CLEARONE INC - FORM 10-Q/A - January 13, 2016

Attached files

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EX-32.1 - EXHIBIT 32.1 - SOX CERTIFICATION CEO - CLEARONE INCexhibit321033115a.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION - CLEARONE INCexhibit312033115a.htm
EX-32.2 - EXHIBIT 32.2 - SOX CERTIFICATION FINANCIAL OFFICER - CLEARONE INCexhibit322033115a.htm
EX-15.1 - EXHIBIT 15.1 REVIEW LETTER - CLEARONE INCexhibit151letterfromtanner.htm
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION - CLEARONE INCexhibit311033115a.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q/A
(Amendment No. 1)

(Mark One)

[x]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
or
[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _______ to _______

Commission file number: 001-33660
CLEARONE, 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 number)
5225 Wiley Post Way, Suite 500, Salt Lake City, Utah
 
84116
(Address of principal executive offices)
 
(Zip Code)
(801) 975-7200
(Registrant’s telephone number, including area code) 

Indicate by check 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.   Yes [ ] No [x]

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 [x]

See the definition of “large 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 Exchange Act).  Yes [ ] No [x]

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of ClearOne common stock outstanding as of January 8, 2016 was 9,148,596.


EXPLANATORY NOTE

This Amendment No. 1 to ClearOne, Inc.’s (the “Company’s”) Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015 (the “Amendment”), as filed with the Securities and Exchange Commission (the “SEC”) on May 15, 2015 (the “Original Filing”), is being filed to amend Part I, Item 1 and Part II, Item 6 of the Original Filing following the re-review of the Company’s unaudited interim financial information for the quarterly period ended March 31, 2015 (the “Re-review”) by its current independent registered public accounting firm, Tanner LLC (“Tanner”). This Amendment is being filed to: (i) update disclosures in Part I, Item 1 with the inclusion of a Report of Independent Registered Public Accounting Firm on this Form 10-Q/A and updates of references to the Form 10-K/A resulting from the review and re-audit by Tanner, respectively; (ii) amend Part II, Item 6 of the Original Filing to include new certifications, as reflected in Exhibits 31.1, 31.2, 32.1 and 32.2; (iii) to


replace the related XBRL files as Exhibit 101 to this Form 10-Q/A which incorporates XBRL references to subsequent events occurring after the Original 10-Q was filed; and (iv) to provide an acknowledgment from Tanner regarding the unaudited interim financial statements, as reflected in Exhibit 15.1. No other changes have been made to the Original Filing, and, except as set forth in Note 11 to the financial statements within the changes described above, this Amendment does not reflect events or transactions occurring after the date of the Original Filing or modify or update those disclosures that may have been affected by events or transactions occurring subsequent to such filing date.

BACKGROUND

As previously disclosed, on October 8, 2015 ClearOne, Inc. ("the  Company") received notice from its registered public accounting firm, McGladrey LLP ("McGladrey"), that McGladrey resigned effective October 8, 2015. McGladrey's resignation was not due to any reason related to the Company's financial reporting or accounting operations, policies or practices. In its resignation letter, McGladrey stated it had concluded that its independence had been impaired because an associated entity of McGladrey has provided certain prohibited non-audit services under applicable Securities and Exchange Commission rules and related Public Company Accounting Oversight Board professional practice standards to an international subsidiary of the Company.

On October 13, 2015 , the Company engaged Tanner LLC ("Tanner") to serve as its new independent registered public accounting firm for (a) the audit for the fiscal year ending December 31, 2015; (b) interim reviews for the periods ending September 30, 2015, March 31, 2016, June 30, 2016 and September 30, 2016; and (c) for the (i) re-audit and report of Independent Registered Public Accounting Firm relating to the Company's consolidated financial statements for the year ended December 31, 2014; and (ii) the re-review of the Company's financial statements for the interim periods ended March 31, 2015 and June 30, 2015.  The Company’s unaudited interim financial statements for the quarter ended March 31, 2015 that are presented in this amended quarterly report have been prepared in accordance with U.S. Securities and Exchange Commission (“SEC”) rules.



CLEARONE, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2015

INDEX










PART I – FINANCIAL INFORMATION

Item 1.
FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Shareholder
ClearOne, Inc.:

We have reviewed the consolidated balance sheet of ClearOne, Inc. (the Company) as of March 31, 2015, the related consolidated statements of income and comprehensive income and cash flows for the three-month periods ended March 31, 2015 and 2014. These consolidated financial statements are the responsibility of the Company’s management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles. We have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ClearOne, Inc. as of December 31, 2014, and the related consolidated statements of income and comprehensive income, equity, and cash flows for the year then ended (not presented herein); and in our report dated January 13, 2016 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2014 and the consolidated statement of equity for the year ended December 31, 2014, is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived.



/s/ Tanner LLC
Salt Lake City, Utah
January 13, 2016


1


CLEARONE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
 
 
 
 
ASSETS
March 31, 2015
 
December 31, 2014
Current assets:
 
 
 
Cash and cash equivalents
$
10,865

 
$
7,440

Marketable securities
7,314

 
6,994

Receivables, net of allowance for doubtful accounts of $79 and $58, respectively
8,593

 
9,916

Inventories
13,869

 
12,766

Distributor channel inventories
1,540

 
1,698

Deferred income taxes
3,824

 
3,824

Prepaid expenses and other assets
1,267

 
2,143

Total current assets
47,272

 
44,781

Long-term marketable securities
18,133

 
19,162

Long-term inventories, net
690

 
876

Property and equipment, net
1,901

 
2,039

Intangibles, net
7,581

 
7,896

Goodwill
12,724

 
12,724

Deferred income taxes
1,265

 
1,265

Other assets
115

 
117

Total assets
$
89,681

 
$
88,860

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,854

 
$
3,057

Accrued liabilities
2,508

 
2,694

Deferred product revenue
4,684

 
5,004

Total current liabilities
11,046

 
10,755

Deferred rent
222

 
248

Other long-term liabilities
1,304

 
1,841

Total liabilities
12,572

 
12,844

Shareholders' equity:
 
 
 
Common stock, par value $0.001, 50,000,000 shares authorized, 9,111,790 and 9,097,827 shares issued and outstanding
9

 
9

Additional paid-in capital
45,204

 
44,939

Accumulated other comprehensive (loss)
(133
)
 
(8
)
Retained earnings
32,029

 
31,076

Total shareholders' equity
77,109

 
76,016

Total liabilities and shareholders' equity
$
89,681

 
$
88,860


See accompanying notes


2


CLEARONE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)


Three months ended March 31,

2015

2014
Revenue
$
13,586


$
12,708

Cost of goods sold
5,124


5,006

Gross profit
8,462


7,702





Operating expenses:



Sales and marketing
2,622


2,737

Research and product development
1,941


2,241

General and administrative
2,000


1,968

Total operating expenses
6,563


6,946





Operating income
1,899


756

Other income, net
104


81

Income before income taxes
2,003


837

Provision for income taxes
731


352

Net income
$
1,272


$
485





Basic earnings per common share
$
0.14


$
0.05

Diluted earnings per common share
$
0.13


$
0.05





Basic weighted average shares outstanding
9,100,107


9,082,546

Diluted weighted average shares outstanding
9,508,479


9,558,941

 
 
 
 
Comprehensive income:
 
 
 
Net income
$
1,272

 
$
485

   Other comprehensive income:
 
 
 
      Unrealized gain on available-for-sale securities, net of tax
55

 
73

      Change in foreign currency translation adjustment
(180
)
 
—

Comprehensive income
$
1,147

 
$
558


See accompanying notes


3


CLEARONE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)



 
Three months ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
1,272

 
$
485

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation and amortization expense
521

 
324

Amortization of deferred rent
(23
)
 
(21
)
Stock-based compensation expense
238

 
84

Provision for (recoveries of) doubtful accounts, net
21

 
(27
)
Write-down of inventory to net realizable value
47

 
416

    Loss on disposal of assets
—

 
2

    Tax benefit from exercise of stock options
(7
)
 
(87
)
Deferred income taxes
—

 
44

Changes in operating assets and liabilities:
 
 
 
Receivables
1,205

 
853

Inventories
(806
)
 
40

Prepaid expenses and other assets
877

 
886

Accounts payable
820

 
178

Accrued liabilities
(832
)
 
210

Income taxes payable
338

 
235

Deferred product revenue
(291
)
 
(51
)
Other long-term liabilities
(537
)
 
—

Net cash provided by operating activities
2,843

 
3,571

 
 
 
 
Cash flows from investing activities:
 
 
 
Payment towards business acquisitions
—

 
(13,060
)
Purchase of property and equipment
(76
)
 
(249
)
Purchase of intangibles
—

 
(90
)
Proceeds from maturities and sales of marketable securities
2,376

 
—

Purchases of marketable securities
(1,612
)
 
(780
)
Net cash provided by (used in) investing activities
688

 
(14,179
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net proceeds from equity-based compensation programs
20

 
1,021

Tax benefits from equity-based compensation programs
7

 
87

Stock registration costs
—

 
(55
)
Net cash provided by financing activities
27

 
1,053

 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(133
)
 
—

Net increase (decrease) in cash and cash equivalents
3,425

 
(9,555
)
Cash and cash equivalents at the beginning of the period
7,440

 
17,192

Cash and cash equivalents at the end of the period
$
10,865

 
$
7,637

See accompanying notes



4


CLEARONE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


The following is a summary of supplemental cash flow activities:
 
Three months ended March 31,
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
$
881

 
$
29

    Issuance of common stock in connection with acquisition of business
—

 
1,679


See accompanying notes


5

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)





1.
Business Description, Basis of Presentation and Significant Accounting Policies

Business Description:

ClearOne, Inc. and its subsidiaries (collectively, “ClearOne” or the “Company”) are a global company that designs, develops and sells conferencing, collaboration, streaming and digital signage solutions for audio and visual communications.  The performance and simplicity of its advanced comprehensive solutions offer unprecedented levels of functionality, reliability and scalability.  

Basis of Presentation:

The fiscal year for ClearOne is the 12 months ending on December 31st.  The consolidated financial statements include the accounts of ClearOne and its subsidiaries. All significant inter-company accounts and transactions have been eliminated.

These accompanying interim condensed consolidated financial statements for the three months ended March 31, 2015 and 2014, respectively, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and are not audited. Certain information and footnote disclosures that are usually included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been either condensed or omitted in accordance with SEC rules and regulations. The accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31, 2015 and December 31, 2014, the results of operations for the three months ended March 31, 2015 and 2014, and cash flows for the three months ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the results for a full-year period.  These interim condensed consolidated financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2014 filed with the SEC on January 13, 2016.

Significant Accounting Policies:

The significant accounting policies were described in Note 1 to the audited consolidated financial statements included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2014 filed with the SEC on January 13, 2016. There have been no changes to these policies during the three months ended March 31, 2015 that are of significance or potential significance to the Company.

Recent Accounting Pronouncements:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. Early adoption is not permitted. The updated standard becomes effective for the Company on January 1, 2017. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

2.
Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per common share:

6

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)



 
Three months ended March 31,
 
2015
 
2014
Numerator:
 
 
 
Net income
$
1,272

 
$
485

Denominator:
 
 
 
Basic weighted average shares outstanding
9,100,107

 
9,082,546

Dilutive common stock equivalents using treasury stock method
408,372

 
476,395

Diluted weighted average shares outstanding
9,508,479

 
9,558,941

 
 
 
 
Basic earnings per common share
$
0.14

 
$
0.05

Diluted earnings per common share
$
0.13

 
$
0.05

 
 
 
 
Weighted average options outstanding
1,037,137

 
1,044,208

Anti-dilutive options not included in the computations
268,709

 
116,000


3.
Business Combination

Acquisition of Sabine

On March 7, 2014, the Company completed the acquisition of Sabine, Inc. ("Sabine") through a stock purchase agreement ("SPA"). Sabine manufactures, designs and sells Sacom professional wireless microphone systems for live and installed audio. It also makes FBX Feedback Exterminator for reliable automatic feedback control. With the addition of Sabine, ClearOne will have reliable and exclusive access to the wireless microphones that are a critical component of ClearOne’s complete microphone portfolio.


7

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)



Pursuant to the SPA, the Company (i) paid initial consideration of $8,141 in cash, (ii) accrued for possible additional earn-out payments over the next two years, estimated to be $657, and (iii) issued 150,000 shares of restricted common stock of the Company, valued at $1,679 (determined on the basis of the closing market price of the Company's stock on the acquisition date). The purchase price was paid out of cash on hand. The SPA contains representations, warranties and indemnifications customary for a transaction of this type.

The following table summarizes the consideration paid for the acquisition:
 
Consideration
Cash
$
8,141

Common stock
1,679

Contingent consideration
657

Total
$
10,477


The fair values of Sabine assets acquired and liabilities assumed are based on the information that was available during the measurement period of twelve months from the date of acquisition. The fair value of identified assets and liabilities acquired and goodwill is as follows:

 
Fair value
Cash
$
125

Accounts receivable
255

Inventories
844

Prepaid and other
105

Intangibles
3,970

Property, plant and equipment
292

Other long-term assets
11

Goodwill
5,510

Deferred tax asset
245

Trade accounts payable
(420
)
Accrued liabilities
(405
)
Stock registration costs
(55
)
Total
$
10,477


The goodwill of $5,510 related to the acquisition of Sabine is composed of expected synergies in utilizing Sabine technology in ClearOne product offerings, reduction in future combined research and development expenses, and intangible assets including acquired workforce that do not qualify for separate recognition. The goodwill balance of $5,510 related to the acquisition of Sabine is expected to be deductible for tax purposes.

Supplemental Pro Forma Information:

1) Revenue and net loss from the Sabine business from March 8, 2014 to March 31, 2014 were $84 and $163 respectively.
2) Revenue and earnings of the combined entity as though the business combination occurred as of January 1, 2014 were as follows:
 
Three months ended March 31,
 
2015
 
2014
Revenue
$
13,586

 
$
12,977

Earnings
1,272

 
244

Basic earnings per common share
$
0.14

 
$
0.03

Diluted earnings per common share
$
0.13

 
$
0.03


8

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)




3) There were no material, nonrecurring pro forma adjustments directly attributable to the acquisition included in this Supplemental Pro Forma Information.

Acquisition of Spontania Business of Spain-based Dialcom Networks, S.L.

On April 1, 2014 ClearOne, Inc. closed on the acquisition of the Spontania business of Spain-based Dialcom Networks, S.L. The Spontania cloud-based service empowers customers to deploy HD video conferencing, web collaboration, and more with equipment most businesses have and use every day - video-conferencing endpoints, desktops, laptops, web browsers, tablets, and smartphones. With Spontania there is no hardware investment and the service operates off of a reservation-less model, enabling on-demand video communications from virtually anywhere, anytime, with anyone on any device.

The aggregate purchase price under the terms of the transaction was approximately €3.66 million in cash (approximately US$5.1 million ), after certain closing adjustments. ClearOne did not assume any debt or cash. The cash purchase price was paid out of cash on hand. The addition of this technology was an integral part of the company’s strategy to build an all-inclusive video collaboration portfolio.

The fair value of identified assets and liabilities acquired from the Spontania acquisition was as follows:
 
Fair value
Intangibles
$
1,335

Property and equipment
47

Goodwill
3,741

Accrued liabilities
(71
)
Total
$
5,052


The goodwill of $3,741 relates to the acquisition of Spontania cloud-based technology and intangible assets including acquired workforce that does not qualify for separate recognition. The goodwill of $3,741 from the Spontania acquisition is expected to be deductible for tax purposes.

Supplemental Pro Forma Information:

Revenue and earnings of the combined entity as though the business combination occurred as of January 1, 2014 is not available. The Spontania business was part of a business unit of Dialcom Networks, S.L., and thus separate stand-alone financial information for Spontania is not available.

Acquisition Expenses:

During the period ended March 31, 2015, the company incurred $70 in total acquisition related expenses for the Sabine and Spontania acquisitions, all of which are categorized under general and administrative expenses in the Consolidated Statement of Operations.

Retroactive Restatement:

Following the completion of the valuation process for the acquisition of Sabine we reported intangible amortization to reflect the final adjusted values on Form 10-K, as amended, for the year ended December 31, 2014. For the quarter ended March 31, 2015 we reported amortization based on the final intangible items. For the comparative quarter ended March 31, 2014 we have restated net income to reflect the inclusion of the revised amortization applicable to that period. Net income changed from $490 originally reported for the three months ended March 31, 2014 to $485. The reported retained earnings balance of $29,482 at March 31, 2014 under the restatement would be $29,477. The restatement did not result in a reportable change to earnings per share for the period.

4.
Marketable Securities
The Company has classified its marketable securities as available-for-sale securities. These securities are carried at estimated fair value with unrealized holding gains and losses included in accumulated other comprehensive income/loss in stockholders' equity until realized. Gains and losses on marketable security transactions are reported on the specific-identification method. Dividend and interest income are recognized when earned.

The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value for available-for-sale securities by major security type and class of security at March 31, 2015 and December 31, 2014 were as follows:

 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Estimated
fair value
March 31, 2015
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds and notes
$
19,220

 
$
162

 
$
(48
)
 
$
19,334

 
 
Municipal bonds
6,079

 
36

 
(2
)
 
6,113

 
Total available-for-sale securities
$
25,299

 
$
198

 
$
(50
)
 
$
25,447



9

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)



 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Estimated
fair value
December 31, 2014
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
Corporate bonds and notes
$
19,804

 
$
89

 
$
(55
)
 
$
19,838

 
 
Municipal bonds
6,292

 
28

 
(2
)
 
6,318

 
Total available-for-sale securities
$
26,096

 
$
117

 
$
(57
)
 
$
26,156


Maturities of marketable securities classified as available-for-sale securities were as follows at March 31, 2015:

 
Amortized
cost
 
Estimated
fair value
March 31, 2015
 
 
 
     Due within one year
$
7,327

 
$
7,314

 
     Due after one year through five years
17,611

 
17,771

 
     Due after five years through ten years
361

 
362

 
Total available-for-sale securities
$
25,299

 
$
25,447

Debt securities in an unrealized loss position as of March 31, 2015 were not deemed impaired at acquisition and subsequent declines in fair value are not deemed attributed to declines in credit quality. Management believes that it is more likely than not that the securities will receive a full recovery of par value. The available-for-sale marketable securities in a gross unrealized loss position as of March 31, 2015 are summarized as follows:
 
Less than 12 months
 
More than 12 months
 
Total
(In thousands)
Estimated
fair value
 
Gross
unrealized
holding
losses
 
Estimated
fair value
 
Gross
unrealized
holding
losses
 
Estimated
fair value
 
Gross
unrealized
holding
losses
As of March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds and notes
$
1,127

 
$
(26
)
 
$
2,533

 
$
(22
)
 
$
3,660

 
$
(48
)
Municipal bonds
—

 
—

 
433

 
(2
)
 
433

 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,127

 
$
(26
)
 
$
2,966

 
$
(24
)
 
$
4,093

 
$
(50
)

5.
Intangible Assets

Intangible assets as of March 31, 2015 and December 31, 2014 consisted of the following:

 
Estimated useful lives
 
March 31, 2015
 
December 31, 2014
Tradename
7 years
 
$
555

 
$
555

Patents and technological know-how
10 years
 
5,850

 
5,850

Proprietary software
3 to 15 years
 
4,341

 
4,341

Other
5 years
 
324

 
324

 
 
 
11,070

 
11,070

Accumulated amortization
 
 
(3,489
)
 
(3,174
)
 
 
 
$
7,581

 
$
7,896



The amortization of intangible assets for the three months ended March 31, 2015 and March 31, 2014 was as follows:

10

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)



 
Three months ended March 31,
 
2015
 
2014
Amortization of intangible assets
$
315

 
$
169


The estimated future amortization expense of intangible assets is as follows:
Years ending December 31,
 
2015 (remainder)
$
943

2016
1,121

2017
925

2018
851

2019
778

Thereafter
2,963

 
$
7,581


6.
Inventories

Inventories, net of reserves, as of March 31, 2015 and December 31, 2014 consisted of the following:
 
March 31, 2015
 
December 31, 2014
Current:
 
 
 
Raw materials
$
3,071

 
$
3,056

Finished goods
12,338

 
11,408

 
$
15,409

 
$
14,464

Long-term:
 
 
 
Raw materials
$
70

 
$
59

Finished goods
620

 
817

 
$
690

 
$
876


Long-term inventory represents inventory held in excess of our current (next 12 months) requirements based on our recent sales and forecasted level of sales. We expect to sell the above inventory, net of reserves, at or above the stated cost and believe that no loss will be incurred on its sale.

Current finished goods include consigned inventory in the amounts of approximately $1,540 and $1,698 as of March 31, 2015 and December 31, 2014, respectively. Consigned inventory represents inventory at distributors and other customers where revenue recognition criteria have not yet been achieved.

The following table summarizes the losses incurred on valuation of inventory at lower of cost or market value and write-off of obsolete inventory during the three months ended March 31, 2015 and 2014, respectively.
 
Three months ended March 31,
 
2015
 
2014
Net loss (gain) on valuation of inventory and write-off of obsolete inventory
$
47

 
$
416


7.
Share-based Compensation

Share-based compensation expense has been recorded as follows:

11

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)



 
Three months ended March 31,
 
2015
 
2014
Cost of goods sold
$
5

 
$
2

Sales and marketing
40

 
20

Research and product development
33

 
11

General and administrative
160

 
51

 
$
238

 
$
84


As of March 31, 2015, the total remaining unrecognized compensation cost related to non-vested stock options, net of forfeitures, was approximately $1,084, which will be recognized over a weighted average period of 2.55 years.

8.
Shareholders’ Equity

The following table summarizes the change in shareholders’ equity during the three months ended March 31, 2015 and 2014, respectively:
 
Three months ended March 31,
 
2015
 
2014
Balance at the beginning of the period
$
76,016

 
$
70,335

Net income during the period
1,272

 
485

Share-based compensation
238

 
84

Tax benefit - stock option exercise
7

 
87

Exercise of stock options
20

 
1,021

Dividends
(319
)
 
—

Stock issued for acquisitions
—

 
1,679

Unrealized gain or loss on investments, net of tax
55

 
73

Foreign currency translation adjustment
(180
)
 
—

Balance at end of the period
$
77,109

 
$
73,764


On April 28, 2015, the Company announced a quarterly cash dividend of $0.035 per share to be paid on May 15, 2015 to shareholders of record as of May 4, 2015.

9.
Fair Value Measurements

The fair value of the Company's financial instruments reflects the amounts that the Company estimates it will receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value hierarchy prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 - Quoted prices in active markets for identical assets and liabilities.
Level 2 - Observable inputs other than quoted prices in active markets for identical assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. This category generally includes U.S. Government and agency securities; municipal securities; mutual funds and securities sold and not yet settled.
Level 3 - Unobservable inputs.
The substantial majority of the Company’s financial instruments are valued using quoted prices in active markets or based on other observable inputs. The following table sets forth the fair value of the financial instruments re-measured by the Company as of March 31, 2015 and December 31, 2014:

12

CLEARONE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)



 
  
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2015
 
 
 
 
 
 
 
Corporate bonds and notes
$
—

 
$
19,334

 
$
—

 
$
19,334

Municipal bonds
—

 
6,113

 
—

 
6,113

 
Total
$
—

 
$
25,447

 
$
—

 
$
25,447

 
  
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2014
 
 
 
 
 
 
 
Corporate bonds and notes
$
—

 
$
19,838

 
$
—

 
$
19,838

Municipal bonds
—

 
6,318

 
—

 
6,318

 
Total
$
—

 
$
26,156

 
$
—

 
$
26,156


10.
Income Taxes
The Company's forecasted effective tax rate at March 31, 2015 is 35.8%, a 3.8% increase from the 32.0% effective tax rate recorded at December 31, 2014. The forecasted effective tax rate of 35.8% excludes jurisdictions for which no benefit from forecasted current year losses is anticipated. Including losses from such jurisdictions results in a forecasted effective tax rate of 36.1%. Our forecasted effective tax rate could fluctuate significantly on a quarterly basis and could change, to the extent that earnings in countries with tax rates that differ from that of the U.S. differ, from amounts anticipated at March 31, 2015.

After discrete tax expense of $2, the effective tax rate for the quarter ended March 31, 2015 is 36.5%. The discrete tax expense is primarily attributable to interest and penalties related to unrecognized tax benefits.

11.
Subsequent Events

On April 28, 2015, the company announced a quarterly cash dividend of $0.035 per share to be paid on May 15, 2015 to shareholders of record as of May 4, 2015.

On July 16, 2015, the company announced a quarterly cash dividend of $0.035 per share to be paid on August 10, 2015 to shareholders of record as of July 27, 2015.

On October 8, 2015, the company received notice from its registered public accounting firm, McGladrey LLP (McGladrey), that McGladrey resigned effective October 8, 2015. A full description the disclosures surrounding the resignation can be found in the related Form 8-K filed on October 14, 2015.

On October 13, 2015, the company engaged Tanner LLC (Tanner) to serve as its new independent registered public accounting firm for (a) the audit for the fiscal year ending December 31, 2015; (b) interim reviews for the periods ending September 30, 2015, March 31, 2016, June 30, 2016 and September 30, 2016; and (c) for the (i) re-audit and report of Independent Registered Public Accounting Firm relating to the Company's consolidated financial statements for the year ended December 31, 2014; and (ii) the re-review of the Company's financial statements for the interim periods ended March 31, 2015 and June 30, 2015. A full description the disclosures surrounding the appointment can be found in the related Form 8-K filed on October 14, 2015.

On November 12, 2015, the company announced a quarterly cash dividend of $0.050 per share to be paid on December 21, 2015 to shareholders of record as of December 4, 2015.

On November 24, 2015, the company”) received a letter from NASDAQ Stock Market stating that the Company no longer complies with NASDAQ Listing Rule 5250(c)(1) as a result of its former auditor McGladrey LLP’s resignation and withdrawal of its audit report on the Company’s financial statements for the year ended December 31, 2014 solely as a result of its determination that it was not independent of the Company for such period and subsequent interim periods and the Company’s delay in filing its Form 10-Q for the period ended September 30, 2015. A full description the disclosures surrounding the receipt of the letter can be found in the related Form 8-K filed on December 1, 2015.


13

CLEARONE, INC.


PART II - OTHER INFORMATION


Item 6.
EXHIBITS
Exhibit No.
 
Title of Document
31.1
 
Section 302 Certification of Chief Executive Officer (filed herewith)
31.2
 
Section 302 Certification of Principal Financial Officer (filed herewith)
32.1
 
Section 906 Certification of Chief Executive Officer (filed herewith)
32.2
 
Section 906 Certification of Principal Financial Officer (filed herewith)
101.INS
 
XBRL Instance Document (filed herewith)
101.SCH
 
XBRL Taxonomy Extension Schema (filed herewith)
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase (filed herewith)
101.DEF
 
XBRL Taxonomy Extension Definitions Linkbase (filed herewith)
101.LAB
 
XBRL Taxonomy Extension Label Linkbase (filed herewith)
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase (filed herewith)
  

14

CLEARONE, INC.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
ClearOne, Inc.,
(Registrant)
 
 
 
January 13, 2016
By:
/s/ Zeynep Hakimoglu
 
 
Zeynep Hakimoglu
Chief Executive Officer
(Principal Executive Officer)
 
 
 
January 13, 2016
By:
/s/ Narsi Narayanan
 
 
Narsi Narayanan
 Senior Vice President of Finance
(Principal Financial and Accounting Officer)







15

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