
2022
2021
Audio conferencing
$
3,201
$
2,916
$
9,655
$
8,847
Microphones
2,475
2,659
8,525
8,227
Video products
588
1,417
3,004
4,691
$
6,264
$
6,992
$
21,184
$
21,765
The following table disaggregates the Company’s revenue into major regions:
Three months ended September 30,
Nine months ended September 30,
2022
2021
2022
2021
North and South America
$
3,251
$
3,419
$
10,211
$
10,583
Asia Pacific (includes Middle East, India and Australia)
2,018
2,130
6,560
6,153
Europe and Africa
995
1,443
4,413
5,029
$
6,264
$
6,992
$
21,184
$
21,765
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
3 . Loss Per Share
Loss per common share is computed based on the weighted-average number of common shares outstanding and, when appropriate, dilutive potential common stock outstanding during the period. Stock options, warrants and the convertible portion of senior convertible notes are considered to be potential common stock. The computation of diluted earnings (loss) per share does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Basic earnings (loss) per common share is the amount of net earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period. Diluted earnings (loss) per common share is the amount of earnings (loss) for the period available to each weighted-average share of common stock outstanding during the reporting period and to each share of potential common stock outstanding during the period, unless inclusion of potential common stock would have an anti-dilutive effect.
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
Three months ended September 30,
Nine months ended September 30,
2022
2021
2022
2021
Numerator:
Net loss
$
( 1,248 )
$
( 2,169
)
$
( 3,472 )
$
( 5,410
)
Denominator:
Basic weighted average shares outstanding
23,952,555
19,449,283
23,933,033
19,002,758
Dilutive common stock equivalents using treasury stock method
—
—
—
—
Diluted weighted average shares outstanding
23,952,555
19,449,283
23,933,033
19,002,758
Basic loss per common share
$
( 0.05 )
$
( 0.11
)
$
( 0.15 )
$
( 0.28
)
Diluted loss per common share
$
( 0.05 )
$
( 0.11
)
$
( 0.15 )
$
( 0.28
)
Weighted average options, warrants and convertible portion of senior convertible notes outstanding
6,694,433
4,240,247
6,896,803
3,826,807
Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation
6,694,433
4,240,247
6,896,803
3,826,807
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UNAUDITED 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 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 December 31, 2021 were as follows.
Amortized cost
Gross unrealized holding gains
Gross unrealized holding losses
Estimated fair value
December 31, 2021
Available-for-sale securities:
Corporate bonds and notes
$
1,434
$
8
$
( 2
)
$
1,440
Municipal bonds
1,573
—
( 3
)
1,570
Total available-for-sale securities
$
3,007
$
8
$
( 5
)
$
3,010
There were no available-for-sale securities as of September 30, 2022 .
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
5 . Intangible Assets
Intangible assets as of September 30, 2022 and December 31, 2021 consisted of the following:
Estimated useful lives (years)
September 30, 2022
December 31, 2021
Tradename
5
to
7
$
555
$
555
Patents and technological know-how
10
to
20
34,288
33,553
Proprietary software
3
to
15
2,981
2,981
Other
3
to
5
323
323
Total intangible assets
38,147
37,412
Accumulated amortization
( 14,364
)
( 12,326
)
Total intangible assets, net
$
23,783
$
25,086
The amortization of intangible assets for the three and nine months ended September 30, 2022 and 2021 was as follows:
Three months ended September 30,
Nine months ended September 30,
2022
2021
2022
2021
Amortization of intangible assets
$
686
$
582
$
2,038
$
1,636
The estimated future amortization expense of intangible assets is as follows:
Years ending December 31,
Amount
2022 (Remainder)
$
689
2023
2,748
2024
2,484
2025
2,423
2026
2,423
Thereafter
13,016
Total
$
23,783
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
6 . Inventories
Inventories, net of reserves, as of September 30, 2022 and December 31, 2021 consisted of the following:
September 30, 2022
December 31, 2021
Current:
Raw materials
$
4,835
$
4,085
Finished goods
4,873
5,948
$
9,708
$
10,033
Long-term:
Raw materials
$
1,380
$
1,980
Finished goods
1,581
1,587
$
2,961
$
3,567
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 and nine months ended September 30, 2022 and 2021 was as follows:
Three months ended September 30,
Nine months ended September 30,
2022
2021
2022
2021
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory
$
194
$
116
$
221
$
798
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 and nine months ended September 30, 2022 and 2021 was as follows:
Three months ended September 30,
Nine months ended September 30,
2022
2021
2022
2021
Rent expense
$
169
$
181
$
518
$
540
The Company occup ies 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 the Company's research and development activities.
The Company occupies 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 the Company's principal administrative, sales, marketing, customer support, and research and product development activities.
The Company occupied a 950 square-foot facility in Austin, Texas under the terms of an operating lease that expired in October 20 22 . This facility supported the Company's sales, marketing, customer support, and research and development activities.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
The Company occupies a 6,175 square-foot facility in Chennai, India under the terms of an operating lease expiring in August 2023. This facility support s the Company's administrative, marketing, customer support, and research and product development activities.
The Company occupies a 40,000 square-foot warehouse in Salt Lake City, Utah under the terms of an operating lease expiring in April 2025, which serves as the Company's primary inventory fulfillment center.
Supplemental cash flow information related to leases was as follows:
Nine months ended September 30,
2022
2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
531
$
502
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
—
$
212
Supplemental balance sheet information related to leases was as follows:
September 30, 2022
December 31, 2021
Operating lease right-of-use assets
$
1,088
$
1,537
Current portion of operating lease liabilities, included in accrued liabilities
$
622
$
623
Operating lease liabilities, net of current portion
559
1,026
Total operating lease liabilities
$
1,181
$
1,649
Weighted average remaining lease term for operating leases (in years)
1.83
2.64
Weighted average discount rate for operating leases
5.91
%
5.87
%
The following represents maturities of operating lease liabilities as of September 30, 2022:
Years ending December 31,
2022 (Remainder)
$
172
2023
671
2024
343
2025
69
2026
—
Total lease payments
1,255
Less: Imputed interest
( 74
)
Total
$
1,181
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UNAUDITED 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,
2022
2021
2022
2021
Common stock and additional paid-in capital
Balance, beginning of period
$
74,885
$
63,450
$
72,817
$
63,378
Issuance of common stock and warrants, net
—
9,288
2,000
9,288
Share-based compensation expense
24
35
90
100
Proceeds from employee stock purchase plan
1
5
3
12
Balance, end of period
$
74,910
$
72,778
$
74,910
$
72,778
Accumulated other comprehensive loss
Balance, beginning of period
$
( 266
)
$
( 213
)
$
( 241
)
$
( 186
)
Unrealized loss on available-for-sale securities, net of tax
—
( 8
)
( 2
)
( 13
)
Foreign currency translation adjustment
( 22
)
( 4
)
( 45
)
( 26
)
Balance, end of period
$
( 288
)
$
( 225
)
$
( 288
)
$
( 225
)
Accumulated deficit
Balance, beginning of period
$
( 23,296
)
$
( 16,619
)
$
( 21,072
)
$
( 13,378
)
Net loss
( 1,248
)
( 2,169
)
( 3,472
)
( 5,410
)
Balance, end of period
$
( 24,544
)
$
( 18,788
)
$
( 24,544
)
$
( 18,788
)
Total shareholders' equity
$
50,078
$
53,765
$
50,078
$
53,765
Issue of Common Stock and Warrants
On September 13, 2020, the Company entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued and sold in a registered direct offering 2,116,050 shares of the Company's common stock, par value $ 0.001 per share at an offering price of $ 2.4925 per share. The Company received gross proceeds of approximately $ 5,275 and net proceeds $ 4,764 after deducting placement agent fees and related offering expenses. In a concurring private placement, the Company also issued to the same purchasers warrants exercisable for an aggregate of 1,058,025 shares of common stock at an exercise price of $ 2.43 per share. Each warrant became immediately exercisable and will expire five years from the issuance date.
On September 12, 2021, the Company entered into a securities purchase agreement with certain purchasers named therein, pursuant to which the Company issued 3,623,189 shares of the Company's common stock, par value $ 0.001 per share at an offering price of $ 2.76 per share. The Company received gross proceeds of approximately $ 10,000 and net proceeds of $ 9,288 after deducting placement agent fees and related offering expenses. In a concurring private placement the Company also issued to the same purchasers warrants exercisable for an aggregate of 3,623,189 shares of common stock at an exercise price of $ 2.76 per share. Each warrant became immediately exercisable and will expire on March 15, 2027 .
On January 4, 2022, the Company entered into a Securities Purchase Agreement with Edward D. Bagley, an affiliate of the Company, pursuant to which the Company agreed to issue and sell, in a private placement 1,538,461 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share, at a purchase price of $ 1.30 per share of Common Stock. The consideration for the Shares is the cancellation and termination of Mr. Bagley’s outstanding bridge loan to the Company in the principal amount of $ 2,000 originally issued on July 2, 2021 and amended and restated on September 11, 2021 . Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
9 . 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 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
49.4 %
Expected dividend yield
0 %
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:
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
September 30, 2022
December 31, 2021
Liability component:
Principal
$
2,100
$
2,640
Less: debt discount and issuance costs, net of amortization
( 237
)
( 385
)
Net carrying amount
$
1,863
$
2,255
Equity component ( 1 ) :
Warrants
$
318
$
318
Conversion feature
122
122
Net carrying amount
$
440
$
440
Current portion of liability component included under short-term debt
$
855
$
720
Long-term portion of liability component included under long-term debt
1,245
1,920
Liability component total
$
2,100
$
2,640
(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, 2022, amortization of debt discount and issuance costs was $ 49 and $ 147 , respectively and for the three and nine months ended September 30, 2021, amortization of debt discount and issuance costs was $ 49 and $ 147 , respectively. The following table represents schedule of maturities of principal amount contained in the Notes as of September 30, 2022:
Year ending December 31,
Principal Amount Maturing
2022 (Remainder)
$
180
2023
1,920
2024
—
2025
—
Total principal amount
$
2,100
Short-term Bridge Loan
On July 2, 2021, the Company obtained a bridge loan in the principal amount of $ 2,000 from Edward D. Bagley (the “Bridge Loan”), an affiliate of the C ompany. The Bridge Loan is evidenced by a promissory note dated July 2, 2021 (the “Note”) issued by the Company to Mr. Bagley. The Note bears interests at a rate of 8.0 % per annum, matures on the earlier to occur of (i) October 1 , 2021 or (ii) within two business days of the Company’s receipt of its expected U.S. federal income tax refund, and contains other customary covenants and even ts of default . On September 11, 2021, the Company amended and restated the terms of the Bridge Loan to extend the latest maturity date from October 1, 2021 to January 3, 2022 . All other terms and conditions of the Bridge Loan remained the same. This Bridge Loan of $ 2,000 is included under short-term debt as of December 31, 2021. On January 4, 2022, the Company entered into a Securities Purchase Agreement with Edward D. Bagley, pursuant to which the Company issued and sold to Mr. Bagley, in a private placement 1,538,461 shares (the “Shares”) of the Company’s common stock, par value $ 0.001 per share, at a purchase price of $ 1.30 per share of Common Stock. The consideration for the Shares was the cancellation and termination of Mr. Bagley’s outstanding bridge loan to the Company in the principal amount of $ 2,000 originally issued on July 2, 2021 and amended and restated on September 11, 2021 . Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder.
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 had 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 Company's Paycheck Protection Program Loan ("PPP Loan") under the CARES Act was forgiven by Small Business Administration effective April 29, 2022. With this forgiveness, the Company is not required to repay the principal amount of $ 1,499 and the interest of $ 31 . The Company received $ 953 back that it had already paid towards principal and interest payments toward the PPP Loan. The Company treated the forgiveness as extinguishment of debt in this quarter ended September 30, 2022 and reported the entire principal amount forgiven of $ 1,499 along with interest already accounted for of $ 29 as a gain on extinguishment of debt.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
September 30, 2022
December 31, 2021
Current portion of the PPP Loan included under short-term debt
$
—
$
761
Long-term portion of the PPP Loan included under long-term debt
—
—
Liability component total
$
—
$
761
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 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, 2022 and December 31, 2021:
Level 1
Level 2
Level 3
Total
December 31, 2021
Corporate bonds and notes
$
—
$
1,440
$
—
$
1,440
Municipal bonds
—
1,570
—
1,570
Total
$
—
$
3,010
$
—
$
3,010
There were no financial instruments that were re-measured by the Company as of September 30, 2022.
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, 2022 mostly represents income tax expense recorded for jurisdictions outside the United States.
The Company had approximately $ 895 of uncertain tax positions as of September 30, 2022. Due to the inherent uncertainty of the underlying tax positions, it is not possible to forecast the payment of this liability for any particular year.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
12 . Subsequent events
On October 28, 2022 the Company obtained a bridge loan in the principal amount of $ 2,000 from Edward D. Bagley (the “2022 Bridge Loan”), an affiliate of the C ompany. The 2022 Bridge Loan is evidenced by a promissory note dated October 28, 2022 (the “2022 Note”) issued by the Company to Mr. Bagley. The 2022 Note bears interest at a rate of 12.0 % per annum and matures on October 28, 2023 . Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder.
13 . Commitments
We have manufacturing agreements with electronics manufacturing service (“EMS”) providers related to the outsourced manufacturing of our products. Certain manufacturing agreements establish annual volume commitments. We are also obligated to repurchase the Company-forecasted but unused materials. The Company has non-cancellable, non-returnable, and long-lead time commitments with its EMS providers and certain suppliers for inventory components that will be used in production. The Company’s purchase commitments under such agreements are approximately $ 2,226 as of September 30, 2022.
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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.