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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-KT

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from July 1, 2009  to December 31, 2009

 

Commission file number:  001-33660

 

 

CLEARONE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

 

Utah

 

87-0398877

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

5225 Wiley Post Way, Suite 500,  Salt Lake City, Utah 84116

(Address of principal executive offices, including zip code)

 

(801) 975-7200

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Common Stock, $0.001 par value

The NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act:   None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ¨ Yes   x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   ¨ Yes   x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes  ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

 

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes   ¨ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 Larger Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)

Smaller Reporting Company   x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes               x No

 

The aggregate market value of the shares of voting common stock held by non-affiliates was approximately $19.6 million at December 31, 2008 (the Company's most recently completed second fiscal quarter), based on the $3.93 closing price for the Company’s common stock on the NASDAQ Capital Market on such date. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

 

The number of shares of ClearOne common stock outstanding as of May 4, 2010 was 8,929,279.

 

 

 

 

 

 

 

 

 


 

 

CLEARONE COMMUNICATIONS, INC.

 

TRANSITION REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 2009

 

INDEX

 

 Item Number

 

Page No.

 

 

 

PART I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

14

Item 1B.

Unresolved Staff comments

20

Item 2.

Properties

20

Item 3.

Legal Proceedings

20

Item 4.

Reserved

20

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21

Item 6.

Selected Financial Data

21

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

33

Item 8.

Financial Statements and Supplementary Data

33

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

33

Item 9A(T).

Controls and Procedures

34

Item 9B.

Other Information

35

 

 

 

PART III

 

 

Item 10.

Directors , Executive Officers and Corporate Governance

36

Item 11.

Executive Compensation

38

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

42

Item 13.

Certain Relationships and Related Transactions, and Director Independence

44

Item 14.

Principal Accountant Fees and Services

45

 

 

 

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

46

 

 

 

SIGNATURES

48

 

 

 

 

 

 

(i)

 

Table of Contents

 

 

 

 

 

 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.  These statements reflect our views with respect to future events based upon information available to us at this time. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from these statements. Forward-looking statements are typically identified by the use of the words “believe,” “may,” “could,” “will,” “should,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “intend,” and similar words and expressions. Examples of forward-looking statements are statements that describe the proposed development, manufacturing, and sale of our products; statements that describe our results of operations, pricing trends, the markets for our products, our anticipated capital expenditures, our cost reduction and operational restructuring initiatives, and regulatory developments; statements with regard to the nature and extent of competition we may face in the future; statements with respect to the sources of and need for future financing; and statements with respect to future strategic plans, goals, and objectives. Forward-looking statements are contained in this report under “Business” included in Item 1 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Qualitative and Quantitative Disclosures About Market Risk” included in Items 7 and 7A of Part II of this Annual Report on Form 10-K. The forward-looking statements are based on present circumstances and on our predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences and timing than those now assumed or anticipated. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the risk factors discussed in this report under the caption “Item 1A Risk Factors.” These cautionary statements are intended to be applicable to all related forward-looking statements wherever they appear in this report. The cautionary statements contained or referred to in this report should also be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. Any forward-looking statements are made only as of the date of this report and we assume no obligation to update forward-looking statements to reflect subsequent events or circumstances.

 

PART I

 

References in this Transition Report on Form 10-K to “ClearOne,” “we,” “us,” “CLRO” or “the Company” refer to ClearOne Communications, Inc., a Utah corporation, and, unless the context otherwise requires or is otherwise expressly stated, its subsidiaries.

 

ITEM 1.   BUSINESS

 

Overview

 

ClearOne was formed as a Utah corporation in 1983 organized under the laws of the State of Utah.

 

ClearOne develops and markets advanced audio and video connectivity technologies that enhance the quality of life through better communication, education, and entertainment.  These technologies include conferencing, collaboration, multimedia and network solutions.

 

We occupy the number one position in the global professional audio conferencing market with more than 50% of the global market share. The reliability, flexibility and performance of our comprehensive solutions create a natural communications environment that saves organizations time and money by enabling more effective and efficient communication. We develop, manufacture, market, and service a comprehensive line of high-quality audio conferencing products under personal, tabletop, premium and professional (installed audio) categories. We believe the performance and reliability of our high-quality audio conferencing & collaboration products create a natural communications environment, which saves organizations of all sizes time and money by enabling more effective and efficient communication.

 

 

 

 

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ITEM 1 - BUSINESS

 

 

On November 3, 2009 ClearOne acquired NetStreams, Inc, a pioneer in digital media networks based on Internet Protocol (IP) technology, that is used in a wide variety of applications, including digital signage, corporate video distribution, network operations centers and government facilities, and large venues in such industries as hospitality, entertainment and casinos. NetStreams' digital streaming media and control systems support virtually any number of digital or analog sources, including high definition audio and video content to nearly an unlimited number of networked endpoints. Under the terms of the merger and acquisition agreement, ClearOne paid approximately $1.45 million in cash and agreed to assume $2 million in debt. Please refer to Note 3 – Business Combination, Goodwill and Intangibles in the Notes to Consolidated Financial Statements (Part II, Item 8) for more financial information.  NetStreams products are sold primarily in the residential electronics channel and audio and video commercial channel. The addition of NetStreams’ networked media and control distribution products to ClearOne’s portfolio of audio conferencing and related products presents a perfect fit for both businesses bringing complementary products and sales channels to both organizations.  We believe this combination of high-quality audio conferencing and technology to distribute media and control over IP based networks will enable us to provide a comprehensive high definition audio and video solution to better realize the true promise of audiovisual and IT convergence.

 

ClearOne now also develops and sells products to distribute media and control via data networks after its acquisition of NetStreams, Inc. in November 2009.  We are a world leader in digital media networks based on Internet Protocol (IP) technology. ClearOne’s IP-based and IP-controlled systems handle any number of digital or analog sources and deliver high definition audio and video, to an unlimited number of zones. By combining content and control signals in one data stream, ClearOne systems offer new levels of affordability, simplicity, reliability, and expandability, benefiting both installers and end-users with lower costs for installation, set-up, and support.

 

We also manufacture and sell media carts for audio and video conferencing.  We have an established history of product innovation and plan to continue to apply our expertise in audio engineering to develop and introduce innovative new products and enhance our existing products.

 

Our conferencing & collaboration products are used by organizations of all sizes to accomplish effective group communication. Our networked media and control distribution systems are used by a wide range of customers from individual residential users to large enterprises.  Our end-users range from some of the world’s largest and most prestigious companies and institutions to small and medium-sized businesses, educational institutions, and government organizations as well as individual consumers. We sell our products to these end-users primarily through a network of independent distributors and resellers who in turn sell our products to dealers, systems integrators, and other value-added resellers. We also sell products directly to dealers, systems integrators, value-added resellers, and end-users.

 

Our website address is www.clearone.com . Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports are available, free of charge, on our website at the "Investor Relations" section under "Company", as soon as reasonably practicable after we file electronically such material with, or furnish it to, the SEC.

 

For a discussion of certain risks applicable to our business, results of operations, financial position, and liquidity see the risk factors described in “Item 1A, Risk Factors” below.

 

 

 

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CLEARONE COMMUNICATIONS, INC. AND SUBSIDIARIES

ITEM 1 - BUSINESS

 

Business Strategy

 

We currently participate in the following markets: Professional AV, telephony, digital signage, corporate video distribution, network operations centers, content and control distribution to hospitality, entertainment and casino enterprises, and home automation.

 

Our goals are to:

maintain our market leadership in the professional conferencing category

continue building on our leadership in premium conferencing category (a category we created)

further penetrate the tabletop conferencing and personal conferencing markets

capitalize on the convergence of AV over IP

provide solutions that are new and reach deeper into the enterprise infrastructure by bringing clear, differentiated value to both the practitioner and the customer.

 

We will continue to improve our existing high-quality products and develop new products for stand alone audio conferencing applications or for integration with leading video and web conferencing systems and applications.  We also intend to be the leader in the networked media and control distribution product market. The principal components of our strategy to achieve this goal are set forth below.

 

Provide a superior conferencing experience

 

We have been developing audio technologies since 1981 and believe we have established a reputation for providing some of the highest quality group audio conferencing solutions in the industry. Our proprietary audio signal processing technologies, including Distributed Echo Cancellation®, have been the core of our professional conferencing products and are the foundation for our new product development in other conferencing categories. We plan to build upon our reputation of being a market leader and continue to provide the highest quality products and technologies to the customers, partners and markets we serve.

 

Provide significant impact on how media and control are distributed

 

We believe ClearOne’s innovative approach of bringing together networking technology with audio and video distribution and control and our mastery over these technologies have the potential to bring about a significant change in the audio and video industry and beyond. We believe the benefits and features that only networked digital media can offer will change and enhance the user experience.

 

Offer greater value to our customers and partners

 

To provide our customers and partners with audio conferencing products that offer high value, we are focused on listening to our customers and partners and delivering products to meet their needs. By offering high quality products that are designed to solve conferencing ease-of-use issues and are easy to install, configure, and maintain, we believe we can provide greater value to our customers and partners and enhance business communications and decision making.  Our networked media and control distribution products offer significant cost savings and are easy to install and maintain by utilizing the existing networking infrastructure.

 

Leverage and extend ClearOne technology leadership and innovation

 

We continue to focus on developing cutting edge conferencing products and are committed to incorporating the latest technologies into our new and existing product lines. Key to this effort is adopting emerging technologies such as Voice over Internet Protocol (VoIP), wideband audio, wireless connectivity, and convergence of voice and data networks, exploring new application models for our premium and personal audio conferencing technologies, and developing products based on internationally accepted standards and protocols. With the acquisition of NetStreams, ClearOne plans to leverage on its patented StreamNet® technology, to increase its current market share and enter new markets.

 

 

 

 

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Expand and strengthen sales channels

 

We continue to expand and strengthen domestic and international sales channels through the addition of key distributors and dealers that expand beyond our traditional audio-video channels that carry our professional conferencing products. We continue to direct significant sales efforts toward channel partners who are focused on the tabletop and personal conferencing markets. We also continue to strengthen our presence within the telephony reseller channel. We believe the telephony reseller channel is best suited to sell our premium conferencing systems, tabletop conference phones, and personal conferencing & collaboration products.

 

We plan to introduce commercial networked media and control distribution products into ClearOne’s existing and global sales channels and offer training, certification, support and other resources to grow, strengthen, and increase our ability to promote and sell our  products through these channels.

 

We will continue to actively market the existing NetStreams brand within the existing residential channel and will recruit additional channel and sales partners to bring greater awareness to the product solutions.

 

Broaden our product offerings

 

We believe we offer the industry’s most complete audio conferencing product line, including the following:

Professional conferencing products that are used in executive boardrooms, courtrooms, hospitals, and auditoriums that integrate with leading video and telepresence systems

Premium conferencing products that integrate with leading video and web conferencing systems and applications

Tabletop conferencing phones used in conference rooms and offices

Personal conferencing products that enable hands-free audio communications in new ways such as through PCs, laptops, cell phones and handsets.

   

With the acquisition of NetStreams, ClearOne offers a full line of networked media and control distribution products for a wide range of commercial and residential applications.

 

We also provide a comprehensive portfolio of media carts that provide equipment mobility and making conferencing equipment easy to access and use. We plan to continue to broaden and expand our product offerings to meet the evolving needs of our customers and partners, address changes in the markets we currently serve, and effectively target new markets for our products.

 

Develop strategic partnerships

 

To stay on the leading edge of product and market developments, we plan to continue to identify partners with expertise in areas strategic to our growth objectives. We will work to develop partnerships with leaders in markets complimentary to our products, who can benefit from our products and technologies and through whom we can access new market growth opportunities.  We have entered into partnerships with Avaya, Microsoft, NEC, Skype, and others to offer conferencing products uniquely suited to their systems and applications.  We also plan to broaden the application and use of our newly acquired patented StreamNet technology by partnering with other market participants through licensing the technology, joint development of products, co-marketing, etc.

 

Strengthen existing customer and partner relationships through dedicated support

 

We have developed outstanding technical and sales support teams that are dedicated to providing customers and partners with the best available service and support. We believe our technical support is recognized as among the best in the industry and we will continue to invest in the necessary resources to ensure that our customers and partners have access to the information and support they need to be successful in using our products. We also dedicate significant resources to providing product training to our channel partners worldwide.

 

 

 

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CLEARONE COMMUNICATIONS, INC. AND SUBSIDIARIES

ITEM 1 - BUSINESS

 

Markets and Products

 

Audio Conferencing Products: Overview

 

The performance and reliability of our high-quality audio conferencing products enable effective and efficient communication between geographically separated businesses and organizations by connecting them to their employees, customers and partners. We offer a full range of audio conferencing products including professional conferencing products used in executive boardrooms, courtrooms, hospitals, classrooms, and auditoriums, premium conferencing products that interface with video and web conferencing systems, tabletop conferencing phones used in conference rooms and offices, and personal conferencing products that can be used with laptops and other portable devices. For each of the last two fiscal years and the transition period covered by this report, our professional conferencing products and tabletop conference phones have together contributed in excess of 77% percent of our consolidated revenue. Our audio conferencing products feature our proprietary Distributed Echo Cancellation® and noise cancellation technologies to enhance communication during a conference call by eliminating echo and background noise. Most of our products also feature proprietary audio processing technologies such as adaptive modeling and first-microphone priority, which combine to deliver clear, crisp and full-duplex audio. These technologies enable natural and fatigue-free communication between distant conferencing participants.

 

We believe the principal drivers of demand for audio conferencing products are the following:

Availability of easy-to-use conferencing systems and applications

Voice quality of audio conferencing systems as compared to the quality of telephone handset speakerphones

Expansion of global, regional, and local corporate enterprises

 

Other factors we expect to have a significant impact on the demand for our audio conferencing systems include the following:

Availability of affordable audio conferencing solutions for small businesses and home offices

Growth of distance learning and corporate training programs

Increasing adoption of teleworking

Decreases in travel due to cost and carbon footprint considerations

Transition to the Internet Protocol (IP) network from the traditional public switched telephone network (PSTN) and the deployment of VoIP applications

Increased adoption of unified communication platforms that leverage the affordability and capability of personal computers as a central component of corporate communication.

 

We expect these growth factors to be offset by direct competition  from high-end telephone handset speakerphones, new and existing competitors in the audio conferencing market, the technological volatility of IP-based products, and continued pressures on enterprises to reduce spending.

 

Audio Conferencing Products: Professional Audio Conferencing

 

We occupy the number one position in the global professional audio conferencing market with more than 50% of the global market share. We have been developing high-end, professional conferencing products since 1991 and believe we have established strong brand recognition for these products worldwide. Our professional conferencing products include the Converge® Pro and Converge 560/590 product lines. The Converge SR 1212 product features similar technologies and is used for sound reinforcement applications.

 

The Converge Pro product line leads our professionally installed audio products line of product offerings. Based on the success of our Converge Pro product line, the XAP series of products was discontinued effective July 2009. The Converge Pro series delivers a significant feature set and performance improvements including unprecedented proprietary acoustical echo cancellation, noise cancellation, full duplex performance, enhanced management capabilities, and simplified configuration utilities. We continue to expand the Converge Pro product line with the addition of the Converge 880T and 880TA products which consolidates the functionality of an audio amplifier and telephone interface into a single product.  

 

 

 

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These products offer easier installation and increased features to our customers and partners. The Converge SR 1212 is a digital matrix mixer that provides advanced audio processing, microphone mixing, and routing for sound reinforcement. This product line was also expanded with the addition of the Converge SR 1212A which integrates a 4 channel audio amplifier, our proprietary DARE® feedback eliminator and industry leading expandability with the features of the Converge SR1212 into a single product. These products are comprehensive audio processing systems designed to excel in the most demanding acoustical environments and routing configurations. These products are also used for integrating high-quality audio with video and web conferencing systems.

 

We also added Converge Pro VH20 to our Converge Pro family of products in October 2009. VH20 provides a direct connection between Converge Pro audio conferencing systems and VoIP PBX phone systems so that users can transport audio signals across their IP networks. VH20 easily links with any of ClearOne's Converge Pro products to create a complete audio conferencing system that can quickly be integrated with Cisco, Avaya and many other VoIP PBX phone systems for complete interoperability. VH20 also delivers wideband audio for rich and crystal clear sound, provides guaranteed quality of service (QoS), and ensures full security with TLS, AES and SRTP encryption. We believe these features combine to deliver the most advanced professional quality VoIP audio interface available on the market today.

 

In response to our customers’ and partners’ need for professional audio solutions that would fit the budgetary requirements for mid-sized conference rooms, we designed the Converge 560 and Converge 590 professional conferencing products. These products are positioned between our professional and premium conferencing product lines both in terms of functionality and price, and are an excellent fit for rooms requiring customized microphone (up to nine microphones) and speaker configurations along with connectivity to leading video and web conferencing systems and applications.

 

In June 2008, we announced the introduction of two models of Converge Amplifiers, PA2250 and PA4160.  However, for operational and strategic reasons, the products were discontinued.

 

We also offer a Tabletop Controller for the Converge Pro product lines. This affordable solution gives users the ability to easily start and navigate an audio conference without the need for touch panel control systems, which can be expensive, complex, or intimidating to users. The dial pad on the controller resembles a telephone keypad for instant familiarity and users can dial a conference call as easily as dialing a telephone. The Tabletop Controller can be significantly less expensive than touch-screen panel control systems, which require considerable integration and programming time and costs.

 

Frost and Sullivan, a leading global research and consulting group, awarded us their Product Line Strategy Award for both 2007 and 2006. This award is presented each year to a company that has demonstrated the most insight into customer needs and product demands within their industry, and has optimized its product line by leveraging products with the various price, performance, and feature points required by the market.

 

In November 2008, Frost and Sullivan awarded us their 2008 Global Market Leadership Award. This award is given to the company that has exhibited excellence in all areas of the market leadership process, including the identification of market challenges, drivers and restraints, as well as strategy development and methods of addressing changing market dynamics. Frost & Sullivan noted that ClearOne not only has the largest market share in the installed audio segment, but has also put into practice growth and implementation strategies to a degree well above most of their competitors. We were recognized for our ability to expand our market share, integrate new technologies into our portfolio of products, and maintain market-leading pricing.

 

Audio Conferencing Products: Premium Conferencing

 

Our RAV audio conferencing product is a complete, out-of-the-box system that includes an audio mixer, Bose® loudspeakers, microphones, and a control device that can be either wired or wireless. The RAV product uniquely combines the sound quality of a professionally installed audio system with the simplicity of a conference phone and can be easily connected to rich-media devices, such as video or web conferencing systems, to deliver enhanced audio performance.

 

 

 

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RAV is strategically positioned between our professional and tabletop conferencing products in price and functionality, and fills an important audio conferencing solution requiring integration of quality audio with leading video and web conferencing systems and applications. RAV offers many powerful audio processing technologies from our professional conferencing products without the need for professional installation and programming.

 

Audio Conferencing Products: Tabletop Conferencing

 

Our MAX line of tabletop conferencing phones utilizes many of the high-end echo cancellation, noise cancellation, and audio processing technologies found in our professional audio conferencing products.

 

MAX product line is comprised of the following product families: the MAX® EX and MAXAttach™; MAX Wireless and MAXAttach Wireless; and MAX IP™ and MAXAttach IP™ tabletop conferencing phones. MAX Wireless was the industry’s first wireless conferencing phone. Designed for use in executive offices or small conference rooms with multiple participants, MAX Wireless can be moved from room to room within 150 feet of its base station. MAXAttach Wireless was the industry’s first and remains the only dual-phone, completely wireless solution. This system gives customers tremendous flexibility in covering larger conference room areas.

 

The MAX EX and MAXAttach wired phones feature an industry-first capability – instead of just adding extension microphones for use in larger rooms, the conference phones can be daisy chained together, up to a total of four phones. This provides even distribution of microphones, loudspeakers, and controls for better sound quality and improved user access in medium to large conference rooms. In addition, all MAXAttach wired versions can be used separately when they are not daisy-chained together.

 

The MAX IP and MAXAttach IP are VoIP tabletop conference phones which are based on the industry-standard SIP signaling protocol. These phones can also be daisy-chained together, up to a total of four phones providing outstanding room and control coverage that other VoIP conference phones on the market cannot match.

 

Our latest addition to the MAX family is MAX IP Response Point.  Response Point is an innovative new phone system from Microsoft® that utilizes voice recognition technology to create an easy to use experience for small business users.  MAX IP Response Point is the first and only conference phone for the response point phone system, bringing high performance audio to small business.  MAX IP Response Point contains HDConference™, our suite of high-performance audio processing technologies and provides the ability to daisy-chain up to four phones together. In January 2009, Internet Telephony magazine recognized MAX IP Response Point as a recipient of its 2008 Product of the Year Award.

 

Audio Conferencing Products: Personal Conferencing Products

 

Our CHAT™ line of conferencing speaker phones delivers our trademark crystal-clear full-duplex audio performance, and can be used in a variety of applications with a wide number of devices including the following:

 

PCs and Macs

VoIP telephony applications such as Skype; Popular audio instant messaging (IM) applications like Yahoo, MSN, Google, etc.; enterprise softphones; audio for web-based videoconferencing applications; gaming; music playback

Cell and Smart phones

Connects to the 2.5mm headset jack of many cell and smart phones for hands-free, full-duplex audio conferencing

Telephones

Connects to the headset jack (certain phone models) for hands-free, full-duplex audio conferencing

iPods and MP3 players

For full-bandwidth audio playback

Desktop video conferencing systems

For hands-free, full-duplex audio conferencing

 

 

 

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CHAT 50 attracted significant media coverage and won many recognitions since its introduction including, PC Magazine’s Editors’ Choice Award in March 2006 and Portable Computer Magazine’s Best for Business Products Award for 2007.

 

CHAT 150 offers many of the same connectivity options as CHAT 50, but features three microphones in a larger form factor for use by a larger number of participants compared to CHAT 50.  Customers have the ability to add a high-quality, full-duplex speaker phone to their handsets, and still retain the full functionality that comes with today’s handsets, including access to company directory, voicemail access, audio bridge functions, etc. CHAT 150 makes it possible to introduce quality conferencing capability without the need for extending an additional analog PBX line.


During 2009 CHAT 170 and CHAT 70 were introduced to fill the needs for a hands-free speakerphone for individuals using Microsoft's unified communications platform, Office Communications Server 2007. CHAT 70 is similar to CHAT 50 with single microphone, while CHAT 170 has three microphones like CHAT 150. CHAT 70 and CHAT 170 utilize technologies shared by CHAT 50 and CHAT 150 including HDConference and full duplex audio technologies. CHAT 70 and CHAT 170 are the perfect audio peripherals for greatly enhanced collaboration through unified communication. True to their plug-and-play capabilities, CHAT 70 and CHAT 170 require no drivers to be installed and plug into a USB port - enabling all incoming Office Communicator calls to ring on the CHAT 70 or CHAT 170. In the short period since its introduction, CHAT 170 has already gained industry-wide recognition and media awards.

 

CHAT 60 and CHAT 160 were introduced after June 30, 2009 to support Skype users.

 

Our personal conferencing products have become popular with large enterprises and organizations. We have entered into partnerships with Avistar, Microsoft, Skype, and others to offer personal conferencing products uniquely suited to their systems and applications for their enterprise users and consumers.

 

Networked media and control distribution products


Our DigiLinX IP audio, video and control system is extremely easy to use. The system can control audio sources, video sources, security systems, HVAC systems and lighting and can activate multiple actions all together in just a single touch. This multi-room system creates a seamless web where audio, video, gaming, heating, air conditioning, security and lighting all reside on one system making for a truly interactive experience. The system enables control through its attractive touch screens, computer or any device with a built-in web browser. DigiLinX also allows you to communicate through room-to-room paging, room monitoring and answering the door using the intercom.  DigiLinX has no limits on the numbers of sources, displays, or amplifiers in a project and can be used from residential homes with a few rooms to large commercial projects.

 

Expanding the network size is as simple as adding a computer to the network. There is no central controller that limits the number of devices on the network. Content and control are carried over existing network wiring obviating the necessity to pull separate bundles of cable for audio, video, and another system for controlling the sources and displays. Converting an audio or video signal to TCP/IP, preserves the quality of the signal across the network. Unlike analog systems, which lose quality over long distances,TCP/IP packets are decoded with exactly the same quality as they were encoded. Whether the signal is being sent to the next floor or across the campus it arrives just as it was sent. ClearOne’s networked media and control distribution products also allow for decentralization of hardware. Each piece of hardware contains the needed processing and interfaces for its function. The DigiLinX graphical user interface (GUI) is dynamically generated based on the devices connected on the network requiring no additional programming. The GUI includes everything needed to easily control a system and any third party systems, saving time and money on costly user interface design.

 

 

 

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CLEARONE COMMUNICATIONS, INC. AND SUBSIDIARIES

ITEM 1 - BUSINESS

 

ClearOne's patented StreamNet Technology encompasses several protocols, conventions, and technologies to insure the best quality audio and video distribution over TCP/IP. StreamNet technology provides an end-to-end all digital solution with A/V signal synchronization, automatic device discovery & configuration, remote access for control, software upgrades and more. One fundamental problem with using TCP/IP to distribute digital audio to multiple zones is the synchronization of playback. Without synchronization, audio can sputter, cut out, or have strong echo effects from room to room, sometimes playing several seconds apart.  ClearOne’s  StreamNet® technology ensures that audio or video content is synchronized to less than a millisecond of each device, preventing any odd echoing or latency.

 

Musica Distributed Audio system is designed to deliver superior audio performance and features interactive keypads that are very easy to operate and use. The advanced design of the Musica system places digital amplifiers in each zone, behind each keypad, rather than in one central location. This improves sound quality by reducing noise, distortion and power losses as well as increasing reliability and simplifying the installation. Any Musica keypad can be upgraded to include a digital FM Tuner, allowing every zone an independent selection of radio stations.  Audio Ports of Musica are highly flexible, allowing the output of the distributed audio to be coupled with a powered subwoofer or external amplifier, as well as the input of a local source such as a television monitor or cable box.

 

Quartet®, a residential electronics solution offers an affordable alternative to projects that do not require the full capabilities of Musica. The system enables homeowners to enjoy exceptional audio quality from different audio sources in up to four different zones at the same time.

 

Panorama® video system is a point to multi-point high definition video distribution and  control system. The system serves as the central video switch and distributes various video sources including composite, S-videoand component video sources over standard network cable. Multiple Panorama systems can be cascaded for distribution of video for larger systems. Panorama can also be integrated with DigiLinX and Musica and other third party control systems.

 


Media Carts

 

We complement our audio conferencing products with microphones, media carts for audio and video conferencing. Our wide selection of wood, metal, and laminate media carts features audiovisual carts; plasma screen carts and video conferencing carts. We expanded our Titan media carts line with the Titan Articulating Arm Dual Plasma Cart in June 2009.  This innovative product features an articulating plasma mounting system that folds the monitor support arms for angle viewing, transportation and storage. Once folded the cart will fit into standard elevators or through standard doorways while accommodating most Plasma or LCD displays up to 50”. In June 2009, we announced the introduction of ClearPresence Dual Media Cart to accommodate two flat screen monitors for video and audio conferencing systems.  However, for operational and strategic reasons, the product was discontinued.

 

Marketing and Sales

 

We primarily use a two-tier channel model, through which we sell our products directly to a worldwide network of independent audiovisual, residential electronics, information technology, and telecommunications distributors, who then sell our products to independent systems integrators, dealers, and value-added resellers, who in turn work directly with the end-users of our products for product fulfillment and installation. We also sell our products on a limited basis directly to certain dealers, systems integrators, value-added resellers, and end-users.

 

During the transition period, approximately $10.8 million, or 64 percent, of our total product sales were generated in the United States and product sales of approximately $6.0 million, or 36 percent, were generated outside the United States. Revenue from product sales to customers outside of the United States accounted for approximately 32 percent of our total product sales for fiscal 2009 and approximately 30 percent of our total product sales for fiscal 2008.

 

 

 

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We sell directly to our distributors, resellers and end users in more than 55 countries worldwide. We anticipate that the portion of our total product revenue from international sales will continue to increase as we further enhance our focus on developing new products, establishing new channel partners, strengthening our presence in key growth areas, complying with regional environmental regulatory standards, and improving product localization with country-specific product documentation and marketing materials.

 

Direct Distributors and resellers

 

We sell our products directly to approximately 190 distributors and resellers throughout the world. Distributors and resellers purchase our products at a discount from list price and resell them on a non-exclusive basis to independent systems integrators, dealers, and other value-added resellers. Our distributors maintain their own inventory and accounts receivable and are required to provide technical and non-technical support for our products to the next level of distribution participants. We work with our distributors and resellers to establish appropriate inventory stocking levels. We also work with our distributors and resellers to maintain relationships with our existing systems integrators, dealers, and other value-added resellers.

 

 Independent Integrators, Dealers, and Resellers

 

Our direct distributors and resellers sell our products worldwide to approximately 1,000 independent system integrators, telephony value-added resellers, IT value-added resellers, and PC dealers on a non-exclusive basis. While dealers, resellers, and system integrators all sell our products directly to the end-users, system integrators typically add significant value to each sale by combining our products with products from other manufacturers as part of an integrated system solution. Dealers and value-added resellers usually purchase our products from distributors and may bundle our products with products from other manufacturers for resale to the end-user. We maintain close working relationships with our reseller partners and offer them education and training on all of our products.

 

Marketing

 

Much of our marketing effort is conducted in conjunction with our channel partners, who provide leverage for us in reaching existing and prospective customers worldwide. We also regularly attend industry forums and exhibit our products at multiple regional and international trade shows, often with our channel partners. These trade shows provide exposure for our brand and products to a wide audience.

 

In addition to advertising our products in popular publications serving the conferencing and residential electronics industries, we also conduct public relations initiatives to get press coverage and product reviews in industry and non-industry publications alike.

 

Customers

 

We do not believe that any end-user accounted for more than 10 percent of our total revenue during fiscal 2009 or 2008. Revenues included sales to three distributors that represented approximately 50 and 58 percent of total revenue during the transition period of six months ended December 31, 2009 and fiscal year ended June 30, 2009, respectively. Each of these three distributors, NewComm Distributing, Starin Marketing and VSO Marketing, accounted for more than 10 percent of consolidated revenue during the transition period of six months ended December 31, 2009 and fiscal year ended June 30, 2009. As discussed above, these distributors facilitate product sales to a large number of independent systems integrators, dealers, and value-added resellers and subsequently to their end-users. The loss of one or more distributors could reduce revenue and have a material adverse effect on our business and results of operations. As of December 31, 2009, our shipped orders on which we had not recognized revenue were $4.7 million and our backlog of unshipped orders was $255,000.

 

 

 

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Competition

 

The conferencing and the networked media and control distribution product markets are characterized by intense competition and rapidly evolving technology. We compete with businesses having substantially greater financial, research and product development, manufacturing, marketing, and other resources. If we are not able to continually design, manufacture, and successfully market new or enhanced products or services that are comparable or superior to those provided by our competitors and at comparable or better prices, we could experience pricing pressures and reduced sales, gross profit margins, profits, and market share, each of which could have a materially adverse effect on our business.

 

Our competitors vary within each product category. We believe we are able to differentiate ourselves and therefore successfully compete as a result of the high audio quality of our products resulting from our proprietary audio signal processing technologies, patented IP based networking technology, technical and channel support services, and the strength of our brands.

 

We believe the principal factors driving sales are the following:

 

Quality and functionality of the products

Broad and deep channel partnerships

Established history of successful world-wide installations for diverse vertical markets

Brand name recognition

Quality of customer and partner support, and

Effective sales and marketing communication

 

In the professional audio conferencing systems and sound reinforcement markets, our main competitors include Biamp Systems, Harman International, Lectrosonics, Peavey, Polycom, and Shure and their original equipment manufacturing (OEM) partners, with several other companies potentially poised to enter the market. We occupy the number one position in the global professional audio conferencing market with more than 50% of the global market share. We uniquely contributed to the professional conferencing market with the introduction of the Audio Perfect (“AP”) product line a number of years ago, followed by the XAP and recently with the introduction of Converge Pro.  We believe we continue to have a strong reputation with the system integrators and audio visual consultants.

 

We believe we created a new audio conferencing category with the introduction of the RAV platform, which we call premium conferencing. RAV is a unique product with capabilities we do not believe can be found on any other competing system.

 

In the tabletop conferencing market, we face significant competition from Aethra, Konftel, LifeSize (now part of Logitech), Panasonic and Polycom and especially from their OEM partnerships. The significant portion of the tabletop market is covered by sales through OEM partnerships. While we believe MAX products have unique features like the ability to attach or daisy chain multiple phones together and have superior quality through our proprietary digital signal processing technologies, our limited OEM partnerships and pricing pressures from higher volume competitors restrict our ability to expand our existing share of this market.

 

The personal conferencing market has seen a number of new entrants. Our primary competitors in the personal conferencing market are Actiontec, Iogear, mVox, Phoenix Audio and Polycom and their OEM partners. We believe that our CHAT family of products offer unique advantages in their superior audio performance and their abilities to connect to multiple devices for variety of applications.

 

Our networked media and control distribution products face intense competition from a few well-established corporations like AMX, Crestron, Extron and Linear and numerous other competitors of diversified capabilities and strengths. We believe that our pioneering patented StreamNet technology delivers superior audio and video performance and provides us a competitive edge over other industry players.

 

 

 

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Our media carts compete primarily with the products of Accuwood, Comlink, and Video Furniture International and multiple small vendors. Sales of media carts are affected by shipping costs, resulting in higher product costs when compared to local vendors and suppliers.

 

In each of the markets in which we compete, many of our competitors may have access to greater financial, technical, manufacturing, and marketing resources, and as a result they may respond more quickly or effectively to new technologies and changes in customer preferences. We cannot provide assurance that we will continue to compete effectively in the markets we serve.

 

Regulatory Environment

 

Regulations regarding the materials used in manufacturing, the process of disposing of electronic equipment and the efficient use of energy require additional time to obtain regulatory approvals of new products in international markets. Such regulations may impact our ability to expand our sales in a timely and cost-effective manner and as a result our business could be harmed.

 

Sources and Availability of Raw Materials

 

We manufacture our products through contract manufacturers, who are generally responsible to source and procure required raw materials and components. Most of the components that our contract manufacturers require for manufacturing our products are readily available from a number of sources. We continually work with our contract manufacturers to seek alternative sources for all our components and raw materials requirements to ensure higher quality and better pricing. Most of our contract manufacturers and their vendors are qualified by Corporate Quality Assurance. We work with our contract manufacturers to ensure raw materials and components conform to our specifications.

 

Manufacturing

 

Currently, all of our products are manufactured by third-party manufacturers. Our primary contract manufacturer is Flextronics.

 

Seasonality

 

Our audio conferencing products revenue has historically been strongest during the second and fourth quarters though the variations between the quarters are not consistently significant. There can be no assurance that any historic sales patterns will continue and, as a result, sales for any prior quarter are not necessarily indicative of the sales to be expected in any future quarter.

 

Research and Product Development

 

We are committed to research and product development and view our continued investment in research and product development as a key ingredient to our long-term business success. Our research and product development expenditures were approximately $3.5 million during the six months ended December 31, 2009, $7.5 million in fiscal year ended June 30, 2009 and $7.1 million in fiscal year ended June 30, 2008.

 

Our core competencies in research and product development include (a) many audio technologies, including telephone echo cancellation, acoustic echo cancellation, and noise cancellation using advanced digital signal processing technology, and (b) networking and media distribution technologies. We also have expertise in wireless technologies, VoIP, and software and network application development. We believe that ongoing development of our core technological competencies is vital to develop new products and to enhance existing products.

 

 

 

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Intellectual Property and Other Proprietary Rights

 

We believe that our success depends in part on our ability to protect our proprietary rights. We rely on a combination of patent, copyright, trademark, and trade secret laws and confidentiality agreements and processes to protect our proprietary rights. The laws of foreign countries may not protect our intellectual property to the same degree as the laws of the United States.

 

We generally require our employees, customers, and potential distribution participants to enter into confidentiality and non-disclosure agreements before we disclose any confidential aspect of our technology, services, or business. In addition, our employees are required to assign to us any proprietary information, inventions, or other technology created during the term of their employment with us. However, these precautions may not be sufficient to protect us from misappropriation or infringement of our intellectual property.

 

We currently have about 40 patents, whether applied for, pending or issued, that cover conferencing products and networking and media distribution technologies. The expiration dates of issued patents range from 2018 to 2025. We hold 21 registered trademarks and have also applied for registration for 13 trademarks. Registered trademarks include ClearOne, XAP, MAX, Converge, CHAT, AccuMic, Distributed Echo Cancellation, Gentner, NetStreams, StreamNet and others.  We have also filed for trademarks for CleaRoom, AVoIP, Interact, and other marks we use. We have received or filed for registered copyrights of certain of our source code for acoustic echo cancellation and other related audio signal processing algorithms.

 

Employees

 

As of December 31, 2009, we had 121 full-time employees and one part-time employee. Of these employees, 83 were located in our Salt Lake City office, 32 in other U.S. locations, two in the United Kingdom and four in Asia. None of our employees are subject to a collective bargaining agreement and we believe our relationship with our employees is good.  We occasionally hire contractors with specific skill sets to meet our operational needs.

 

 

 

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ITEM 1A.  RISK FACTORS

 

Investors should carefully consider the risks described below. The risks described below are not the only ones we face and there are risks that we are not presently aware of or that we currently believe are immaterial that may also impair our business operations. Any of these risks could harm our business. The trading price of our common stock could decline significantly due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this transition report on Form 10-K, including our consolidated financial statements and related notes.

 

Risks Relating to Our Business

 

We face intense competition in all markets for our products and services; our operating results will be adversely affected if we cannot compete effectively against other companies.

 

The markets for our products and services are characterized by intense competition and pricing pressures and rapid technological change. We compete with businesses having substantially greater financial, research and product development, manufacturing, marketing, and other resources. If we are not able to continually design, manufacture, and successfully introduce new or enhanced products or services that are comparable or superior to those provided by our competitors and at comparable or better prices, we could experience pricing pressures and reduced sales, gross profit margins, profits, and market share, each of which could have a materially adverse effect on our business.

 

Difficulties in estimating customer demand in our products segment could harm our profit margins.

 

Orders from our distributors and other distribution participants are based on demand from end-users. Prospective end-user demand is difficult to measure. This means that our revenue during any fiscal quarter could be adversely impacted by low end-user demand, which could in turn negatively affect orders we receive from distributors and dealers. Our expectations for both short- and long-term future net revenues are based on our own estimates of future demand.

 

Revenue for any particular time period is difficult to predict with any degree of certainty. We typically ship products within a short time after we receive an order; consequently, unshipped backlog has not historically been a good indicator of future revenue. We believe that the level of backlog is dependent in part on our ability to forecast revenue mix and plan our manufacturing accordingly. A significant portion of our customers’ orders are received during the last month of the quarter. We budget the amount of our expenses based on our revenue estimates. If our estimates of sales are not accurate and we experience unforeseen variability in our revenue and operating results, we may be unable to adjust our expense levels accordingly and our gross profit and results of operations will be adversely affected. Higher inventory levels or stock shortages may also result from difficulties in estimating customer demand.

 

Our sales depend to a certain extent on government funding and regulation.

 

In the audio conferencing products market, the revenue generated from sales of our audio conferencing products for distance learning and courtroom facilities depend on government funding.  In the event government funding for such initiatives was reduced or became unavailable, our sales could be negatively impacted. Additionally, many of our products are subject to governmental regulations. New regulations could significantly impact sales in an adverse manner.

 

Environmental laws and regulations subject us to a number of risks and could result in significant costs and impact on revenue

 

Regulations regarding the materials used in manufacturing, the process of disposing of electronic equipment and the efficient use of energy require additional time to obtain regulatory approvals of new products in international markets. Such regulations may impact our ability to expand our sales in a timely and cost-effective manner and as a result our business could be harmed.

 

 

 

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Product development delays or defects could harm our competitive position and reduce our revenue.

 

We have, in the past, and may again experience, technical difficulties and delays with the development and introduction of new products. Many of the products we develop contain sophisticated and complicated circuitry, software and components, and utilize manufacturing techniques involving new technologies. Potential difficulties in the development process that could be experienced by us include difficulty in the following:

 

meeting required specifications and regulatory standards;

meeting market expectations for performance;

hiring and keeping a sufficient number of skilled developers;

obtaining prototype products at anticipated cost levels;

having the ability to identify problems or product defects in the development cycle; and

achieving necessary manufacturing efficiencies.

 

Once new products reach the market, they may have defects, or may be met by unanticipated new competitive products, which could adversely affect market acceptance of these products and our reputation. If we are not able to manage and minimize such potential difficulties, our business and results of operations could be negatively affected.

 

Our profitability may be adversely affected by our continuing dependence on our distribution channels.

 

We market our products primarily through a network of distributors who in turn sell our products to systems integrators, dealers, and value-added resellers. All of our agreements with such distributors and other distribution participants are non-exclusive, terminable at will by either party, and generally short-term. No assurances can be given that any or all such distributors or other distribution participants will continue their relationship with us. Distributors and to a lesser extent systems integrators, dealers, and value-added resellers cannot easily be replaced and the loss of revenues and our inability to reduce expenses to compensate for the loss of revenue could adversely affect our net revenue and profit margins.

 

Although we rely on our distribution channels to sell our products, our distributors and other distribution participants are not obligated to devote any specified amount of time, resources, or efforts to the marketing of our products or to sell a specified number of our products. There are no prohibitions on distributors or other resellers offering products that are competitive with our products and some do offer competitive products. The support of our products by distributors and other distribution participants may depend on the competitive strength of our products and the price incentives we offer for their support. If our distributors and other distribution participants are not committed to our products, our revenue and profit margins may be adversely affected.

 

Additionally, we offer our distributors price protection on their inventory of our products. If we reduce the list price of our products, we will compensate our distributors for the respective products that remain in their inventory on the date the price adjustment becomes effective provided that they have taken delivery of the products within the last 35 days. Our net revenue and profit margins could adversely be affected if we reduce product prices significantly or distributors happen to have significant inventory on-hand of the affected product at the time of a price reduction. Further, if we do not have sufficient cash resources to compensate distributors on terms satisfactory to them or us, our price protection obligations may prevent us from reacting quickly to competitive market conditions.

 

 

 

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We rely on reporting of channel inventory by distributors to recognize revenue from product sales to them, which could turn out to be inaccurate.

 

We defer recognition of revenue from product sales to distributors until the return privilege has expired, which approximates when product is sold-through to customers of our distributors. We evaluate, at each quarter-end, the inventory in the channel through information provided by our distributors. We use this information to determine the amount of inventory in the channel, and the appropriate revenue and cost of goods sold associated with those channel products. We cannot guarantee that the third party data, as reported will be accurate. We periodically audit a limited number of distributors.   

 

We depend on an outsourced manufacturing strategy, and any disruption in their services could negatively impact our product availability and revenues.

 

We outsource the manufacturing of all of our products to third-party manufacturers located in both the U.S. and Asia. If any of these manufacturers experience difficulties in obtaining sufficient supplies of components, component prices significantly exceed anticipated costs, an interruption in their operations, or otherwise suffer capacity constraints, we would experience a delay in shipping these products which would have a negative impact on our revenue. Should there be any disruption in services due to natural disaster, economic or political difficulties, transportation restrictions, acts of terror, quarantines or other restrictions associated with infectious diseases, or other similar events, or any other reason, such disruption would have a material adverse effect on our business. Operating in the international environment exposes us to certain inherent risks, including unexpected changes in regulatory requirements and tariffs, and potentially adverse tax consequences, which could materially affect our results of operations. Currently, we have no second source of manufacturing for a portion of our products.

 

The cost of delivered product from our contract manufacturers is a direct function of their ability to buy components at a competitive price and to realize efficiencies and economies of scale within their overall business structure. If they are unsuccessful in driving efficient cost models, our delivered costs could rise, affecting our profitability and ability to compete. In addition, if the contract manufacturers are unable to achieve greater operational efficiencies, delivery schedules for new product development and current product delivery could be negatively impacted.

 

Difficulties in integrating past or potential future acquisitions could adversely affect our business.

 

We recently acquired NetStreams, a pioneer in digital media networks based on Internet Protocol (TCP/IP).  The efficient and effective integration of this business into our organization is important to our growth.  Any acquisition involves numerous risks, including difficulties in integrating the operations, technologies and products of the acquired companies, the diversion of our management's attention from other business concerns, and the potential loss of key customers or employees of an acquired company. Failure to achieve the anticipated benefits of this and any future acquisitions or to successfully integrate the operations of any companies we acquire could also harm our business, results of operations and cash flows. Additionally, we cannot assure you that we will not incur material charges in future quarters to reflect additonal costs associated with acquisitions or any future acquisitions we may make.


Product obsolescence could harm demand for our products and could adversely affect our revenue and our results of operations.

 

Our industry is subject to technological innovations that could render existing technologies in our products obsolete and thereby decrease market demand for such products. If any of our products become slow-moving or obsolete and the recorded value of our inventory is greater than its market value, we will be required to write down the value of our inventory to its fair market value, which would adversely affect our results of operations. In limited circumstances, we are required to purchase components that our outsourced manufacturers use to produce and assemble our products. Should technological innovations render these components obsolete, we will be required to write down the value of this inventory, which could adversely affect our results of operations.

 

 

 

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If we are unable to protect our intellectual property rights or have insufficient proprietary rights, our business would be materially impaired.

 

We currently rely primarily on a combination of trade secrets, copyrights, trademarks, patents, patents pending, and nondisclosure agreements to establish and protect our proprietary rights in our products. No assurances can be given that others will not independently develop similar technologies, or duplicate or design around aspects of our technology. In addition, we cannot assure that any patent or registered trademark owned by us will not be invalidated, circumvented or challenged, or that the rights granted thereunder will provide competitive advantages to us. Litigation may be necessary to enforce our intellectual property rights. We believe our products and other proprietary rights do not infringe upon any proprietary rights of third parties; however, we cannot assure that third parties will not assert infringement claims in the future. Our industry is characterized by vigorous protection of intellectual property rights. Such claims and the resulting litigation are expensive and could divert our attention, regardless of the merit of such claims. In the event of a successful claim, we might be required to license third-party technology or redesign our products, which may not be possible or economically feasible.

 

We currently hold only a limited number of patents. To the extent that we have patentable technology for which we have not filed patent applications, others may be able to use such technology or even gain priority over us by patenting such technology themselves. With respect to any patent application we have filed, we cannot assure that a patent will be awarded.

 

International sales account for a significant portion of our net revenue and risks inherent in international sales could harm our business.

 

International sales represent a significant portion of our total product revenue. We anticipate that the portion of our total product revenue from international sales will continue to increase as we further enhance our focus on developing new products for new markets, establishing new distribution partners, strengthening our presence in emerging economies, and improving product localization with country-specific product documentation and marketing materials. Our international business is subject to the financial and operating risks of conducting business internationally, including the following:

 

unexpected changes in, or the imposition of, additional legislative or regulatory requirements;

unique or more onerous environmental regulations;

fluctuating exchange rates;

tariffs and other barriers;

difficulties in staffing and managing foreign sales operations;

import and export restrictions;

greater difficulties in accounts receivable collection and longer payment cycles;

potentially adverse tax consequences;

potential hostilities and changes in diplomatic and trade relationships; and

disruption in services due to natural disaster, economic or political difficulties,  transportation, quarantines or other restrictions associated with infectious diseases.

 

 

 

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We may not be able to hire and retain qualified key and highly-skilled technical employees, which could affect our ability to compete effectively and may cause our revenue and profitability to decline.

 

We depend on our ability to hire and retain qualified key and highly skilled employees to manage, research and develop, market, and service new and existing products. Competition for such key and highly-skilled employees is intense, and we may not be successful in attracting or retaining such personnel. To succeed, we must hire and retain employees who are highly skilled in the rapidly changing communications and Internet technologies. Individuals who have the skills and can perform the services we need to provide our products and services are in great demand. Because the competition for qualified employees in our industry is intense, hiring and retaining employees with the skills we need is both time-consuming and expensive. We may not be able to hire enough skilled employees or retain the employees we do hire. In addition, provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC impose heightened personal liability on some of our key employees. The threat of such liability could make it more difficult to identify, hire and retain qualified key and highly-skilled employees. We have relied on our ability to grant stock options as a means of recruiting and retaining key employees. Recent accounting regulations requiring the expensing of stock options will impair our future ability to provide these incentives without incurring associated compensation costs. If we are unable to hire and retain employees with the skills we seek, our ability to sell our existing products, systems, or services or to develop new products, systems, or services could be hindered with a consequent adverse effect on our business, results of operations, financial position, or liquidity.

 

We rely on third-party technology and license agreements, the loss of any of which could negatively impact our business.

 

We have licensing agreements with various suppliers for software and hardware incorporated into our products. These third-party licenses may not continue to be available to us on commercially reasonable terms, if at all. The termination or impairment of these licenses could result in delays of current product shipments or delays or reductions in new product introductions until equivalent designs could be developed, licensed, and integrated, if at all possible, which would have a material adverse effect on our business.

 

We may have difficulty in collecting outstanding receivables.

 

We grant credit to substantially all of our customers without requiring collateral. In times of economic uncertainty, the risks relating to the granting of such credit will typically increase.  Although we monitor and mitigate the risks associated with our credit policies, we cannot ensure that such mitigation will be effective. We have experienced losses due to customers failing to meet their obligations. Future losses could be significant and, if incurred, could harm our business and have a material adverse effect on our operating results and financial position.

 

Interruptions to our business could adversely affect our operations.

 

As with any company, our operations are at risk of being interrupted by earthquake, fire, flood, and other natural and human-caused disasters, including disease and terrorist attacks. Our operations are also at risk of power loss, telecommunications failure, and other infrastructure and technology based problems. To help guard against such risks, we carry business interruption loss insurance to help compensate us for losses that may occur.

 

 

 

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Risks Relating to Share Ownership

 

Our stock price fluctuates as a result of the conduct of our business and stock market fluctuations.

 

The market price of our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price of our common stock may be significantly affected by a variety of factors, including the following:

 

statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the market in which we do business or relating to us specifically;

disparity between our reported results and the projections of analysts;

the shift in sales mix of products that we currently sell to a sales mix of lower-gross profit product offerings;

the level and mix of inventory levels held by our distributors;

the announcement of new products or product enhancements by us or our competitors;

technological innovations by us or our competitors;

success in meeting targeted availability dates for new or redesigned products;

the ability to profitably and efficiently manage our supplies of products and key components;

the ability to maintain profitable relationships with our customers;

the ability to maintain an appropriate cost structure;

quarterly variations in our results of operations;

general consumer confidence or general market conditions or market conditions specific to technology industries;

domestic and international economic conditions;

unexpected changes in regulatory requirements and tariffs;

our ability to report financial information in a timely manner; and

the markets in which our stock is traded.

 

Rights to acquire our common stock could result in dilution to other holders of our common stock.

 

As of December 31, 2009, we had outstanding options to acquire approximately 1.2 million shares of our common stock at a weighted average exercise price of $5.44 per share. An additional 753,000 shares remain available for grant under our 2007 Plan.  During the terms of these options, the holders thereof will have the opportunity to profit from an increase in the market price of the common stock.  The existence of these options may adversely affect the terms on which we can obtain additional financing, and the holders of these options can be expected to exercise such options at a time when we, in all likelihood, would be able to obtain additional capital by offering shares of our common stock on terms more favorable to us than those provided by the exercise of these options.

 

Sales of additional shares of our common stock could have a negative effect on the market price of our common stock.

 

Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices and could impair our ability to raise capital through the sale of our equity securities.  Most shares of common stock currently outstanding are eligible for sale in the public market, subject in certain cases to compliance with the requirements of Rule 144 under the securities laws.  Shares issued upon the exercise of stock options granted under our stock option plan generally will be eligible for sale in the public market.  We also have the authority to issue additional shares of common stock and shares of one or more series of preferred stock.  The issuance of such shares could dilute the voting power of the currently outstanding shares of our common stock and could dilute earnings per share.

 

 

 

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ITEM 1A - RISK FACTORS

 

Our common stock could be delisted, and, as a result, become more volatile and less liquid.

 

Our common stock is currently listed on the NASDAQ Capital Market.  On April 16, 2010, we received a letter from the NASDAQ Stock Market stating that the Company no longer complies with NASDAQ Marketplace Rule 5250(c)(1) as a result of delay in filing this transition report on Form 10-K for the period ended December 31, 2009.  Pursuant to the letter, we have 60 calendar days, or until June 15, 2010, to submit to NASDAQ a plan to regain compliance with the NASDAQ Listing Rules which must be accepted by NASDAQ. While we do not expect to be delisted, in the event of delisting by NASDAQ, our common shares might continue to trade on the “over-the-counter” (“OTC”) market although we can give no assurances this would be the case.  OTC transactions involve risks in addition to those associated with transactions on a stock exchange.  Many OTC stocks trade less frequently and in smaller volumes than stocks listed on an exchange.  Accordingly, OTC-traded shares are less liquid and are likely to be more volatile than exchange-traded stocks.


We have previously identified material weaknesses in our internal controls.

 

In our Form 10-K for the fiscal year ending June 30, 2006 and Form 10-K/A-2 for the fiscal year ending June 30, 2008, we reported and identified a material weakness in our internal controls. Although we believe we have remedied this weakness through the commitment of considerable resources, we are always at risk that any future failure of our own internal controls or the internal control at any of our outsourced manufacturers or partners could result in additional reported material weaknesses. Any future failures of our internal controls could have a material impact on our market capitalization, results of operations, or financial position, or have other adverse consequences.

 

ITEM 1B.   UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2.  PROPERTIES

 

We currently occupy a 36,279 square-foot facility in Salt Lake City, Utah under the terms of an operating lease expiring in December 2013 which supports our principal administrative, sales, marketing, customer support, and research and product development facility.

 

We occupy a 23,712 square-foot warehouse in Salt Lake City under the terms of an operating lease expiring in November 2013 which serves as our primary inventory fulfillment and repair center. We also occupy a warehouse measuring 6,500 square feet in Salt Lake City under the terms of an operating lease expiring in December 2011. We also lease approximately 3,700 square-feet in warehouse space in Hong Kong under the terms of two operating leases both expiring in February 2011 which support our partners and customers located in the Asia-Pacific region.

 

We also occupy a 15,370 square-foot facility in Austin, Texas under the terms of two operating leases expiring in September 2010, which serves as an additional facility to support our administrative, sales, marketing, customer support, and research and development activities.

 

We believe our current facilities are adequate to meet our needs for the foreseeable future and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

 

ITEM 3.  LEGAL PROCEEDINGS

 

See Note  9 – Commitments and Contingencies of the Notes to Consolidated Financial Statements (Part II, Item 8) for information regarding legal proceedings in which we are involved, which is incorporated in this Item 3 by reference.

 

ITEM 4.  RESERVED

 

 

- 20 -

 

Table of Contents

CLEARONE COMMUNICATIONS, INC. AND SUBSIDIARIES



PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock has been traded on the Nasdaq Capital Market under the symbol CLRO since August 14, 2007.  The following table sets forth high and low sale prices (or high and low bid quotations) of our common stock for each fiscal quarter indicated as reported on the applicable exchange or market.

 

 

 

Period ended December 31, 2009

 

 

Year ended June 30, 2009

 

 

Year ended June 30, 2008

 

 

 

High

 

 

Low

 

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter – July 1 to Sep 30

 

$

2.93

 

 

$

2.40

 

 

$

5.00

 

 

$

3.10

 

 

$

7.25

 

 

$

4.40

 

Second Quarter – Oct 1 to Dec 31

 

 

3.49

 

 

 

2.63

 

 

 

4.74

 

 

 

3.27

 

 

 

7.42

 

 

 

5.00

 

Third Quarter – Jan 1 to Mar 31

 

 

 

 

 

 

 

 

 

 

4.06

 

 

 

3.00

 

 

 

5.81

 

 

 

4.50

 

Fourth Quarter – April 1 to Jun 30

 

 

 

 

 

 

 

 

 

 

3.25

 

 

 

2.47

 

 

 

5.07

 

 

 

3.66

 

 

On May 4, 2010, the closing price for our common stock as reported on the Nasdaq Capital Market was $3.03.

 

Shareholders

 

As of May 4, 2010, there were 8,929,279 shares of our common stock issued and outstanding and held by approximately 480 shareholders of record. This number includes each broker dealer and clearing corporation, that hold shares for customers, as a single shareholder.

 

Dividends

 

We have not paid a cash dividend on our common stock and do not anticipate doing so in the foreseeable future. We intend to retain earnings to fund future working capital requirements, infrastructure needs, growth, product development, and our stock repurchase program.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

We currently have two equity compe


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