CLEARONE INC

Current report

Risks Related to Our Recent Financing and Asset Sale Obligations

Current report

Our recent issuance of convertible notes and designation of preferred stock may result in significant dilution to existing stockholders and could adversely affect our financial condition. On June 20, 2025, we issued $3.0 million in convertible notes to First Finance Ltd., which are mandatorily convertible into Class B Convertible Preferred Stock, further convertible into common stock at $6.008 per share (subject to adjustments). This, combined with First Finance Ltd.'s option to purchase up to an additional $2.0 million of Class B Convertible Preferred Stock, could lead to substantial dilution of existing stockholders' ownership and voting power upon conversion.

Current report

We are obligated to pursue an Asset Sale, which may not be completed on favorable terms or at all, potentially leading to adverse consequences for our business and stockholders. Under the terms of our recent financing, we must use reasonable best efforts to complete a sale of all or substantially all of our current assets and operations within 180 days of issuing the Class A Redeemable Preferred Stock. If we fail to consummate an Asset Sale, we may face liquidity constraints, as the convertible notes and preferred stock include provisions for mandatory redemption or conversion that could strain our resources. Moreover, the process of pursuing an Asset Sale may disrupt operations, divert management attention, and result in the loss of key customers, suppliers, or employees, further impacting our financial performance.

Current report

Our dependence on third-party financing terms introduces risks related to control and governance changes. The appointment of two directors nominated by First Finance Ltd. on June 20, 2025, expands our Board and may influence strategic decisions, including the Asset Sale. The financing terms, including restricted use of proceeds and potential warrant repurchases, limit our operational flexibility and expose us to risks if we cannot comply with covenants or if First Finance Ltd. exercises its rights in ways adverse to other stakeholders.

Current report

The reduction in force we implemented may impair our ability to maintain operations and comply with obligations. On June 20, 2025, we reduced our workforce significantly as part of scaling operations for the Asset Sale pursuit. This RIF could lead to decreased morale, loss of institutional knowledge, and challenges in continuing essential functions such as sales, customer support, and public reporting, potentially resulting in regulatory non-compliance, revenue declines, or increased costs to rebuild capabilities if the Asset Sale is not completed.

Current report

The special stock dividend of Class A Redeemable Preferred Stock may not result in value to stockholders if the Asset Sale is not completed, or if completed on unfavorable terms, potentially leading to no or minimal redemption proceeds and increased complexity in our capital structure.

Current report

Concentration of Ownership and Control

Current report

Concentration of ownership by significant stockholders could adversely affect our operations and stockholder value. As disclosed in a Schedule 13D/A filed on July 1, 2025, First Finance Ltd. beneficially owns approximately 32.4% of our common stock on an as converted basis (including rights to acquire up to an additional $2 million of shares of our Class B Convertible Preferred Stock (the “Additional Financing Right”)), with rights to nominate two directors. In addition, assuming full exercise by First Finance Ltd. of its Additional Financing Right, Edward D. Bagley beneficially owns approximately 32.5% of our issued and outstanding shares of common stock. Mr. Bagley’s daughter, Lisa Higley, is a member of our board of directors.

Current report

Each of First Finance and Mr. Bagley will be able to significantly influence over corporate actions, including the Asset Sale, board composition, and other matters requiring stockholder approval, potentially in ways that conflict with the interests of other stockholders or lead to delays in strategic initiatives. In addition, the concentration of ownership in First Finance Ltd. and Mr. Bagley may discourage third parties from seeking to acquire control of us, which may adversely affect the market price of our common stock

Current report

For more information on these events, see Notes [7, 8, 12, 13] to the Condensed Consolidated Financial Statements and 'Liquidity and Capital Resources' in MD&A.