Item 1. Financial Statements
Item 1 . FINANCIAL STATEMENTS
CLEARONE, INC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
September 30, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
13,694
$
984
Current marketable securities
5,698
—
Legal settlement receivable
—
55,000
Receivables, net of allowance of $ 326
3,874
3,603
Inventories, net
8,664
8,961
Income tax receivable
6,381
1,071
Prepaid expenses and other assets
3,776
7,808
Total current assets
42,087
77,427
Long-term marketable securities
583
—
Long-term inventories, net
2,870
2,707
Property and equipment, net
590
383
Operating lease - right of use assets, net
1,081
1,047
Intangibles, net
1,794
2,071
Other assets
112
115
Total assets
$
49,117
$
83,750
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
1,759
$
1,284
Accrued liabilities
2,340
3,041
Deferred product revenue
38
63
Short-term debt
1,204
3,732
Total current liabilities
5,341
8,120
Operating lease liability, net of current
755
492
Other long-term liabilities
1,008
1,008
Total liabilities
7,104
9,620
Shareholders' equity:
Common stock, par value $ 0.001 , 50,000,000 shares authorized, 23,960,684 and 23,955,767 shares issued and outstanding , respectively
24
24
Additional paid-in capital
46,015
74,910
Accumulated other comprehensive loss
( 308
)
( 288
)
Accumulated deficit
( 3,718
)
( 516
)
Total shareholders' equity
42,013
74,130
Total liabilities and shareholders' equity
$
49,117
$
83,750
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,
2023
2022
2023
2022
Revenue
$
4,889
$
6,264
$
14,550
$
21,184
Cost of goods sold
3,273
3,694
9,771
12,991
Gross profit
1,616
2,570
4,779
8,193
Operating expenses:
Sales and marketing
1,119
1,151
3,634
4,273
Research and product development
889
876
2,805
3,406
General and administrative
1,097
1,673
3,373
5,146
Total operating expenses
3,105
3,700
9,812
12,825
Operating loss
( 1,489
)
( 1,130
)
( 5,033
)
( 4,632
)
Interest expense
( 86 )
( 90
)
( 469
)
( 285
)
Other income (loss), net
243
( 3
)
2,346
1,505
Loss before income taxes
( 1,332
)
( 1,223
)
( 3,156
)
( 3,412
)
Provision for income taxes
19
25
46
60
Net loss
$
( 1,351
)
$
( 1,248
)
$
( 3,202
)
$
( 3,472
)
Basic weighted average shares outstanding
23,960,313
23,952,555
23,957,311
23,933,033
Diluted weighted average shares outstanding
23,960,313
23,952,555
23,957,311
23,933,033
Basic loss per share
$
( 0.06
)
$
( 0.05
)
$
( 0.13
)
$
( 0.15
)
Diluted loss per share
$
( 0.06
)
$
( 0.05
)
$
( 0.13
)
$
( 0.15
)
Comprehensive loss:
Net loss
$
( 1,351
)
$
( 1,248
)
$
( 3,202
)
$
( 3,472
)
Unrealized loss on available-for-sale securities, net of tax
( 31
)
—
( 17
)
( 2
)
Change in foreign currency translation adjustment
( 7
)
( 22
)
( 3
)
( 45
)
Comprehensive loss
$
( 1,389
)
$
( 1,270
)
$
( 3,222
)
$
( 3,519
)
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,
2023
2022
Cash flows from operating activities:
Net loss
$
( 3,202
)
$
( 3,472
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense
709
2,390
Amortization of right-of-use assets
306
449
Share-based compensation expense
80
90
Change of inventory to net realizable value
105
221
Gain recognized on Paycheck Protection Plan Loan forgiveness
—
( 1,528
)
Gain (loss) on disposal of assets and sale of marketable securities
( 12
)
—
Changes in operating assets and liabilities:
Receivables
( 271
)
868
Legal settlement receivable
55,000
—
Inventories
29
710
Prepaid expenses and other assets
4,035
2,051
Accounts payable
475
( 3,336
)
Accrued liabilities
( 448
)
( 54
)
Income taxes receivable
( 5,310
)
—
Deferred product revenue
( 25
)
19
Operating lease liabilities
( 328
)
( 468
)
Net cash provided by (used in) operating activities
51,143
( 2,060
)
Cash flows from investing activities:
Purchase of property and equipment
( 372
)
( 17
)
Purchase of intangibles
( 111
)
( 93
)
Capitalized patent defense costs
—
( 642
)
Proceeds from maturities and sales of marketable securities
3,094
3,008
Purchases of marketable securities
( 9,389
)
—
Net cash provided by (used in) investing activities
( 6,778
)
2,256
Cash flows from financing activities:
Dividend payment
( 28,979
)
—
Net proceeds from equity-based compensation programs
4
3
Paycheck Protection Program loan refund upon full forgiveness net of loan payments
—
768
Principal payments of debt
( 2,675
)
( 540
)
Net cash provided by (used in) financing activities
( 31,650
)
231
Effect of exchange rate changes on cash and cash equivalents
( 5
)
( 48
)
Net increase in cash and cash equivalents
12,710
379
Cash and cash equivalents at the beginning of the period
984
1,071
Cash and cash equivalents at the end of the period
$
13,694
$
1,450
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,
2023
2022
Cash paid for income taxes
$
6,650
$
68
Cash paid for interest
311
140
See accompanying notes
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CLEARONE, INC.
UNAUDITED 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, 2023 and December 31, 2022 , the results of operations for the three and nine months ended September 30, 2023 and 2022 , and the cash flows for the nine months ended September 30, 2023 and 2022 . The results of operations for the three and nine months ended September 30, 2023 and 2022 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, 2022 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, 2022 . There have been no changes to these policies during the quarter ended September 30, 2023 that are of significance or potential significance to the Company.
Recent accounting pronouncements:
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016 - 13 , Financial Instruments - Credit Losses (Topic 326 ). The new standard amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities. In February 2020, the FASB issued ASU 2020 - 02 , Financial Instruments-Credit Losses (Topic 326 ) and Leases (Topic 842 ) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016 - 02 , Leases (Topic 842 ), which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016 - 13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. CECL estimates of expected credit losses on trade receivables over their life will be required to be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts. The Company adopted the standard in its first quarter of 2023 . There was no material impact on the results of operations.
The Company has determined that recently issued accounting standards, other than the above discussed, will not have a material impact on its consolidated financial position, results of operations or cash flows.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Liquidity:
As of September 30, 2023 , our cash and cash equivalents were approximately $ 13,694 compared to $ 984 as of December 31, 2022 . Our working capital was $ 36,746 as of September 30, 2023 . Net cash provided by operating activities was $ 51,143 for the nine months ended September 30, 2023 , an increase of $ 53,203 compared to $ 2,060 of cash used in operating activities for the nine months ended September 30, 2022 . The Company believes, although there can be no assurance, that the current cash position and effective management of working capital, will provide the liquidity needed to meet our operating needs through at least November 8, 2024 . The Company also believes that its strong portfolio of intellectual property and its solid brand equity in the market will enable it to raise additional capital if and when needed to meet its short and long-term financing needs; however, there can be no assurance that, if needed, the Company will be successful in obtaining the necessary funds through equity or debt financing on favorable terms or at all. If the Company needs additional capital and is unable to secure financing, it may be required to further reduce expenses, or delay product development and enhancement.
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,
2023
2022
2023
2022
Audio conferencing
$
1,867
$
3,201
$
6,484
$
9,655
Microphones
2,355
2,475
6,239
8,525
Video products
667
588
1,827
3,004
$
4,889
$
6,264
$
14,550
$
21,184
The following table disaggregates the Company’s revenue into major regions:
Three months ended September 30,
Nine months ended September 30,
2023
2022
2023
2022
North and South America
$
2,400
$
3,251
$
7,353
$
10,211
Asia Pacific (includes Middle East, India and Australia)
2,058
2,018
5,426
6,560
Europe and Africa
431
995
1,771
4,413
$
4,889
$
6,264
$
14,550
$
21,184
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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,
2023
2022
2023
2022
Numerator:
Net loss
$
( 1,351
)
$
( 1,248
)
$
( 3,202
)
$
( 3,472 )
Denominator:
Basic weighted average shares outstanding
23,960,313
23,952,555
23,957,311
23,933,033
Dilutive common stock equivalents using treasury stock method
—
—
—
—
Diluted weighted average shares outstanding
23,960,313
23,952,555
23,957,311
23,933,033
Basic loss per common share
$
( 0.06
)
$
( 0.05
)
$
( 0.13
)
$
( 0.15 )
Diluted loss per common share
$
( 0.06
)
$
( 0.05
)
$
( 0.13
)
$
( 0.15 )
Weighted average options, warrants and convertible portion of senior convertible notes outstanding
6,294,994
6,694,433
6,316,137
6,896,803
Anti-dilutive options, warrants and convertible portion of senior convertible notes not included in the computation
6,294,994
6,694,433
6,316,137
6,896,803
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 as of September 30, 2023 were as follows:
Amortized cost
Gross unrealized holding gains
Gross unrealized holding losses
Estimated fair value
September 30, 2023
Available-for-sale securities:
US Treasury securities
$
3,281
$
—
$
( 3
)
$
3,278
Mutual funds
1,169
2
—
1,171
Certificates of deposit
859
—
—
859
Corporate bonds and notes
$
989
$
—
$
( 16
)
$
973
Total available-for-sale securities
$
6,298
$
2
$
( 19
)
$
6,281
There were no available-for sale securities as of December 31, 2022.
Amortized cost
Estimated fair value
Due within one year
$
5,715
$
5,698
Due after one year through five years
583
583
Due after five years
—
—
Total available-for-sale securities
$
6,298
$
6,281
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Debt securities in an unrealized loss position as of September 30, 2023 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, 2023
US Treasury securities
$
3,278
$
( 3
)
$
—
$
—
$
3,278
$
( 3
)
Corporate bonds and notes
973
( 16
)
—
—
973
( 16
)
Total
$
4,251
$
( 19
)
$
—
$
—
$
4,251
$
( 19
)
5 . Intangible Assets
Intangible assets as of September 30, 2023 and December 31, 2022 consisted of the following:
Estimated useful lives (years)
September 30, 2023
December 31, 2022
Tradename
5
to
7
$
555
$
555
Patents and technological know-how
10
to
20
7,164
7,053
Proprietary software
3
to
15
2,981
2,981
Other
3
to
5
323
323
Total intangible assets
11,023
10,912
Accumulated amortization
( 9,229
)
( 8,841
)
Total intangible assets, net
$
1,794
$
2,071
The amortization of intangible assets for the three and nine months ended September 30, 2023 and 2022 was as follows:
Three months ended September 30,
Nine months ended September 30,
2023
2022
2023
2022
Amortization of intangible assets
$
141
$
686
$
388
$
2,038
The estimated future amortization expense of intangible assets is as follows:
Years ending December 31,
Amount
2023 (Remainder)
$
129
2024
255
2025
194
2026
193
2027
63
Thereafter
960
Total
$
1,794
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
6 . Inventories
Inventories, net of reserves, as of September 30, 2023 and December 31, 2022 consisted of the following:
September 30, 2023
December 31, 2022
Current:
Raw materials
$
3,210
$
4,499
Finished goods
5,454
4,462
$
8,664
$
8,961
Long-term:
Raw materials
$
1,302
$
1,068
Finished goods
1,568
1,639
$
2,870
$
2,707
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 three and nine months ended September 30, 2023 and 2022 was as follows:
Three months ended September 30,
Nine months ended September 30,
2023
2022
2023
2022
Net loss incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory
$
3
$
194
$
105
$
221
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 three and nine months ended September 30, 2023 and 2022 was as follows:
Three months ended September 30,
Nine months ended September 30,
2023
2022
2023
2022
Rent expense
$
110
$
169
$
369
$
518
The Company occup ies a 1,350 square-foot facility in Gainesville, Florida under the terms of an operating lease expiring in F ebruary 2028 . The Gainesville facility is used primarily to support the Company's research and development activities.
The Company occupies a 9,402 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in February 2028. The facility supports the Company's principal administrative, sales, marketing, customer support, and research and product development activities.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 2024. This facility support s the Company's administrative, marketing, customer support, and research and product development activities. The Company is planning to renew the lease.
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,
2023
2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$
378
$
531
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
341
$
—
Supplemental balance sheet information related to leases was as follows:
September 30, 2023
December 31, 2022
Operating lease right-of-use assets
$
1,081
$
1,047
Current portion of operating lease liabilities, included in accrued liabilities
$
390
$
641
Operating lease liabilities, net of current portion
755
492
Total operating lease liabilities
$
1,145
$
1,133
Weighted average remaining lease term for operating leases (in years)
3.56
2.12
Weighted average discount rate for operating leases
6.43
%
5.93
%
The following represents maturities of operating lease liabilities as of September 30, 2023 :
Years ending December 31,
2023 (Remainder)
$
114
2024
439
2025
272
2026
210
2027
216
Thereafter
38
Total lease payments
1,289
Less: Imputed interest
( 144
)
Total
$
1,145
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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,
2023
2022
2023
2022
Common stock and additional paid-in capital
Balance, beginning of period
$
46,003
$
74,885
$
74,934
$
72,817
Dividends paid
—
—
( 28,979
)
—
Issuance of common stock and warrants, net
—
—
—
2,000
Share-based compensation expense
33
24
80
90
Proceeds from employee stock purchase plan
3
1
4
3
Balance, end of period
$
46,039
$
74,910
$
46,039
$
74,910
Accumulated other comprehensive loss
Balance, beginning of period
$
( 270
)
$
( 266
)
$
( 288
)
$
( 241
)
Unrealized loss on available-for-sale securities, net of tax
( 31
)
—
( 17
)
( 2
)
Foreign currency translation adjustment
( 7
)
( 22
)
( 3
)
( 45
)
Balance, end of period
$
( 308
)
$
( 288
)
$
( 308
)
$
( 288
)
Accumulated deficit
Balance, beginning of period
$
( 2,367
)
$
( 23,296
)
$
( 516
)
$
( 21,072
)
Net loss
( 1,351
)
( 1,248
)
( 3,202
)
( 3,472
)
Balance, end of period
$
( 3,718
)
$
( 24,544
)
$
( 3,718
)
$
( 24,544
)
Total shareholders' equity
$
42,013
$
50,078
$
42,013
$
50,078
Issue of Common Stock a nd Warrants
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.
Cash Dividend Distribution
On May 8, 2023 , the Company announced that the Company’s Board of Directors had declared a special one -time cash dividend of $ 1.00 per share of the Company’s common stock or eligible warrants and paid $ 28,978 of cash dividends on May 31, 2023 to shareholders of record on May 22, 2023 .
Nasdaq Delisting Notification
On August 1, 2023, the Company received a letter (the “Notice”) from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) informing management that because the closing bid price for the Company’s common stock listed on Nasdaq was below $ 1.00 for 30 consecutive trading days, the Company is not in compliance with the minimum bid price requirement for continued listing on the Nasdaq Capital Market, as set forth in Nasdaq Marketplace Rule 5550 (a)( 2 ) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Marketplace Rule 5810 (c)( 3 )(A), the Company was granted a period of 180 calendar days from August 1, 2023, or until January 29, 2024, to regain compliance with the Minimum Bid Price Requirement. The Company’s common stock has continued to trade below $ 1.00 per share.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 expected 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
(Dollars in thousands, except per share amounts)
September 30, 2023
December 31, 2022
Liability component:
Principal
$
1,245
$
1,920
Less: debt discount and issuance costs, net of amortization
( 41
)
( 188
)
Net carrying amount
$
1,204
$
1,732
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
$
1,245
$
1,920
Liability component total
$
1,245
$
1,920
( 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, 2023 amortization of debt discount and issuance costs was $ 49 and $ 147 , respectively and for the three and nine months ended September 30, 2022 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, 2023 :
Year ending December 31,
Principal Amount Maturing
2023 (Remainder)
1,245
Total principal amount
$
1,245
Short-term Bridge Loans
On July 2, 2021, the Company obtained a bridge loan in the principal amount of $ 2,000 from Edward D. Bagley (the “ 2021 Bridge Loan”), an affiliate of the C ompany. The Bridge Loan was evidenced by a promissory note dated July 2, 2021 (the “Note”) issued by the Company to Mr. Bagley. The Note bore interest at a rate of 8.0 % per annum. 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. 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.
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 Company. The 2022 Bridge Loan was evidenced by a promissory note dated October 28, 2022 (the “ 2022 Note”) issued by the Company to Mr. Bagley. The 2022 Note bore interest at a rate of 12.0 % per annum and had a maturity date of October 28, 2023 . Mr. Bagley is an affiliate of the Company and the Company’s single largest stockholder. This Bridge Loan of $ 2,000 is included under short-term debt as of December 31, 2022. In January 2023, the 2022 Bridge loan of $ 2,000 along with applicable interest was repaid in full.
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited - Dollars in thousands, except per share amounts)
10 . Share-based Compensation
As of September 30, 2023 , the Company had 218,810 options with contractual lives of ten years and 393,229 options with contractual lives of six years offered under the Company’s 2007 Equity Incentive Plan (the “ 2007 Plan”), which was restated and approved by the shareholders on December 12, 2015. As of September 30, 2023 , the 2007 Plan had 852,815 authorized unissued options.
The Company uses judgment in determining the fair value of the share-based payments on the date of grant using an option-pricing model with assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the risk-free interest rate of the awards, the expected life of the awards, the expected volatility over the term of the awards, and the expected dividends of the awards. The Company uses the Black-Scholes option pricing model to determine the fair value of share-based payments granted under the guidelines of ASC Topic 718 .
In applying the Black-Scholes methodology to 160,000 options granted in June 2023 , the Company used the following assumptions:
Risk free interest rate, average
3.91 %
Expected option life, average
5 years
Expected price volatility, average
91.47 %
Expected dividend yield
0 %
A summary of the stock option activity under the Company’s plans for the nine months ended September 30, 2023 , is as follows:
Number of shares
Weighted average exercise price
Options outstanding at beginning of year
488,477
$
6.48
Granted
160,000
1.01
Less:
Exercised
—
—
Forfeited prior to vesting
( 5,210
)
2.50
Canceled or expired
( 31,228
)
7.63
Options outstanding at September 30, 2023
612,039
5.03
Options exercisable at end of September 30, 2023
391,537
$
7.06
As of September 30, 2023 , the total remaining unrecognized compensation cost related to non-vested stock options, net of forfeitures, was approximately $ 186 , which will be recognized over a weighted average period of 2.42 year s .
Share-based compensation expense has been recorded as follows:
Three months ended September 30,
Nine months ended September 30,
2023
2022
2023
2022
Cost of goods sold
$
2
$
2
$
5
$
6
Sales and marketing
2
2
6
9
Research and product development
17
10
37
34
General and administrative
12
10
32
40
$
33
$
24
$
80
$
89
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UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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, 2023 mostly represents income tax expense recorded for jurisdictions outside the United States.
The Company had approximately $ 962 of uncertain tax positions as of September 30, 2023 . 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.
12 . 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, 2023:
Level 1
Level 2
Level 3
Total
September 30, 2023
Mutual funds
$
1,171
$
—
$
—
$
1,171
US Treasury securities
—
3,278
—
3,278
Certificates of deposit
—
859
—
859
Corporate bonds and notes
—
973
—
973
Total
$
1,171
$
5,110
$
—
$
6,281
There were no financial instruments that were re-measured by the Company as of December 31, 2022.
13 . 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.