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CLRO > SEC Filings for CLRO > Form 10-Q on 15-Nov-2012All Recent SEC Filings

Show all filings for CLEARONE COMMUNICATIONS INC

Form 10-Q for CLEARONE COMMUNICATIONS INC


15-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements in this report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. In some cases, forward-looking statements can be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "intends," "believes," "estimates," "potential," or "continue," or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct. Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements. Future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including, without limitation, product recalls and product liability claims; infringement of our technology or assertion that our technology infringes the rights of other parties; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth; delays in obtaining regulatory approvals or the failure to maintain such approvals; concentration of our revenue among a few customers, products or procedures; development of new products and technology that could render our products obsolete; market acceptance of new products; introduction of products in a timely fashion; price and product competition, availability of labor and materials, cost increases, and fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; and other factors referred to in our press releases and reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2011. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Additional factors that may have a direct bearing on our operating results are discussed in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011.

BUSINESS OVERVIEW

ClearOne is a global company that designs, develops and sells conferencing, collaboration, streaming and digital signage solutions for audio, video and data multimedia communication. The performance and simplicity of its advanced comprehensive solutions enhance the quality of life.
We develop, manufacture, market, and service a comprehensive line of high-quality audio conferencing products for personal use as well as traditional tabletop, mid-tier premium and higher end professional products for both large and small businesses. We occupy the number one global market share position, with nearly 50% market share in the professional audio conferencing market for professional products used by large businesses and organizations such as enterprise, healthcare, education and distance learning, government, legal and finance organizations. Our conferencing solutions save organizations time and money by creating a natural environment for collaboration.

NetStreams® DigilinX, the ClearOne brand for residential multimedia streaming and control, and VIEW™, the ClearOne brand for commercial multimedia streaming and control, deliver a superior IP A/V experience by streaming high definition audio and video (multimedia) and control over TCP/IP LAN networks. NetStreams' technology is used in a wide variety of applications including digital signage, corporate video streaming, network operations centers, distance education, and in venues for hospitality and entertainment, as well as casinos.

ClearOne's products, designed for commercial and residential use, offer outstanding levels of performance, functionality, simplicity, reliability, and scalability. By combining audio and/or video content, meta-data and control signals into one stream over existing Internet Protocol networks in harmony with industry standards, ClearOne's newly patented StreamNet® solutions enable the Power of AV over IP™ for burgeoning markets such as digital signage, enterprise multimedia streaming and home entertainment. Also sold under the NetStreams residential brand are non-IP multimedia distribution solutions for economical multimedia residential streaming applications.


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CLEARONE COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

On September 2, 2011, we acquired the business of Oregon based MagicBox, Inc., a developer and marketer of a variety of hardware and software solutions designed to deliver digital content and information to digital displays. This acquisition significantly broadens ClearOne's current StreamNet offerings and expands its digital signage product portfolio with tools for content and playlist creation and management. The MagicBox content management and its database integration software complement ClearOne's StreamNet systems. The StreamNet and MagicBox technologies are an excellent fit to deliver on the challenging requirements for any digital signage provider to distribute content over a local area network while maintaining content and scheduling alignment. As a result of this acquisition and the combination of StreamNet and Magicbox technologies, we are the only company to offer complete end-to-end digital signage content management, IP streaming, and control solutions.

On February 16, 2012, we acquired the business of Israel based VCON Video Conferencing, Ltd ("VCON") for approximately $4.6 million in cash. The acquisition presents us with new global market opportunities and will facilitate accelerated product development. VCON is a pioneer in software based video conferencing solutions with product offerings that include group video conferencing endpoints, desktop video conferencing endpoints, video conferencing infrastructure solutions and software development kits. This acquisition and the combination of streaming and digital signage technologies will provide us with complimentary technology opportunities allowing us to enter new growth markets.

Our business goals are to:
• Leverage on the video conferencing, streaming and digital signage technologies we recently acquired to enter new growth markets;

• Maintain our global market share leadership of professional audio conferencing products for large businesses and organizations;

• Focus on the small and medium business (SMB) market with scaled, lower cost and less complex products and solutions;

• Capitalize on the growing adoption of unified communications and introduce new products by entering Information Technology channels;

• Partner with large enterprise communications providers worldwide to bring value added products to their solution portfolios and channels;

• Capitalize on emerging market opportunities as audio visual, information technology, unified communications and traditional digital signage converge to meet enterprise and commercial multimedia needs; and

• Expand and strengthen sales channels.

We will continue to improve our existing high-quality products and develop new products for the burgeoning conferencing and collaboration, and multimedia streaming markets and focus on strategic initiatives to achieve our business goals.

Our revenues were $11.6 million and $33.4 million during the three and nine months ended September 30, 2012, respectively, compared to $11.5 million and $34.1 million during the three and nine months ended September 30, 2011, respectively. Revenues were essentially flat during the three months ended September 30, 2012 when compared to revenues over the comparable period in 2011. Revenues declined by 2% during the nine months ended September 30, 2012, when compared to revenues over the comparable period in 2011. Our gross profit decreased by $260,000 and $518,000 during the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011. Net income also decreased by $2.4 million and $3.6 million during the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011. Net income for the three months ended September 30, 2012 declined primarily due to the recognition of $3.7 million proceeds from the litigation against Biamp included in the three months ended September 30, 2011 and due to reduced gross profit margin. Net income for the nine months ended September 30, 2012 declined primarily due to the recognition of $3.7 million proceeds from the litigation against Biamp included in the nine months ended September 30, 2011 and due to reduced revenue and added costs due to acquisitions.

We expect the recent acquisitions and new product introductions to start contributing to revenue in the near future. The prospects of growth in both revenues and profits in the near future would depend on the strength of the global economy and the penetration level of our new products, including products added through acquisitions. We continue to closely monitor the global economic events and continue our existing measures to control costs and invest in strategic products and initiatives.

A detailed discussion of our results of operations follows below.


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CLEARONE COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

ANALYSIS OF RESULTS OF OPERATIONS
Results of Operations for the three months ended September 30, 2012, and 2011,
and nine months ended September 30, 2012, and 2011

The following table sets forth certain items from our unaudited condensed
consolidated statements of operations (dollars in thousands) for the three
months ended September 30, 2012 and 2011, respectively, and the nine months
ended September 30, 2012 and 2011, respectively, together with the percentage of
total revenue which each such item represents:
                                          Three months ended September 30,                                 Nine months ended September 30,
                                 2012          % of Revenue       2011       % of Revenue        2012        % of Revenue       2011       % of Revenue
Revenue                    $    11,573               100 %     $ 11,511          100  %      $   33,382          100  %      $ 34,102          100  %
Cost of goods sold               4,856                42 %        4,534           39  %          13,464           40  %        13,666           40  %
Gross profit                     6,717                58 %        6,977           61  %          19,918           60  %        20,436           60  %
Sales and marketing              1,821                16 %        2,184           19  %           6,209           19  %         6,274           18  %
Research and product
development                      1,959                17 %        1,796           16  %           5,996           18  %         5,249           15  %
General and administrative       1,545                13 %        1,333           12  %           4,736           14  %         4,166           12  %
Proceeds from litigation             -                 - %       (3,702 )        (32 )%            (250 )         (1 )%        (3,702 )        (11 )%
Operating income                 1,392                12 %        5,366           47  %           3,227           10  %         8,449           25  %
Other income (expense),
net                                 29                 0 %           (4 )          0  %              40            0  %            15            0  %
Income before income taxes       1,421                12 %        5,362           47  %           3,267           10  %         8,464           25  %
Provision for income taxes         492                 4 %        1,987           17  %           1,310            4  %         2,956            9  %
Net income                 $       929                 8 %     $  3,375           29  %      $    1,957            6  %      $  5,508           16  %

Revenue

Revenue for the three months ended September 30, 2012 ("2012 Q3") increased by approximately 1% over the three months ended September 30, 2011 ("2011 Q3"). The near flat revenue was due to reduced demand in Asia offset by increased demand in Europe. Increases in revenue from premium and personal product categories were offset by declines in revenue from professional products.

Revenue for the nine months ended September 30, 2012 ("2012 YTD") decreased by approximately 2% over the nine months ended September 30, 2011 ("2011 YTD"). The revenue decreased due to reduced demand across all the regions and all the product categories with the exception of premium and personal product categories.

The decline in revenue was partially offset by additional revenue from video conferencing and digital signage products.

During 2012 Q3 and 2011 Q3, the net change in deferred revenue was net deferral of revenue of $94,000 and net recognition of revenue of $49,000, respectively. During 2012 YTD and 2011 YTD, the net change in deferred revenue was net deferral of $141,000 and net recognition of revenue of $601,000, respectively. See "Critical Accounting Policies and Estimates" under "Revenue and Associated Allowance for Revenue Adjustments and Doubtful Accounts" below for a detailed discussion of deferred revenue.

Costs of Goods Sold and Gross Profit

Costs of goods sold include expenses associated with finished goods purchased from electronic manufacturing services (EMS) providers, in addition to other operating expenses, which include material and direct labor, our manufacturing and operations organization, property and equipment depreciation, warranty expenses, freight expenses, royalty payments, and the allocation of overhead expenses.

Our gross profit margin (GPM), which is gross profit as a percentage of revenue, was 58% and 61% in 2012 Q3 and 2011 Q3, respectively. GPM for 2012 Q3 decreased due to unfavorable product mix and higher overhead absorption due to a substantial decrease in inventory of $2.7 million. GPM for 2012 YTD did not change from the GPM of 60% for 2011 YTD.


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CLEARONE COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Operating Expenses

2012 Q3 operating expenses were approximately $5.3 million, compared to the same amount in 2011 Q3 after excluding litigation proceeds from Biamp amounting to $3.7 million. 2012 YTD operating expenses excluding litigation proceeds of $250,000 were approximately $16.9 million, an increase of approximately $1.2 million from $15.7 million in 2011 YTD after excluding litigation proceeds from Biamp amounting to $3.7 million, or an increase of 8%. See Proceeds from litigation below for additional information on the litigation proceeds received in 2012 YTD and 2011 YTD from Biamp.

Sales and Marketing ("S&M") Expenses. S&M expenses include selling, customer service, and marketing expenses such as employee-related costs, allocations of overhead expenses, trade shows, and other advertising and selling expenses.

S&M expenses during 2012 Q3 decreased $363,000 or 17% when compared to 2011 Q3 primarily due to decreases in commission and bonus payments to sales people and independent sales agents. S&M expenses during 2012 YTD remained at the same level as it was during YTD.

Research and Development ("R&D") Expenses. R&D expenses include research and development and product line management, including employee-related costs, outside services, expensed materials and depreciation, and an allocation of overhead expenses.

R&D expenses during 2012 Q3 increased by $163,000, or 9%, compared to R&D expenses during 2011 Q3. The increase was primarily due to increases in employee-related costs due to recent acquisitions, partially offset by decreases in project related costs.

R&D expenses during 2012 YTD increased by $747,000, or 14%, compared to R&D expenses during 2011 YTD. The increase was primarily due to increases in employee-related costs due to recent acquisitions, and other hires partially offset by decreases in software and subscription costs.

General and Administrative ("G&A") Expenses. G&A expenses include employee-related costs, professional service fees, allocations of overhead expenses, litigation costs, and corporate administrative costs, including finance, information technology and human resources.

G&A expenses during 2012 Q3 increased by $212,000, or 16%, compared to expenses during 2011 Q3. The increase was primarily due to increased costs associated with the recently acquired operations of VCON, an increase in amortization of intangibles, and increased employee-related costs, partially offset by a reduction in bad debts.

G&A expenses during 2012 YTD increased by $570,000, or 14%, compared to expenses during 2011 YTD. The increase was primarily due to increased costs associated with the recently acquired operations of VCON, an increase in amortization of intangibles and bank fees, partially offset by reduction in legal expenses, bad debts, recruitment costs and consulting expenses.

We continue to incur high legal expenses due to various litigation items explained in detail in our Form 10-K for the year ended December 31, 2011 and updated in our subsequent Form 10-Qs.

Proceeds from Litigation

The litigation proceeds received in 2012 YTD of $250,000 represent the receipt of a settlement of amounts due from a defendant in our litigation related to the "Theft of Intellectual Property and Related Cases" described in detail in in Note 8 - Commitments and Contingencies of the Notes to the Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2011. Operating expenses for 2011 Q3 and 2011 YTD are reduced by a credit of $3.7 million for proceeds receivable from Biamp with respect to a judgment award in litigation related to the theft of our intellectual property.

Other income (expense), net

Other income (expense), net, includes interest income, interest expense, and currency gain (loss).


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CLEARONE COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Provision for income taxes

During 2012 Q3, we accrued income taxes at the expected annualized rate of 37.7% as compared to annualized rate
of 33.5% in 2011 Q3. The increase in the expected annualized rate in 2012 Q3 was primarily due to the expiration of
federal R&D credit on December 31, 2011.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012, our cash and cash equivalents were approximately $14.3 million, a decrease of $2.4 million compared to cash and cash equivalents of approximately $16.7 million as of December 31, 2011.

Net cash provided by operating activities was $2.6 million in 2012 YTD, an increase of approximately $590,000 compared to $2.0 million cash provided by operating activities in 2011 YTD. The increase was primarily due to a decrease in inventories and an increase in accrued expenses offset by an increase in income taxes payable.

Net cash used in investing activities in 2012 YTD was approximately $4.9 million, which consisted of the acquisition of the business of VCON for $4.6 million and $260,000 towards purchases of equipment. Net cash used in investing activities in 2011 YTD consisted of the acquisition of the business of MagicBox for $750,000 and $309,000 towards purchases of equipment.

Net cash used in financing activities in 2012 YTD was approximately $83,000, which consisted of the acquisition of outstanding stock totaling $384,000, offset by $301,000 proceeds received on exercise of stock options. In 2011 YTD, net cash provided by financing activities amounted to $732,000 through proceeds received on the exercise of stock options.

As of September 30, 2012 our working capital was $30.9 million as compared to $32.7 million as of December 31, 2011.

We believe that future income from operations and effective management of working capital will provide the liquidity needed for at least the next twelve months to meet our short-term and long-term operating requirements and finance our growth plans. We also believe that our strong financial position and solid business model will help us raise additional capital when needed to meet our short and long-term financing needs. In addition to capital expenditures, we may use cash in the near future for selective investments in technological, marketing or product manufacturing capabilities to broaden our product offerings, and for acquisitions that may strategically fit our business and are accretive to our business performance. However, no assurance can be given that changes will not occur that would consume available capital resources at a rate more rapidly than anticipated and we may need or want to raise additional capital through debt or equity financing to fund our long term operating requirements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our results of operations and financial position are based upon our consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. We review the accounting policies used in reporting our financial results on a regular basis. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. We believe that the estimates we use are reasonable; however, actual results could differ from those estimates.

Our significant accounting policies are described in Note 2 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011 and Note 1 to the Condensed Consolidated Financial Statements attached herewith. We believe the policies described below identify our most critical accounting policies, which are the policies that are both important to the representation of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Revenue and Associated Allowances for Revenue Adjustments and Doubtful Accounts Included in continuing operations is product revenue, primarily from product sales to distributors, dealers, and end-users. Product revenue is recognized when (i) the products are shipped and any right of return expires, (ii) persuasive evidence of an


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CLEARONE COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

arrangement exists, (iii) the price is fixed and determinable, and (iv) collection is reasonably assured.
We provide a right of return on product sales to major distributors under a product rotation program. Under this seldom used program, a distributor is allowed to return, once a quarter, products purchased during the prior 180 days for a total value generally not exceeding 15% of the distributor's net purchases during the preceding quarter. The distributor is, however, required to place a new purchase order for an amount not less than the value of products returned under the stock rotation program. When products are returned, the associated revenue, cost of goods sold, inventory and accounts receivable originally recorded are reversed. When the new order is placed, the revenue, associated cost of goods sold, inventory and accounts receivable are recorded and the product revenue is subject to deferral analysis as described below. In a small number of cases, the distributors are also permitted to return the products for other business reasons.

Revenue from product sales to distributors is not recognized until the return privilege has expired or it can be determined with reasonable certainty that the return privilege has expired, which approximates when product is sold-through to customers of our distributors (dealers, system integrators, value-added resellers, and end-users) rather than when the product is initially shipped to a distributor. We evaluate, at each quarter-end, the inventory in the channel through information provided by our distributors. The level of inventory in the channel will fluctuate up or down, each quarter, based upon our distributors' individual operations. Accordingly, each quarter-end deferral of revenue and associated cost of goods sold is calculated and recorded based upon the actual channel inventory reported at quarter-end. Further, with respect to distributors and other channel partners not reporting channel inventory, the revenue and associated cost of goods sold are deferred until we receive payment for the product sales made to such distributors or channel partners.

The accuracy of the deferred revenue and costs depends to a large extent on the accuracy of the inventory reports provided by our distributors and other resellers and any material error in those reports would affect our revenue deferral. However, we believe that the controls we have in place, including periodic physical inventory verifications and analytical reviews, would help us identify and prevent any material errors in such reports.

The amount of deferred cost of goods sold was included in consigned inventory. The following table details the amount of deferred revenue, cost of goods sold, and gross profit (dollars in thousands):

                             September 30, 2012     December 31, 2011
Deferred revenue            $             3,545    $             3,404
Deferred cost of goods sold               1,270                  1,199
Deferred gross profit       $             2,275    $             2,205

. . .

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