N/A (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class | Trading Symbol | Name of each exchange on which registered | Common stock, par value $1.00 per share | IIN | Nasdaq Global Market |
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. ☒ 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ | Accelerated filer ☐☒ | | | Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☒ Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No The number of outstanding shares of the registrant’s common stock, $1.00 par value, on OctoberJuly 31, 20172019 was 6,869,013. 8,758,324.
INTRICON CORPORATION I N D E X PART I: FINANCIAL INFORMATION ITEM 1.Financial Statements INTRICON CORPORATION | Consolidated Condensed Balance Sheets | (In Thousands, Except Per Share Amounts) |
INTRICON CORPORATION | | | | | | | | | September 30, | | | December 31, | | | | 2017 | | | 2016 | | | | (Unaudited) | | | | | Current assets: | | | | | | | | | Cash | | $ | 332 | | | $ | 667 | | Restricted cash | | | 649 | | | | 595 | | Accounts receivable, less allowance for doubtful accounts of $235 at September 30, 2017 and $170 at December 31, 2016 | | | 6,853 | | | | 7,289 | | Inventories | | | 14,899 | | | | 12,343 | | Other current assets | | | 1,105 | | | | 957 | | Current assets of discontinued operations | | | — | | | | 123 | | Total current assets | | | 23,838 | | | | 21,974 | | | | | | | | | | | Machinery and equipment | | | 40,700 | | | | 40,152 | | Less: Accumulated depreciation | | | 34,412 | | | | 33,546 | | Net machinery and equipment | | | 6,288 | | | | 6,606 | | | | | | | | | | | Goodwill | | | 10,555 | | | | 10,555 | | Intangible assets, net | | | 2,779 | | | | 2,920 | | Investment in partnerships | | | 1,468 | | | | 146 | | Other assets, net | | | 914 | | | | 1,557 | | Total assets (a) | | $ | 45,842 | | | $ | 43,758 | | | | | | | | | | | Current liabilities: | | | | | | | | | Current maturities of long-term debt | | $ | 2,411 | | | $ | 2,346 | | Accounts payable | | | 8,410 | | | | 6,722 | | Accrued salaries, wages and commissions | | | 2,831 | | | | 2,413 | | Other accrued liabilities | | | 2,830 | | | | 1,914 | | Liabilities of discontinued operations | | | — | | | | 123 | | Total current liabilities | | | 16,482 | | | | 13,518 | | | | | | | | | | | Long-term debt, less current maturities | | | 7,014 | | | | 9,284 | | Other postretirement benefit obligations | | | 468 | | | | 501 | | Accrued pension liabilities | | | 754 | | | | 737 | | Other long-term liabilities | | | 685 | | | | 707 | | Total liabilities (a) | | | 25,403 | | | | 24,747 | | Commitments and contingencies (note 11) | | | | | | | | | Shareholders’ equity: | | | | | | | | | Common stock, $1.00 par value per share; 20,000 shares authorized; 6,860 and 6,820 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | | | 6,860 | | | | 6,820 | | Additional paid-in capital | | | 22,140 | | | | 21,383 | | Accumulated deficit | | | (7,349 | ) | | | (8,633 | ) | Accumulated other comprehensive loss | | | (740 | ) | | | (1,014 | ) | Total shareholders’ equity | | | 20,911 | | | | 18,556 | | Non-controlling interest | | | (472 | ) | | | 455 | | Total equity | | | 20,439 | | | | 19,011 | | Total liabilities and equity | | $ | 45,842 | | | $ | 43,758 | |
Consolidated Condensed Balance Sheets (In Thousands, Except Per Share Amounts) (a) Assets of Hearing Help Express (HHE), a consolidated variable interest entity, that can only be used to settle obligations of HHE were $6,408 at September 30, 2017 and $5,159 at December 31, 2016, respectively. Liabilities of HHE, for which creditors do not have recourse to the general credit of IntriCon, were $6,167 at September 30, 2017 and $3,833 at December 31, 2016, respectively. | | (See accompanying notes to the consolidated condensed financial statements) |
INTRICON CORPORATION | Consolidated Condensed Statements of Operations | (In Thousands, Except Per Share Amounts) |
| | | | | | | | | | | | | | | Three Months Ended | | | Nine Months Ended | | | | September 30, | | | September 30, | | | September 30, | | | September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | | | | | | | | | | | | | | | | | Sales, net | | $ | 24,034 | | | $ | 15,570 | | | $ | 66,083 | | | $ | 50,262 | | Cost of sales | | | 16,469 | | | | 12,028 | | | | 46,261 | | | | 37,789 | | Gross profit | | | 7,565 | | | | 3,542 | | | | 19,822 | | | | 12,473 | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | Sales and marketing | | | 2,342 | | | | 1,041 | | | | 6,857 | | | | 3,357 | | General and administrative | | | 2,698 | | | | 2,221 | | | | 7,961 | | | | 6,570 | | Research and development | | | 1,047 | | | | 1,076 | | | | 3,312 | | | | 3,562 | | Restructuring charges | | | — | | | | — | | | | — | | | | 132 | | Total operating expenses | | | 6,087 | | | | 4,338 | | | | 18,130 | | | | 13,621 | | Operating income (loss) | | | 1,478 | | | | (796 | ) | | | 1,692 | | | | (1,148 | ) | | | | | | | | | | | | | | | | | | Interest expense | | | (177 | ) | | | (135 | ) | | | (548 | ) | | | (387 | ) | Other expense | | | (337 | ) | | | (181 | ) | | | (328 | ) | | | (472 | ) | Income (loss) from continuing operations before income taxes and discontinued operations | | | 964 | | | | (1,112 | ) | | | 816 | | | | (2,007 | ) | Income tax expense | | | 47 | | | | 33 | | | | 165 | | | | 119 | | Income (loss) from continuing operations before discontinued operations | | | 917 | | | | (1,145 | ) | | | 651 | | | | (2,126 | ) | Loss on sale of discontinued operations (Note 3) | | | — | | | | — | | | | (164 | ) | | | — | | Loss from discontinued operations (Note 3) | | | — | | | | (194 | ) | | | (128 | ) | | | (759 | ) | Net income (loss) | | | 917 | | | | (1,339 | ) | | | 359 | | | | (2,885 | ) | Less: Loss allocated to non-controlling interest | | | (186 | ) | | | (35 | ) | | | (925 | ) | | | (106 | ) | Net income (loss) attributable to IntriCon shareholders | | $ | 1,103 | | | $ | (1,304 | ) | | $ | 1,284 | | | $ | (2,779 | ) | | | | | | | | | | | | | | | | | | Basic income (loss) per share attributable to IntriCon shareholders: | | | | | | | | | | | | | | | | | Continuing operations | | $ | 0.16 | | | $ | (0.16 | ) | | $ | 0.23 | | | $ | (0.32 | ) | Discontinued operations | | | — | | | | (0.03 | ) | | | (0.04 | ) | | | (0.12 | ) | Net income (loss) per share: | | $ | 0.16 | | | $ | (0.19 | ) | | $ | 0.19 | | | $ | (0.44 | ) | | | | | | | | | | | | | | | | | | Diluted income (loss) per share attributable to IntriCon shareholders: | | | | | | | | | | | | | | | | | Continuing operations | | $ | 0.15 | | | $ | (0.16 | ) | | $ | 0.22 | | | $ | (0.32 | ) | Discontinued operations | | | — | | | | (0.03 | ) | | | (0.04 | ) | | | (0.12 | ) | Net income (loss) per share: | | $ | 0.15 | | | $ | (0.19 | ) | | $ | 0.18 | | | $ | (0.44 | ) | | | | | | | | | | | | | | | | | | Average shares outstanding: | | | | | | | | | | | | | | | | | Basic | | | 6,853 | | | | 6,796 | | | | 6,836 | | | | 6,287 | | Diluted | | | 7,251 | | | | 6,796 | | | | 7,179 | | | | 6,287 | |
| | June 30, | | | December 31, | | | | 2019 | | | 2018 | | | | (Unaudited) | | | (Unaudited) | | Current assets: | | | | | | | | | Cash, cash equivalents and restricted cash | | $ | 9,801 | | | $ | 8,047 | | Short-term investments | | | 19,688 | | | | 38,093 | | Accounts receivable, less allowance for doubtful accounts of $308 at June 30, 2019 and $807 at December 31, 2018 | | | 9,746 | | | | 11,266 | | Inventories | | | 18,251 | | | | 18,163 | | Contract assets | | | 7,116 | | | | 5,624 | | Other current assets | | | 1,216 | | | | 2,146 | | Current assets of discontinued operations | | | 648 | | | | 1,205 | | Total current assets | | | 66,466 | | | | 84,544 | | | | | | | | | | | Machinery and equipment | | | 39,155 | | | | 36,725 | | Less: Accumulated depreciation | | | 26,276 | | | | 25,303 | | Net machinery and equipment | | | 12,879 | | | | 11,422 | | | | | | | | | | | Goodwill | | | 9,551 | | | | 10,808 | | Intangible assets, net | | | — | | | | 2,585 | | Operating lease right of use asset | | | 4,396 | | | | — | | Investment in partnerships | | | 1,445 | | | | 2,091 | | Long-term investments | | | 15,357 | | | | — | | Other assets, net | | | 6,234 | | | | 3,427 | | Noncurrent assets of discontinued operations | | | — | | | | 371 | | Total assets | | $ | 116,328 | | | $ | 115,248 | | | | | | | | | | | Current liabilities: | | | | | | | | | Current financing leases | | $ | 102 | | | $ | — | | Current operating leases | | | 1,620 | | | | — | | Accounts payable | | | 12,000 | | | | 12,871 | | Accrued salaries, wages and commissions | | | 3,456 | | | | 4,409 | | Other accrued liabilities | | | 4,260 | | | | 4,031 | | Liabilities of discontinued operations | | | 606 | | | | 336 | | Total current liabilities | | | 22,044 | | | | 21,647 | | | | | | | | | | | Noncurrent financing leases | | | 69 | | | | — | | Noncurrent operating leases | | | 2,971 | | | | — | | Other postretirement benefit obligations | | | 355 | | | | 377 | | Accrued pension liabilities | | | 737 | | | | 706 | | Other long-term liabilities | | | 1,224 | | | | 544 | | Total liabilities | | | 27,400 | | | | 23,274 | | Commitments and contingencies | | | | | | | | | Shareholders’ equity: | | | | | | | | | Common stock, $1.00 par value per share; 20,000 shares authorized; 8,754 and 8,664 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively | | | 8,754 | | | | 8,664 | | Additional paid-in capital | | | 85,729 | | | | 84,999 | | Accumulated deficit | | | (4,764 | ) | | | (509 | ) | Accumulated other comprehensive loss | | | (538 | ) | | | (927 | ) | Total shareholders’ equity | | | 89,181 | | | | 92,227 | | Non-controlling interest | | | (253 | ) | | | (253 | ) | Total equity | | | 88,928 | | | | 91,974 | | Total liabilities and equity | | $ | 116,328 | | | $ | 115,248 | |
(See accompanying notes to the consolidated condensed financial statements)
INTRICON CORPORATION | Consolidated Condensed Statements of Comprehensive Income (Loss) | (In Thousands) |
| | | | | | | | | | | | | | | Three Months Ended | | | Nine Months Ended | | | | September 30, | | | September 30, | | | September 30, | | | September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | Net income (loss) | | $ | 917 | | | $ | (1,339 | ) | | $ | 359 | | | $ | (2,885 | ) | Interest rate swap, net of taxes of $0 | | | 3 | | | | 26 | | | | 18 | | | | (15 | ) | Pension and postretirement obligations, net of taxes of $0 | | | 5 | | | | 5 | | | | 15 | | | | 15 | | Foreign currency translation adjustment, net of taxes of $0 | | | 116 | | | | (33 | ) | | | 241 | | | | (158 | ) | Comprehensive income (loss) | | $ | 1,041 | | | $ | (1,341 | ) | | $ | 633 | | | $ | (3,043 | ) |
INTRICON CORPORATION Consolidated Condensed Statements of Operations (In Thousands, Except Per Share Amounts) | | Three Months Ended | | | Six Months Ended | | | | June 30, | | | June 30, | | | June 30, | | | June 30, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | | | | | | | | | | | | | Revenue, net | | $ | 29,336 | | | $ | 29,448 | | | $ | 58,906 | | | $ | 54,026 | | Cost of goods sold | | | 21,121 | | | | 19,727 | | | | 42,133 | | | | 36,202 | | Gross profit | | | 8,215 | | | | 9,721 | | | | 16,773 | | | | 17,824 | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | Sales and marketing | | | 3,072 | | | | 2,637 | | | | 6,461 | | | | 5,240 | | General and administrative | | | 3,650 | | | | 2,751 | | | | 6,836 | | | | 5,502 | | Research and development | | | 1,097 | | | | 1,316 | | | | 2,062 | | | | 2,475 | | Impairment loss (Note 10) | | | 3,765 | | | | — | | | | 3,765 | | | | — | | Total operating expenses | | | 11,584 | | | | 6,704 | | | | 19,124 | | | | 13,217 | | Operating income (loss) | | | (3,369 | ) | | | 3,017 | | | | (2,351 | ) | | | 4,607 | | | | | | | | | | | | | | | | | | | Interest income (expense), net | | | 248 | | | | (211 | ) | | | 463 | | | | (405 | ) | Other expense, net | | | (272 | ) | | | (196 | ) | | | (406 | ) | | | (401 | ) | Income (loss) from continuing operations before income taxes and discontinued operations | | | (3,393 | ) | | | 2,610 | | | | (2,294 | ) | | | 3,801 | | Income tax expense | | | 116 | | | | 269 | | | | 247 | | | | 455 | | Income (loss) from continuing operations before discontinued operations | | | (3,509 | ) | | | 2,341 | | | | (2,541 | ) | | | 3,346 | | Loss on disposal of discontinued operations (Note 3) | | | (1,116 | ) | | | — | | | | (1,116 | ) | | | — | | Loss from discontinued operations, net of income taxes (Note 3) | | | (405 | ) | | | (333 | ) | | | (597 | ) | | | (571 | ) | Net income (loss) | | $ | (5,030 | ) | | $ | 2,008 | | | $ | (4,254 | ) | | $ | 2,775 | | | | | | | | | | | | | | | | | | | Basic income (loss) per share attributable to IntriCon shareholders: | | | | | | | | | | | | | | | | | Continuing operations | | $ | (0.40 | ) | | $ | 0.34 | | | $ | (0.29 | ) | | $ | 0.48 | | Discontinued operations | | | (0.17 | ) | | | (0.05 | ) | | | (0.20 | ) | | | (0.08 | ) | Net income (loss) per share: | | $ | (0.57 | ) | | $ | 0.29 | | | $ | (0.49 | ) | | $ | 0.40 | | | | | | | | | | | | | | | | | | | Diluted income (loss) per share attributable to IntriCon shareholders: | | | | | | | | | | | | | | | | | Continuing operations | | $ | (0.40 | ) | | $ | 0.29 | | | $ | (0.29 | ) | | $ | 0.42 | | Discontinued operations | | | (0.17 | ) | | | (0.04 | ) | | | (0.20 | ) | | | (0.07 | ) | Net income (loss) per share: | | $ | (0.57 | ) | | $ | 0.25 | | | $ | (0.49 | ) | | $ | 0.35 | | | | | | | | | | | | | | | | | | | Average shares outstanding: | | | | | | | | | | | | | | | | | Basic | | | 8,743 | | | | 6,991 | | | | 8,724 | | | | 6,930 | | Diluted | | | 8,743 | | | | 8,118 | | | | 8,724 | | | | 8,021 | |
(See accompanying notes to the consolidated condensed financial statements)
INTRICON CORPORATION | Consolidated Condensed Statements of Cash Flows | (In Thousands) |
| | Nine Months Ended | | | | September 30, | | | September 30, | | | | 2017 | | | 2016 | | | | (Unaudited) | | | (Unaudited) | | Cash flows from operating activities: | | | | | | | | | Net income (loss) | | $ | 359 | | | $ | (2,885 | ) | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | Depreciation and amortization | | | 1,659 | | | | 1,543 | | Stock-based compensation | | | 634 | | | | 506 | | Gain on disposition of property | | | — | | | | (55 | ) | Loss on sale of discontinued operations | | | 164 | | | | — | | Change in allowance for doubtful accounts | | | 65 | | | | (68 | ) | Equity in loss of partnerships | | | 281 | | | | 175 | | Changes in operating assets and liabilities: | | | | | | | | | Accounts receivable | | | 249 | | | | 2,346 | | Inventories | | | (2,615 | ) | | | 1,189 | | Other assets | | | (658 | ) | | | (527 | ) | Accounts payable | | | 1,712 | | | | (1,856 | ) | Accrued expenses | | | 1,228 | | | | (954 | ) | Other liabilities | | | 62 | | | | 12 | | Net cash provided by (used in) operating activities | | | 3,140 | | | | (574 | ) | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Purchases of property, plant and equipment | | | (984 | ) | | | (1,557 | ) | Investment in Soundperience and Other | | | (730 | ) | | | (164 | ) | Net cash used in investing activities | | | (1,714 | ) | | | (1,721 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from long-term debt | | | 10,906 | | | | 14,923 | | Repayments of long-term debt | | | (13,110 | ) | | | (15,921 | ) | Proceeds from equity offering, net of offering costs | | | — | | | | 3,678 | | Proceeds from employee stock purchases and exercise of stock options | | | 164 | | | | 83 | | Change in restricted cash | | | (85 | ) | | | (31 | ) | Net cash provided by (used in) financing activities | | | (2,125 | ) | | | 2,732 | | | | | | | | | | | Effect of exchange rate changes on cash | | | 364 | | | | (202 | ) | | | | | | | | | | Net increase (decrease) in cash | | | (335 | ) | | | 235 | | Cash, beginning of period | | | 667 | | | | 369 | | | | | | | | | | | Cash, end of period | | $ | 332 | | | $ | 604 | |
(SeeINTRICON CORPORATION
Consolidated Condensed Statements of Comprehensive Income (Loss) (In Thousands) | | Three Months Ended | | | Six Months Ended | | | | June 30, | | | June 30, | | | June 30, | | | June 30, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | | (Unaudited) | | Net income (loss) | | $ | (5,030 | ) | | $ | 2,008 | | | $ | (4,254 | ) | | $ | 2,775 | | Realized foreign currency translation loss from discontinued operations previously unrealized, net of taxes of $0 | | | 280 | | | | — | | | | 280 | | | | — | | Unrealized foreign currency translation adjustment from continuing operations, net of taxes of $0 | | | (26 | ) | | | (257 | ) | | | (19 | ) | | | (179 | ) | Interest rate swap, net of taxes of $0 | | | — | | | | (1 | ) | | | — | | | | 3 | | Investment in partnerships, net of taxes of $0 | | | — | | | | — | | | | 118 | | | | — | | Pension and postretirement obligations, net of taxes of $0 | | | 5 | | | | 5 | | | | 10 | | | | 10 | | Comprehensive income (loss) | | $ | (4,771 | ) | | $ | 1,755 | | | $ | (3,865 | ) | | $ | 2,609 | |
(See accompanying notes to the consolidated condensed financial statements)
INTRICON CORPORATION Consolidated Condensed Statements of Cash Flows (In Thousands) | | Six Months Ended | | | | June 30, | | | June 30, | | | | 2019 | | | 2018 | | | | (Unaudited) | | | (Unaudited) | | Cash flows from operating activities: | | | | | | | | | Net income (loss) | | $ | (4,254 | ) | | $ | 2,775 | | Loss from discontinued operations, net of tax | | | 1,713 | | | | 571 | | Income (loss) from continuing operations | | | (2,541 | ) | | | 3,346 | | Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: | | | | | | | | | Depreciation and amortization | | | 1,628 | | | | 1,410 | | Impairment loss | | | 3,765 | | | | — | | Equity in loss of partnerships | | | 138 | | | | 222 | | Stock-based compensation | | | 866 | | | | 667 | | Change in allowance for doubtful accounts | | | (499 | ) | | | 245 | | Changes in operating assets and liabilities: | | | | | | | | | Accounts receivable | | | 1,884 | | | | (1,285 | ) | Inventories | | | (262 | ) | | | (1,889 | ) | Contract assets | | | (1,492 | ) | | | (3,053 | ) | Other assets | | | 798 | | | | (251 | ) | Accounts payable | | | (1,166 | ) | | | 1,588 | | Accrued expenses | | | (895 | ) | | | (402 | ) | Other liabilities | | | (49 | ) | | | 428 | | Net cash provided by operating activities of continuing operations | | | 2,175 | | | | 1,026 | | Net cash (used in) operating activities of discontinued operations | | | (96 | ) | | | (769 | ) | Net cash provided by operating activities | | | 2,079 | | | | 257 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Purchases of machinery and equipment | | | (2,359 | ) | | | (1,608 | ) | Payments for acquisition of other assets | | | (667 | ) | | | — | | Purchase of investment securities | | | (36,688 | ) | | | — | | Proceeds from sale of investment securities | | | 38,015 | | | | — | | Proceeds from maturities of investment securities | | | 1,750 | | | | — | | Investment in partnerships | | | (247 | ) | | | (539 | ) | Net cash (used in) investing activities of continuing operations | | | (196 | ) | | | (2,147 | ) | Net cash (used in) investing activities of discontinued operations | | | (16 | ) | | | — | | Net cash (used in) investing activities | | | (212 | ) | | | (2,147 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from long-term debt | | | — | | | | 10,833 | | Repayments of long-term debt | | | — | | | | (9,055 | ) | Payment of financing leases | | | (54 | ) | | | — | | Exercise of stock options and employee stock purchase plan shares | | | 189 | | | | 378 | | Withholding of common stock upon vesting of restricted stock units | | | (235 | ) | | | — | | Net cash provided by (used in) financing activities | | | (100 | ) | | | 2,156 | | | | | | | | | | | Effect of exchange rate changes on cash of continuing operations | | | (8 | ) | | | (96 | ) | Effect of exchange rate changes on cash of discontinued operations | | | (5 | ) | | | (2 | ) | Effect of exchange rate changes on cash | | | (13 | ) | | | (98 | ) | | | | | | | | | | Net increase in cash | | | 1,754 | | | | 168 | | Cash, cash equivalents and restricted cash, beginning of period | | | 8,047 | | | | 1,017 | | | | | | | | | | | Cash, cash equivalents and restricted cash, end of period | | $ | 9,801 | | | $ | 1,185 | | | | | | | | | | | | | | | | | | | | Non-cash investing and financing: | | | | | | | | | Acquisition of machinery and equipment in accounts payable | | | 297 | | | | 1,265 | | Investment in partnership through liability incurred | | | — | | | | 187 | | Fitting software other asset through liabilities incurred and exchange of investment in partnership | | | 3,012 | | | | — | |
(See accompanying notes to the consolidated condensed financial statements)
INTRICON CORPORATION Consolidated Condensed Statements of Equity (In Thousands) | | Shareholders’ Equity, Six Months Ended June 30, 2019 (Unaudited) | | | | | | | | | | Common Stock Number of Shares | | | Common Stock Amount | | | Additional Paid-in Capital | | | Retained Earnings (Accumulated Deficit) | | | Accumulated Other Comprehensive Loss | | | Non-Controlling Interest | | | Total Equity | | Balance December 31, 2018 | | | 8,664 | | | $ | 8,664 | | | $ | 84,999 | | | $ | (509 | ) | | $ | (927 | ) | | $ | (253 | ) | | $ | 91,974 | | Exercise of stock options, net | | | 27 | | | | 27 | | | | (9 | ) | | | — | | | | — | | | | — | | | | 18 | | Withholding of common stock upon vesting of restricted stock units | | | 20 | | | | 20 | | | | (255 | ) | | | — | | | | — | | | | — | | | | (235 | ) | Shares issued under the employee stock purchase plan | | | 3 | | | | 3 | | | | 67 | | | | — | | | | — | | | | — | | | | 70 | | Stock-based compensation | | | — | | | | — | | | | 329 | | | | — | | | | — | | | | — | | | | 329 | | Net income | | | — | | | | — | | | | — | | | | 775 | | | | — | | | | — | | | | 775 | | Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 130 | | | | — | | | | 130 | | Balance March 31, 2019 | | | 8,714 | | | $ | 8,714 | | | $ | 85,131 | | | $ | 266 | | | $ | (797 | ) | | $ | (253 | ) | | $ | 93,061 | | Exercise of stock options, net | | | 29 | | | | 29 | | | | 22 | | | | — | | | | — | | | | — | | | | 51 | | Withholding of common stock upon vesting of restricted stock units | | | 6 | | | | 6 | | | | (6 | ) | | | — | | | | — | | | | — | | | | — | | Shares issued under the employee stock purchase plan | | | 2 | | | | 2 | | | | 48 | | | | — | | | | — | | | | — | | | | 50 | | Stock-based compensation | | | 3 | | | | 3 | | | | 534 | | | | — | | | | — | | | | — | | | | 537 | | Net income (loss) | | | — | | | | — | | | | — | | | | (5,030 | ) | | | — | | | | — | | | | (5,030 | ) | Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 259 | | | | — | | | | 259 | | Balance June 30, 2019 | | | 8,754 | | | $ | 8,754 | | | $ | 85,729 | | | $ | (4,764 | ) | | $ | (538 | ) | | $ | (253 | ) | | $ | 88,928 | |
| | Shareholders’ Equity, Six Months Ended June 30, 2018 (Unaudited) | | | | | | | | | | Common Stock Number of Shares | | | Common Stock Amount | | | Additional Paid-in Capital | | | Accumulated Deficit | | | Accumulated Other Comprehensive Loss | | | Non-Controlling Interest | | | Total Equity | | Balance December 31, 2017 | | | 6,900 | | | $ | 6,900 | | | $ | 21,581 | | | $ | (6,056 | ) | | $ | (733 | ) | | $ | (253 | ) | | $ | 21,439 | | Exercise of stock options, net | | | 41 | | | | 41 | | | | 167 | | | | — | | | | — | | | | — | | | | 208 | | Shares issued under the employee stock purchase plan | | | 3 | | | | 3 | | | | 57 | | | | — | | | | — | | | | — | | | | 60 | | Stock-based compensation | | | — | | | | — | | | | 333 | | | | — | | | | — | | | | — | | | | 333 | | Net income | | | — | | | | — | | | | — | | | | 757 | | | | — | | | | — | | | | 757 | | Comprehensive income | | | — | | | | — | | | | — | | | | — | | | | 86 | | | | — | | | | 86 | | Balance March 31, 2018 | | | 6,944 | | | $ | 6,944 | | | $ | 22,138 | | | $ | (5,299 | ) | | $ | (647 | ) | | $ | (253 | ) | | $ | 22,883 | | Exercise of stock options, net | | | 92 | | | | 92 | | | | (37 | ) | | | — | | | | — | | | | — | | | | 55 | | Shares issued under the employee stock purchase plan | | | 1 | | | | 1 | | | | 54 | | | | — | | | | — | | | | — | | | | 55 | | Stock-based compensation | | | — | | | | — | | | | 334 | | | | — | | | | — | | | | — | | | | 334 | | Net income | | | — | | | | — | | | | — | | | | 1,992 | | | | — | | | | — | | | | 1,992 | | Comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | (252 | ) | | | — | | | | (252 | ) | Balance June 30, 2018 | | | 7,037 | | | $ | 7,037 | | | $ | 22,489 | | | $ | (3,307 | ) | | $ | (899 | ) | | $ | (253 | ) | | $ | 25,067 | |
(See accompanying notes to the consolidated financial statements)
INTRICON CORPORATION Notes to Consolidated Condensed Financial Statements (Unaudited) (In Thousands, Except Per Share Data) In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly IntriCon Corporation’s (“IntriCon” or the “Company”) consolidated financial position as of SeptemberJune 30, 20172019 and December 31, 2016,2018, the consolidated results of its operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 and for the consolidated statement of equity and cash flows for the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. Results of operations for the interim periods are not necessarily indicative of the results of operations expected for the full year or any other interim period. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2018 Annual Report on Form 10-K filed with the SEC. In December 2016,On June 25, 2019, the Company’s officers, pursuant to delegated authority from the board, of directors approved plans to discontinue the operations of its cardiac diagnostic monitoring business. The Company sold the cardiac diagnostic monitoring business on February 17, 2017 to Datrix, LLC.United Kingdom (UK) subsidiary within our body worn device segment. For all periods presented, the Company classified this business as discontinued operations, and accordingly, has reclassified historical financial data presented herein. See Note 3.
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The Company evaluates its voting and variable interests in entities on a qualitative and quantitative basis. The Company consolidates entities in which it concludes it has the power to direct the activities that most significantly impact an entity’s economic success and has the obligation to absorb losses or the right to receive benefits that could be significant to the entity. On January 19, 2017, the Company announced that it had exercised its option to acquire the remaining 80 percent stake in HHE. The transaction is expected to close in the fourth quarter of 2017. The results of HHE were consolidated into the Company’s financial statements beginning October 31, 2016. The Company allocates income and losses to the noncontrolling interest based on current ownership percentage, however, as part of the closing, IntriCon will likely absorb a portion of the losses previously allocated to the majority owner. The amount of losses previously allocated to the majority owner that we may have to absorb could range $500,000 and $700,000. Losses incurred by HHE to date include non-cash amortization, acquisition related costs and operating results, all of which are related to prior periods and have no future cash impact
The Company notes that HHE’s pro forma financial results were not included for 2016 as the company was in bankruptcy for the majority of 2016 and as such was not reflective of the normal operations of HHE.
In April 2017, the Company entered into an agreement to acquire a 49% stake in Soundperience for 1,200 Euros. As of September 30, 2017, the Company holds a 16% stake in Soundperience, which will increase to 49% upon the completion of certain milestones and payment of the purchase price for that equity. As of September 30, 2017, the Company has an equity investment and advance in Soundperience of $1,255. Soundperience has designed self-fitting hearing aid technology. The Company’s self-fitting hearing aid technology is being used in the German market today, most notably through our Signison joint venture with the owner of Soundperience. Both Soundperience and Signison will be accounted for in the Company’s financial statements using the equity method.
The Company has evaluated subsequent events occurring after the date of the consolidated financial statements for events requiring recording or disclosure in the consolidated financial statements. | 2. | NewChanges in Accounting PronouncementsPolicies |
In March 2017, the FinancialThe Company’s significant accounting policies are detailed in “Note 1: Summary of Significant Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07, Retirement Benefits – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, guidance that requires entities to present the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the income statement line items where they report compensation cost. Entities will present all other components of net benefit cost outside operating income, if this subtotal is presented. The rules related to the timing of when costs are recognized or how they are measured have not changed. This amendment only impacts where those costs are reflected within the income statement. In addition, only the service cost component will be eligible for capitalization in inventory and other assets. This guidance becomes effective January 1, 2018. Early adoption is permitted. The Company does not anticipate that the adoption of this new standard will have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 “Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new standard simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed on or after January 1, 2017. The Company does not anticipate that the adoption of this new standard will have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensusPolicies” of the FASB’s Emerging Issues Task Force (the “Task Force”). The new standard requires thatCompany’s Annual Report on Form 10-K for the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature of the restrictions. This update is effective for years beginning afteryear ended December 31, 2018. The Company has restricted cash balances and anticipates that the adoption of this new standard will change the cash amounts and financing activities on its statement of cash flows on its consolidated financial statements.
In February 2016, the FASB issued its final standard on accounting for leases. This standard, issued as ASU 2016-02 “Leases” (Topic 842). Topic 842 supersedes the lease accounting guidance previously set forth in the Accounting Standards Codification (ASC) Topic 840 “Leases,” and requires that an entity that islessees to recognize a lessee recognize lease assetsliability and lease liabilities on the balance sheeta right-of-use asset (ROU) for all leases and disclose key information about leasing arrangements. This update is effective for financial statement periods beginning after December 15, 2018, with earlier application permitted.that extend beyond one year. The Company has not yet determined the impactadopted Topic 842 with a date of this pronouncement on its consolidated financial statementsinitial application of January 1, 2019, which resulted in a ROU asset and related disclosures.lease liability of approximately $6.0M. In May 2014,The Company did not apply Topic 842 retrospectively using the FASB issued new accounting guidance related transition option in ASU 2018-11, “Targeted Improvements”to revenue recognition, ASC 606. This new standard will replace all current U.S. GAAP guidance on this topic842, to not restate comparative periods in transition and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified modelinstead to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depictuse the transfereffective date of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively to each period presented orASC 842, “Leases”, as a cumulative-effect adjustment as of the date of adoption.initial application of transition. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification.
Changes to the Company’s accounting policies as a result of adopting Topic 842 are discussed below: Short-term lease recognition exemption. The Company has establishedadopted the short-term lease recognition exemption as an accounting policy. Accordingly, the Company will not recognize a timeline relatedlease liability and ROU asset for short-term leases in transition and, post-effective date, will continue to recognize short-term leases as expense on a straight-line basis over the lease term. Renewal and purchase options for a lease will be reassessed upon the occurrence of certain discrete reassessment events: (1) the lease term is extended more than 12 months beyond the end of the previously determined lease term or (2) the lessee now concludes that the lessee’s exercise of a purchase option is reasonably certain. When a lease no longer qualifies for the short-term lease exemption, the Company will apply ASC 842 guidance on initial recognition and measurement; the commencement date of the lease for this purpose is the date of the change in circumstances.
Accounting for certain leases at a portfolio level. The Company accounts for leases at a portfolio level when the criteria described below are met and it reasonably expects that the application of the lease model to the implementationportfolio will not differ materially from the application to the individual leases in that portfolio. If the applicable criteria are met, the start of the standard and believeslease term is expected to be the timeline is sufficient to implementfirst of the new standard. We are currently assessingmonth. The criteria are: | 1. | Leases are similar in nature (e.g. similar underlying asset such as vehicles); |
| 2. | Leases have identical or nearly identical contract provisions, including same lessor; and |
| 3. | Leases with effective dates that fall within a narrow window of time (month or quarter) and have the same lease term |
For purposes of arriving at the impacttransition adjustment on the Company’s consolidated financial statements.effective date, a total of seven vehicle leases were combined into three portfolios. The FASB has issued ASU 2016-10Combining lease and ASU 2016-12, which are also related to the revenue recognition standard ASC 606.non-lease components into a single component. The Company willelected to adopt the new provisionsthis practical expedient for all asset classes. As a result of this accounting standard atelection, the beginning of fiscal year 2018. The Company is currently evaluatingconsideration included in the effect that this guidancelease payments for these asset classes will have on its consolidated financial statements.be greater, resulting in a larger lease liability and ROU asset.
| 3. | Discontinued Operations |
On June 25, 2019, the Company’s officers, pursuant to delegated authority from the board, approved plans to discontinue the operations of its UK subsidiary within the body worn device segment. As of June 30, 2019, operations of this business have ceased, certain assets have been sold, our building lease is being transferred to a third party and the Company entered into a distribution agreement with a third party to distribute our hearing aids within the UK. The following table showsremaining assets have been written down to their net realizable value resulting in a loss on disposal of $1.0M for the three and six months ended June 30, 2019. As the disposal meets the definition of a strategic shift in accordance with ASC 205, the results of the UK operations have been classified as loss on discontinued operations, net of income taxes, in the accompanying Consolidated Condensed Statements of Operations, Comprehensive Income/Loss and Cash Flows. Current assets, noncurrent assets, and liabilities of the discontinued cardiac diagnostic monitoring business balance sheetoperations have been reclassified and reflected on the accompanying Consolidated Condensed Balance Sheets as “Current assets of discontinued operations,” “Noncurrent assets of discontinued operations,” and “Liabilities of discontinued operations”, respectively. Prior periods relating to our discontinued operations have also been reclassified to reflect consistency within our condensed consolidated financial statements. The total assets and liabilities of the UK subsidiary at June 30, 2019 and December 31, 2016:2018 were as follows: | | | June 30, | | December 31, | | | | December 31, 2016 | | | 2019 | | | 2018 | | Accounts receivable, net | | $ | 123 | | | $ | 229 | | | $ | 213 | | Inventories | | | | 311 | | | | 818 | | Other current assets | | | | 108 | | | | 174 | | Current assets of discontinued operations | | $ | 123 | | | | 648 | | | | 1,205 | | | | | | | | | | | | | | | Machinery and equipment | | | | — | | | | 436 | | Less:Accumulated depreciation | | | | — | | | | 126 | | Net machinery and equipment | | | | — | | | | 310 | | | | | | | | | | | | Other assets, net | | | | — | | | | 61 | | Total assets | | | $ | 648 | | | $ | 1,576 | | | | | | | | | | | | Accounts payable | | | 22 | | | | 164 | | | | 320 | | Accrued compensation and other liabilities | | | 101 | | | Other accrued liabilities | | | | 442 | | | | 16 | | Current liabilities of discontinued operations | | $ | 123 | | | | 606 | | | | 336 | | Net assets | | | $ | 42 | | | $ | 1,240 | |
The loss on disposal of discontinued operations, as a result of the plan to discontinue the operations of the UK, for the three and six months ended June 30, 2019 was computed as follows: | | | | Cash and cash equivalents | | $ | 5 | | Accounts receivable, net | | | 72 | | Write-down of inventory to realizable value | | | 278 | | Write-down of property, plant and equipment to salvage value | | | 298 | | Other assets and liabilities, net | | | 71 | | Realized loss on foreign currency | | | 280 | | Net assets disposed | | | 1,004 | | Additional disposal costs, net | | | 112 | | Loss on disposal of discontinued operations | | $ | 1,116 | |
The following table shows the results of the cardiac diagnostic monitoringUK subsidiary’s discontinued operations: | | Three Months Ended | | | Nine Months Ended | | | | September 30, 2017 | | | September 30, 2016 | | | September 30, 2017 | | | September 30, 2016 | | Sales, net | | $ | — | | | $ | 445 | | | $ | 140 | | | $ | 987 | | Operating costs and expenses | | | — | | | | (639 | ) | | | (268 | ) | | | (1,746 | ) | Net loss from discontinued operations | | | — | | | | (194 | ) | | | (128 | ) | | | (759 | ) |
| | | | | | | | | | | | | | | Three Months Ended | | | Six Months Ended | | | | June 30, 2019 | | | June 30, 2018 | | | June 30, 2019 | | | June 30, 2018 | | Revenue, net | | $ | 529 | | | $ | 712 | | | $ | 1,068 | | | $ | 1,497 | | Cost of goods sold | | | 321 | | | | 444 | | | | 667 | | | | 920 | | Gross profit | | | 208 | | | | 268 | | | | 401 | | | | 577 | | Sales and marketing | | | 167 | | | | 244 | | | | 314 | | | | 481 | | General and administrative | | | 446 | | | | 357 | | | | 684 | | | | 667 | | Total operating expenses | | | 613 | | | | 601 | | | | 998 | | | | 1,148 | | Loss from discontinued operations, net of taxes | | $ | (405 | ) | | $ | (333 | ) | | $ | (597 | ) | | $ | (571 | ) |
The Company sold the cardiac diagnostic monitoring business on February 17, 2017 to Datrix, LLC for a future revenue earn-out that was valued by the Company at $0. The Company recorded a loss on the sale of $164. The net loss was computed as follows:
Accounts receivable, net | | $ | 179 | | Accrued liabilities | | | (15 | ) | Net assets sold | | | 164 | | Fair value of consideration received | | | — | | Loss on sale of discontinued operations, net of income taxes | | $ | 164 | |
The Company currently operates in two reportable segments: body-worn devices and hearing health direct-to-consumer.direct-to-end-consumer (DTEC). The nature of distribution and services has been deemed separately identifiable. Therefore, segment reporting has been applied. Income (loss) from operations is total net revenues less cost of sales and operating expenses. Identifiable assets by industry segment include assets directly identifiable with those operations. The accounting policies applied to determine segment information are the same as those described in the summary of significant accounting policies described in Note 1 to the financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company evaluates the performance of each segment based on income and loss from continuing operations before income taxes. The following table summarizes certain data from continuing operations by industry segment:
At and for the Three Months Ended September 30, 2017 | | Body Worn Devices | | | Hearing Health Direct-to-Consumer | | | Total | | Revenue, net | | $ | 22,271 | | | $ | 1,763 | | | $ | 24,034 | | Income (loss) from continuing operations | | | 1,121 | | | | (204 | ) | | | 917 | | Identifiable assets (excluding goodwill) | | | 29,883 | | | | 5,404 | | | | 35,287 | | Goodwill | | | 9,551 | | | | 1,004 | | | | 10,555 | | Depreciation and amortization | | | 506 | | | | 48 | | | | 554 | | Capital expenditures | | | 350 | | | | 16 | | | | 366 | |
At and for the Three Months Ended June 30, 2019 | | Body Worn Devices | | | Hearing Health DTEC | | | Total | | Revenue, net | | $ | 27,600 | | | $ | 1,736 | | | $ | 29,336 | | Impairment loss | | | — | | | | (3,765 | ) | | | (3,765 | ) | Income (loss) from continuing operations before income taxes and discontinued operations | | | 1,775 | | | | (5,168 | ) | | | (3,393 | ) | Depreciation and amortization | | | 772 | | | | 46 | | | | 818 | | Capital expenditures | | | 1,343 | | | | 62 | | | | 1,405 | | | | | | | | | | | | | | |
At and for the Six Months Ended June 30, 2019 | | Body Worn Devices | | | Hearing Health DTEC | | | Total | | Revenue, net | | $ | 55,540 | | | $ | 3,366 | | | $ | 58,906 | | Impairment loss | | | — | | | | (3,765 | ) | | | (3,765 | ) | Income (loss) from continuing operations before income taxes and discontinued operations | | | 4,356 | | | | (6,650 | ) | | | (2,294 | ) | Depreciation and amortization | | | 1,498 | | | | 130 | | | | 1,628 | | Capital expenditures | | | 2,277 | | | | 82 | | | | 2,359 | |
At and for the Three Months Ended June 30, 2018 | | Body Worn Devices | | | Hearing Health DTEC | | | Total | | Revenue, net | | $ | 27,396 | | | $ | 2,052 | | | $ | 29,448 | | Income (loss) from continuing operations before income taxes and discontinued operations | | | 3,108 | | | | (498 | ) | | | 2,610 | | Depreciation and amortization | | | 663 | | | | 51 | | | | 714 | | Capital expenditures | | | 934 | | | | 56 | | | | 990 | |
At and for the Six Months Ended June 30, 2018 | | Body Worn Devices | | | Hearing Health DTEC | | | Total | | Revenue, net | | $ | 50,189 | | | $ | 3,837 | | | $ | 54,026 | | Income (loss) from continuing operations before income taxes and discontinued operations | | | 4,752 | | | | (951 | ) | | | 3,801 | | Depreciation and amortization | | | 1,310 | | | | 100 | | | | 1,410 | | Capital expenditures | | | 1,542 | | | | 66 | | | | 1,608 | |
At and for the Nine Months Ended September 30, 2017 | | Body Worn Devices | | | Hearing Health Direct-to-Consumer | | | Total | | Revenue, net | | $ | 61,495 | | | $ | 4,588 | | | $ | 66,083 | | Income (loss) from continuing operations | | | 1,736 | | | | (1,085 | ) | | | 651 | | Identifiable assets (excluding goodwill) | | | 29,883 | | | | 5,404 | | | | 35,287 | | Goodwill | | | 9,551 | | | | 1,004 | | | | 10,555 | | Depreciation and amortization | | | 1,500 | | | | 159 | | | | 1,659 | | Capital expenditures | | | 836 | | | | 148 | | | | 984 | |
The following table summarizes the identifiable assets (excluding goodwill) and goodwill by industry segment: | | June 30, | | | December 31, | | For the period ended | | 2019 | | | 2018 | | Body Worn Devices: | | | | | | | | | Identifiable assets (excluding goodwill) | | $ | 103,342 | | | $ | 97,725 | | Goodwill | | | 9,551 | | | | 9,551 | | Hearing Health DTEC: | | | | | | | | | Identifiable assets (excluding goodwill) | | | 2,787 | | | | 5,139 | | Goodwill | | | — | | | | 1,257 | |
The geographical distribution of long-lived assets to geographical areas consisted of the following at: | | | June 30, | | December 31, | | | | September 30, 2017 | | December 31, 2016 | | | 2019 | | | 2018 | | United States | | $ | 4,570 | | | $ | 4,640 | | | $ | 11,636 | | | $ | 10,065 | | Singapore | | | 1,195 | | | | 1,413 | | | | 1,148 | | | | 1,240 | | Other – primarily United Kingdom and Indonesia | | | 523 | | | | 553 | | | Other | | | | 95 | | | | 117 | | Consolidated | | $ | 6,288 | | | $ | 6,606 | | | $ | 12,879 | | | $ | 11,422 | |
Long-lived assets consist of property and equipment. Excluded from long-lived assets are investments in partnerships, patents, license agreementsgoodwill, operating lease ROU assets and goodwill.certain other assets. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These assets are periodically reviewed to assureensure the net realizable value from the estimated future production based on forecasted cash flows exceeds the carrying value of the assets. The geographical distribution of net salesrevenue to geographical areas for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 were as follows: | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | | | Net Revenue to Geographical Areas | | | June 30, 2019 | | | June 30, 2018 | | | June 30, 2019 | | | June 30, 2018 | | United States | | $ | 19,605 | | | $ | 11,201 | | | $ | 52,804 | | | $ | 35,154 | | | $ | 24,361 | | | $ | 25,255 | | | $ | 48,576 | | | $ | 45,714 | | Europe | | | 2,317 | | | | 2,706 | | | | 7,102 | | | | 8,523 | | | | 1,568 | | | | 1,172 | | | | 3,232 | | | | 2,665 | | Asia | | | 1,740 | | | | 1,380 | | | | 5,541 | | | | 5,918 | | | | 3,219 | | | | 2,699 | | | | 6,728 | | | | 5,167 | | All other countries | | | 372 | | | | 283 | | | | 636 | | | | 667 | | | | 188 | | | | 322 | | | | 370 | | | | 480 | | Consolidated | | $ | 24,034 | | | $ | 15,570 | | | $ | 66,083 | | | $ | 50,262 | | | $ | 29,336 | | | $ | 29,448 | | | $ | 58,906 | | | $ | 54,026 | |
Geographic net sales arerevenue is allocated based on the location of the customer. For the three and ninesix months ended SeptemberJune 30, 2017,2019, one customer accounted for 51%61% and 49%60%, respectively, of the Company’s consolidated net sales.revenue. For both the three and ninesix months ended SeptemberJune 30, 2016,2018, one customer accounted for 38%59% and 39%57%, respectively, of the Company’s consolidated net sales.revenue. At September 30, 2017, twoTwo customers combined accounted for 23%54% and 52% of the Company’s consolidated accounts receivable. Atreceivable at June 30, 2019 and December 31, 2016, two customers combined2018, respectively.
One customer accounted for 31%73% and 78% of the Company’s consolidated accounts receivable.contract assets at June 30, 2019 and December 31, 2018, respectively. | 6. | Investment in Partnerships |
Investment in partnerships consisted of the following: | | June 30, | | | December 31, | | | | 2019 | | | 2018 | | Investment in Signison | | $ | 1,277 | | | $ | 865 | | Investment in and cash advance for Soundperience | | | — | | | | 1,022 | | Other | | | 168 | | | | 204 | | Total | | $ | 1,445 | | | $ | 2,091 | |
The Company has a 50% ownership interest in Signison as of June 30, 2019. Signison is accounted for in the Company’s consolidated financial statements using the equity method. As of December 31, 2018, the Company held a 49% ownership interest in Soundperience, which was accounted for using the equity method. In January 2019, the Company purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience in exchange for 1,750 Euros, our 49% ownership in Soundperience and the related license agreement. See Note 9. The Company currently invests in commercial paper, corporate notes and bonds with original maturities of not more than two years. The Company classifies these investments as held to maturity based on our intent and ability to hold these investments until maturity. As a result, these investments are recorded at amortized cost, which approximates fair value as of June 30, 2019. As of December 31, 2018, the Company invested in certain liquid investment securities which were classified as available for sale investments and measured at fair value based on Level 1 inputs.
The maturity dates of our investments as of June 30, 2019 are as follows: | | Less than one year | | | 1-5 years | | | Total | | Commercial Paper Original Maturities of 91 Days or More | | $ | 6,779 | | | $ | — | | | $ | 6,779 | | Corporate Notes and Bonds | | | 12,909 | | | | 15,357 | | | | 28,266 | | Total Investments | | $ | 19,688 | | | $ | 15,357 | | | $ | 35,045 | |
Inventories consisted of the following at: | | Raw materials | | Work-in process | | Finished products and components | | Total | | | | Raw materials | | | Work-in process | | | Finished products and components | | | Total | | September 30, 2017 | | | | | | | | | | | | | | | | | | | June 30, 2019 | | | | | | | | | | | | | | | | | | | Domestic | | | $ | 6,334 | | | $ | 1,577 | | | $ | 3,150 | | | $ | 11,061 | | | | $ | 11,008 | | | $ | 3,148 | | | $ | 872 | | | $ | 15,028 | | Foreign | | | | 2,125 | | | | 810 | | | | 903 | | | | 3,838 | | | | | 2,648 | | | | 437 | | | | 138 | | | | 3,223 | | Total | | | $ | 8,459 | | | $ | 2,387 | | | $ | 4,053 | | | $ | 14,899 | | | | $ | 13,656 | | | $ | 3,585 | | | $ | 1,010 | | | $ | 18,251 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | | | | | | | | | | | | | | | | Domestic | | | $ | 5,731 | | | $ | 1,324 | | | $ | 2,609 | | | $ | 9,664 | | | | $ | 10,657 | | | $ | 2,484 | | | $ | 1,583 | | | $ | 14,724 | | Foreign | | | | 1,751 | | | | 284 | | | | 644 | | | | 2,679 | | | | | 2,671 | | | | 653 | | | | 115 | | | | 3,439 | | Total | | | $ | 7,482 | | | $ | 1,608 | | | $ | 3,253 | | | $ | 12,343 | | | | $ | 13,328 | | | $ | 3,137 | | | $ | 1,698 | | | $ | 18,163 | |
7. | Short and Long-Term Debt9. | Other Assets, Net |
Short and long-term debt is summarized as follows:Other assets, net consisted of the following at:
| | September 30, 2017 | | | December 31, 2016 | | Domestic Asset-Based Revolving Credit Facility | | $ | 1,755 | | | $ | 3,218 | | Note Payable | | | 2,000 | | | | 2,000 | | Foreign Overdraft and Letter of Credit Facility | | | 1,256 | | | | 1,243 | | Domestic Term-Loan | | | 4,500 | | | | 5,250 | | Unamortized Finance Costs | | | (86 | ) | | | (81 | ) | Total Debt | | | 9,425 | | | | 11,630 | | Less: Current Maturities | | | (2,411 | ) | | | (2,346 | ) | Total Long-Term Debt | | $ | 7,014 | | | $ | 9,284 | |
| | June 30, | | | December 31, | | | | 2019 | | | 2018 | | Fitting Software | | $ | 3,679 | | | $ | — | | NXP Tech | | | 2,063 | | | | 2,259 | | Other | | | 492 | | | | 1,168 | | Total | | $ | 6,234 | | | $ | 3,427 | |
Domestic Credit Facilities
In January 2019, the Company purchased the source code for self-fitting software from Soundperience for 1,750 Euros and also transferred our 49% ownership interest in Soundperience to the majority owner, positioning the Company to capitalize on the upcoming over-the-counter (OTC) hearing aid regulations. The Company has capitalized the self-fitting software within other assets, net based on the cost of the consideration transferred and its domestic subsidiarieswill begin amortizing the asset when it is placed into service. Included in the capitalized cost of the self-fitting software is $586 of cash paid at closing as well as non-cash amounts of $869 due in future quarterly installments over the next four years, $533 due in January 2023 and $1,691 for the value of the partnership and license agreement transferred. The future payments are parties to a credit facility with The PrivateBankdue in Euros and Trust Company. The credit facility,the related liabilities will be revalued based on exchange rates as amended through Septemberof each reporting period. As of June 30, 2017, provides for:2019, outstanding liabilities are $1,329. | ▪10. | a $9,000 revolving credit facility, with a $200 sub facility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Company’s eligible trade receivablesGoodwill and eligible inventory, and eligible equipment less a reserve; andIntangible Assets |
During the 2019 second quarter, we continued to experience negative cash flows within our Hearing Help Express reporting unit. In addition, historical cash flows have varied from our projections. Based on these factors, management cannot put undue reliance on anticipated future cash flow generation for purposes of valuing the fair value of the reporting unit. As such, using recent historical financial information (including historical revenue, gross margins and operating expenses as level 3 inputs) as an input for undiscounted and discounted cash flows utilized in determining fair value for purposes of intangible asset and goodwill impairment testing, management determined it is more likely than not that as of June 30, 2019, the fair value of the goodwill within our Hearing Help Express reporting unit was less than its carrying amount and resulted in a non-cash impairment charge on goodwill of $1.3M and intangible assets of $2.5M. The following summarizes the consolidated carrying amount of goodwill by period: | | | | Carrying amount at December 31, 2018 | | $ | 10,808 | | Impairment of goodwill of Hearing Help Express | | | (1,257 | ) | Carrying amount at June 30, 2019 | | $ | 9,551 | |
The following summarizes the consolidated carrying amounts of intangible assets by period: | | | | Carrying amount at December 31, 2018 | | $ | 2,585 | | Amortization of intangible assets of Hearing Help Express | | | (77 | ) | Impairment of intangible assets of Hearing Help Express | | | (2,508 | ) | Carrying amount at June 30, 2019 | | $ | — | |
| ▪11. | a term loan in the original amount of $6,000.Leases |
On March 9, 2017,The Company leases pertain primarily to engineering, manufacturing, sales and administrative facilities, with an initial term of one year or more. The Company has three leased facilities in Minnesota, two that expire in 2022 and one that expires in 2023, one leased facility in Illinois that expires in 2021 and, one leased facility in Singapore that expires in 2020, one leased facility in Indonesia that expires in 2021, and one leased facility in Germany that expires in 2022.
Certain foreign leases allow for variable lease payments that depend on an index or a market rate adjustment for the respective country and are adjusted on an annual basis. The adjustment is recognized as incurred in profit and loss. The facility leases include options to extend for terms ranging from one to five years. Lease options that the Company is reasonably certain to execute, will be included in the determination of the ROU asset and lease liability. The Company also leases various computer equipment that include bargain purchase options at termination. These leases have been classified as finance leases.
As of June 30, 2019, the Company has a weighted-average lease term of 1.8 years for its finance leases, and 3.2 years for its operating leases. As of June 30, 2019, the Company has a weighted-average discount rate of 5.56% for its finance leases, and 5.49% for its operating leases. Operating cash flows from continuing operations for the six months ended June 30, 2019 from operating leases were $934. Operating cash flows from discontinued operations for the six months ended June 30, 2019 from operating leases were $84. Financing lease assets are classified as machinery and equipment within the consolidated balance sheet. During the six months ended June 30, 2019, we derecognized approximately $761 of non-cash operating lease right of use assets and liabilities from our discontinued operations and short term leases were not significant. The following tables summarizes lease costs by type: | | Three Months Ended June 30, 2019 | | | Six Months Ended June 30, 2019 | | Lease cost | | | | | | | | | Finance lease cost: | | | | | | | | | Amortization of right-of-use assets | | $ | 24 | | | $ | 49 | | Interest on lease liabilities | | | 2 | | | | 5 | | | | | | | | | | | Operating lease cost* | | | 457 | | | | 917 | | Variable lease cost** | | | 141 | | | | 279 | | Total lease cost | | $ | 624 | | | $ | 1,250 | |
*Operating lease cost exclude $44 and $86 related to discontinued operations of the UK for the three and six months ended June 30, 2019, respectively. **Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our domestic subsidiary, IntriCon, Inc., entered into a Tenth Amendmentand foreign building leases, excluding approximately $5 and $11 related to discontinued operations of the UK for the three and six months ended June 30, 2019, respectively.
Maturities of lease liabilities are as follows: | | | Operating Leases | | | Financing Leases | | | Total | | 2019 | | | $ | 928 | | | $ | 57 | | | $ | 985 | | 2020 | | | | 1,699 | | | | 98 | | | | 1,797 | | 2021 | | | | 1,361 | | | | 24 | | | | 1,385 | | 2022 | | | | 794 | | | | — | | | | 794 | | 2023 | | | | 222 | | | | — | | | | 222 | | 2024 and thereafter | | | | — | | | | — | | | | — | | Total lease payments | | | | 5,004 | | | | 179 | | | | 5,183 | | Less: Interest | | | | (413 | ) | | | (8 | ) | | | (421 | ) | Present value of lease liabilities | | | $ | 4,591 | | | $ | 171 | | | $ | 4,762 | |
As previously disclosed in Note 20 of the Notes to the Loan and Security Agreement and Waiver (the “Tenth Amendment”) with The PrivateBank and Trust Company. The Tenth Amendment, among other things:Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, prior to the adoption of ASU 2016-02,Leases (Topic 842), the future minimum payments required under lease agreements as of December 31, 2018 were 2019 - $2,417; 2020 - $2,255; 2021 - $1,689; 2022 - $950; 2023 - $188. | ▪ | amended the minimum EBITDA (as defined in the Loan and Security Agreement), funded debt to EBITDA ratio and fixed charge coverage ratio covenants; and |
| ▪ | waived defaults in the funded debt to EBITDA ratio and fixed charge coverage ratio covenants as of December 31, 2016. |
All of the borrowings under this agreement have been characterized as either a current or long-term liability on our balance sheet in accordance with the repayment terms described more fully below.
Weighted average interest on the revolving credit facility was 7.11% for the nine months ended September 30, 2017 and 4.82% for the year ended December 31, 2016. The outstanding balance of the revolving credit facility was $1,755 and $3,218 at September 30, 2017 and December 31, 2016, respectively. The total availability on the revolving credit facility was approximately $5,632 and $5,121 at September 30, 2017 and December 31, 2016, respectively.
The outstanding principal balance of the term loan, as amended, is payable in quarterly installments of $250. Any remaining principal and accrued interest is payable on February 28, 2019. IntriCon is also required to use 100% of the net cash proceeds of certain asset sales (excluding inventory and certain other dispositions), sale of capital securities or issuance of debt to pay down the term loan.
The Company was in compliance with the financial covenants under the facility as of September 30, 2017.
Foreign Credit Facility
In addition to its domestic credit facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for an asset based line of credit. Borrowings bear interest at a rate of .75% to 2.5% over the lender’s prevailing prime lending rate. Weighted average interest on the international credit facilities was 3.95% and 3.50% for the nine months ended September 30, 2017 and the year ended December 31, 2016. The outstanding balance was $1,256 and $1,243 at September 30, 2017 and December 31, 2016, respectively. The total remaining availability on the international senior secured credit agreement was approximately $524 and $455 at September 30, 2017 and December 31, 2016, respectively.
Note Payable
HHE has a $2,000 note payable to the party holding 80% of its equity interest. The note is secured by substantially all of the assets of HHE. The note is payable over 48 months in quarterly installments with interest at 5% per year, except that interest only will be paid in the first twelve months, with the deferred payments to be made at maturity.
Income tax expense for the three and ninesix months ended SeptemberJune 30, 20172019 was $47$116 and $165$247 compared to $33$269 and $119, respectively,$455 for the same periodsperiod in 2016.2018. The expense was primarilylargely due to our foreign operations. The Company has net operating loss carryforwards for U.S. federal income tax purposes and, consequently, minimal federal or state benefit or expense frompurposes. Due to the domestic operations was recognized asnew tax legislation, there are limitations on the use of certain of the carryforwards. The Company has recorded a full valuation allowance against the deferred tax asset has a full valuation allowance.as of June 30, 2019. The following was the income (loss) from continuing operations before income taxes and discontinued operations for each jurisdiction in which the Company has operations for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | | | June 30, 2019 | | | June 30, 2018 | | | June 30, 2019 | | | June 30, 2018 | | United States | | $ | 1,008 | | | $ | (1,250 | ) | | $ | 1,049 | | | $ | (2,664 | ) | | $ | (3,639 | ) | | $ | 2,450 | | | $ | (2,755 | ) | | $ | 3,300 | | Singapore | | | 245 | | | | 212 | | | | 168 | | | | 779 | | | | 104 | | | | 98 | | | | 222 | | | | 346 | | Indonesia | | | 20 | | | | 18 | | | | 54 | | | | 54 | | | | 19 | | | | 20 | | | | 40 | | | | 42 | | United Kingdom | | | (184 | ) | | | (191 | ) | | | (595 | ) | | | (490 | ) | | Germany | | | (125 | ) | | | 99 | | | | 140 | | | | 314 | | | | 123 | | | | 42 | | | | 199 | | | | 113 | | Income (loss) before income taxes and discontinued operations | | $ | 964 | | | $ | (1,112 | ) | | $ | 816 | | | $ | (2,007 | ) | | Income (loss) from continuing operations before income taxes and discontinued operations | | | $ | (3,393 | ) | | $ | 2,610 | | | $ | (2,294 | ) | | $ | 3,801 | |
The Company expects impairment losses to be an adjustment to the net loss for the three and six months ended June 30, 2019 for income tax purposes. 9. | 13. | Shareholders’ Equity and Stock-based Compensation |
The Company has a 2006 Equity Incentive Plan and a 2015 Equity Incentive Plan. The 2015 Equity Incentive Plan replaced the 2006 Equity Incentive Plan and new grants may not be made under the 2006 Plan.
Under the 2015 Equity Incentive Plan, the Company may grant stock options, stock awards, stock appreciation rights, restricted stock units (“RSUs”) and other equity-based awards, although no such awards, other than stock options, had been granted as of September 30, 2017.awards. Under all awards, the terms are fixed on the grant date. Generally, The Company granted 52 and 75 RSUs for the exercise price of stock options equals the marketthree and six months ended June 30, 2019. The weighted average closing price of the Company’s common stock on the date of grant was $23.00 and $24.09, respectively, for the grant.RSUs granted in the three and six months ended June 30, 2019. The RSUs vest in equal, annual installments over a three year period beginning on the first anniversary of the date of grant at which time common stock is issued with respect to vested units. The Company has also granted stock options under the plans. Options granted under the plans generally vest in equal, annual installments over a three years,year period beginning on the first anniversary of the date of grant and have a maximum term of 10 years. The Compensation CommitteeStock award activity as of the Board of Directors has established a non-employee directors’ stock fee election program, referred to as the director’s program, and a non-employee director and executive officer stock purchase program, referred to as the management purchase program, as an award under the 2015 Plan. There were no shares purchased under the director program or the management purchase program during the three and ninesix months ended SeptemberJune 30, 2017 and 2016.
Stock option activity during the nine months ended September 30, 20172019 was as follows:
| | Number of Shares | | | Weighted-average Exercise Price | | | Aggregate Intrinsic Value | | Outstanding at December 31, 2016 | | | 1,385 | | | $ | 6.54 | | | | | | Options forfeited or cancelled | | | (5 | ) | | | 7.36 | | | | | | Options granted | | | 222 | | | | 7.36 | | | | | | Options exercised | | | (69 | ) | | | 5.50 | | | | | | | | | | | | | | | | | | | Outstanding at September 30, 2017 | | | 1,533 | | | $ | 6.71 | | | $ | 8,566 | | | | | | | | | | | | | | | Exercisable at September 30, 2017 | | | 1,118 | | | $ | 6.52 | | | $ | 6,539 | | | | | | | | | | | | | | | Available for future grant at December 31, 2016 | | | 404 | | | | | | | | | | | | | | | | | | | | | | | Available for future grant at September 30, 2017 | | | 189 | | | | | | | | | |
| | Outstanding Awards | | | Stock Option Weighted-Average | | | Aggregate | | | | Stock Options | | | RSUs | | | Total | | | Exercise Price (a) | | | Intrinsic Value | | | | | | | | | | | | | | | | | | Outstanding at December 31, 2018 | | | 830 | | | | 98 | | | | 928 | | | $ | 6.25 | | | | | | Forfeited, cancelled or expired | | | (1 | ) | | | — | | | | (1 | ) | | | 4.00 | | | | | | Granted | | | — | | | | 75 | | | | 75 | | | | — | | | | | | Exercised or vested | | | (63 | ) | | | (35 | ) | | | (98 | ) | | | 4.30 | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding at June 30, 2019 | | | 766 | | | | 138 | | | | 904 | | | $ | 6.41 | | | $ | 16,206 | | | | | | | | | | | | | | | | | | | | | | | Exercisable at June 30, 2019 | | | 647 | | | | — | | | | 647 | | | $ | 6.28 | | | $ | 11,054 | | | | | | | | | | | | | | | | | | | | | | | Available for future grant at December 31, 2018 | | | | | | | | | | | 249 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available for future grant at June 30, 2019 | | | | | | | | | | | 179 | | | | | | | | | |
(a) The weighted average exercise price calculation does not include outstanding RSUs The number of shares available for future grants at SeptemberJune 30, 20172019 does not include a total of up to 1,084370 shares subject to options outstanding under the 2006 Equity Incentive Plan, which will become available for grant under the 2015 Equity Incentive Plan as outstanding options under the 2006 Equity Incentive Plan expire, terminate, are cancelled or forfeited or are withheld in the event of the expiration, cancellation or surrendera net exercise of such options. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected stock price volatility. Because the Company’s options have characteristics different from those of traded options, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. The weighted average exercise price of options granted was $7.05 and $7.36 for options granted during the three and nine months ended September 30, 2017. The weighted average exercise price of options granted was $7.14 for options granted during the nine months ended September 30, 2016. The Company calculates expected volatility for stock options and awards using the Company’s historical volatility.
The Company currently estimates a zero percent forfeiture rate for stock options, but will continue to review this estimate in future periods.
The risk-free rates for the expected terms of the stock options and awards are based on the U.S. Treasury yield curve in effect at the time of grant.
The weighted average remaining contractual life of options exercisable at September 30, 2017 was 4.02 years.
The Company recorded $209$537 and $634$866 of non-cash stock optioncompensation expense for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively. The Company recorded $159$333 and $506$667 of non-cash stock optioncompensation expense for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. As of SeptemberJune 30, 2017,2019, there was $1,198$2,913 of total unrecognized compensation costs related to non-vested stock option and RSU awards that are expected to be recognized over a weighted-average period of 1.952.15 years. The total intrinsic value of options exercised during the three and six months ended June 30, 2019 was $847 and $2,327, respectively.
The Company also has an Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, as amended, through SeptemberJune 30, 2017,2019, provides that a maximum of 300 shares may be sold under the Purchase Plan. There were 32 and 105 shares purchased under the plan for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, and a total of 51 and 144 shares purchased for the three and ninesix months ended SeptemberJune 30, 2016,2018, respectively. 10. | 14. | Income (Loss) Per Share |
The following table presents a reconciliation between basic and diluted earnings per share: | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | | Six Months Ended | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 | | | June 30, 2019 | | | June 30, 2018 | | | June 30, 2019 | | | June 30, 2018 | | Numerator: | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before discontinued operations | | $ | 917 | | | $ | (1,145 | ) | | $ | 651 | | | $ | (2,126 | ) | | $ | (3,509 | ) | | $ | 2,341 | | | $ | (2,541 | ) | | $ | 3,346 | | Loss on sale of discontinued operations | | | — | | | | — | | | | (164 | ) | | | — | | | Loss from discontinued operations, net of income taxes | | | — | | | | (194 | ) | | | (128 | ) | | | (759 | ) | | Loss on disposal of discontinued operations (Note 3) | | | | (1,116 | ) | | | — | | | | (1,116 | ) | | | — | | Loss from discontinued operations, net of income taxes (Note 3) | | | | (405 | ) | | | (333 | ) | | | (597 | ) | | | (571 | ) | Net income (loss) | | | 917 | | | | (1,339 | ) | | | 359 | | | | (2,885 | ) | | $ | (5,030 | ) | | $ | 2,008 | | | $ | (4,254 | ) | | $ | 2,775 | | | | | | | | | | | | | | | | | | | | Less: loss allocated to non-controlling interest | | | (186 | ) | | | (35 | ) | | | (925 | ) | | | (106 | ) | | | | | | | | | | | | | | | | | | | | Net income (loss) attributable to shareholders | | $ | 1,103 | | | $ | (1,304 | ) | | $ | 1,284 | | | $ | (2,779 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic – weighted shares outstanding | | | 6,853 | | | | 6,796 | | | | 6,836 | | | | 6,287 | | | | 8,743 | | | | 6,991 | | | | 8,724 | | | | 6,930 | | Weighted shares assumed upon exercise of stock options | | | 398 | | | | — | | | | 343 | | | | — | | | Weighted shares assumed upon exercise of stock awards | | | | — | | | | 1,127 | | | | — | | | | 1,091 | | Diluted – weighted shares outstanding | | | 7,251 | | | | 6,796 | | | | 7,179 | | | | 6,287 | | | | 8,743 | | | | 8,118 | | | | 8,724 | | | | 8,021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic income (loss) per share attributable to IntriCon shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Continuing operations | | $ | 0.16 | | | $ | (0.16 | ) | | $ | 0.23 | | | $ | (0.32 | ) | | $ | (0.40 | ) | | $ | 0.34 | | | $ | (0.29 | ) | | $ | 0.48 | | Discontinued operations | | | — | | | | (0.03 | ) | | | (0.04 | ) | | | (0.12 | ) | | | (0.17 | ) | | | (0.05 | ) | | | (0.20 | ) | | | (0.08 | ) | Net income (loss) per share: | | $ | 0.16 | | | $ | (0.19 | ) | | $ | 0.19 | | | $ | (0.44 | ) | | $ | (0.57 | ) | | $ | 0.29 | | | $ | (0.49 | ) | | $ | 0.40 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted income (loss) per share attributable to IntriCon shareholders: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Continuing operations | | $ | 0.15 | | | $ | (0.16 | ) | | $ | 0.22 | | | | (0.32 | ) | | $ | (0.40 | ) | | $ | 0.29 | | | $ | (0.29 | ) | | $ | 0.42 | | Discontinued operations | | | — | | | | (0.03 | ) | | | (0.04 | ) | | | (0.12 | ) | | | (0.17 | ) | | | (0.04 | ) | | | (0.20 | ) | | | (0.07 | ) | Net income (loss) per share: | | $ | 0.15 | | | $ | (0.19 | ) | | $ | 0.18 | | | $ | (0.44 | ) | | $ | (0.57 | ) | | $ | 0.25 | | | $ | (0.49 | ) | | $ | 0.35 | |
The dilutive impact summarized above relates to the periods when the average market price of Company stock exceeded the exercise price of the potentially dilutive option securities granted.options. Earnings per common share was based on the weighted average number of common shares outstanding during the periods when computing the basic earnings per share. When dilutive, stock options are included as equivalents using the treasury stock method when computing the diluted earnings per share. Shares represented by RSUs are also included in the dilution calculation. Individual components of basic and diluted income (loss) per share may not sum to the total income (loss) per share due to rounding. Excluded from the computation of diluted earnings per share forFor the three and ninesix months ended SeptemberJune 30, 20162019, 563 options and 138 RSUs and 575 options and 137 RSUs were outstanding inexcluded from the money options to purchase approximately 73 and 161 common shares,dilutive calculation, respectively, because theas their effect would have been anti-dilutive due to the Company’s net lossantidilutive based on losses in the period.
The Company is a defendant along with a number of other parties in lawsuits alleging that plaintiffs have or may have contracted asbestos-related diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. These lawsuits relate to the discontinued heat technologies segment which was sold in March 2005. Due to the non-informative nature of the complaints, the Company does not know whether any of the complaints state valid claims against the Company. Certain insurance carriers have informed the Company that the primary policies for the period August 1, 1970-1978 have been exhausted and that the carriers will no longer provide defense and insurance coverage under those policies. However, the Company has other primary and excess insurance policies that the Company believes afford coverage for later years. Some of these other primary insurers have accepted defense and insurance coverage for these suits, and some of them have either ignored the Company’s tender of defense of these cases, or have denied coverage, or have accepted the tenders but asserted a reservation of rights and/or advised the Company that they need to investigate further. Because settlement payments are applied to all years a litigant was deemed to have been exposed to asbestos, the Company believes that it will have funds available for defense and insurance coverage under the non-exhausted primary and excess insurance policies. However, unlike the older policies, the more recent policies have deductible amounts for defense and settlements costs that the Company will be required to pay; accordingly, the Company expects that its litigation costs will increase in the future. Further, many of the policies covering later years (approximately 1984 and thereafter) have exclusions for any asbestos products or operations, and thus do not provide insurance coverage for asbestos-related lawsuits. The Company does not believe that the asserted exhaustion of some of the primary insurance coverage for the 1970-1978 period will have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance carriers involved in the defense of the suits, and the significant number of policy years and policy limits under which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company’s consolidated financial position or results of operations. The Company’s former French subsidiary, Selas SAS, filed for insolvency in France. The Company may be subject to additional litigation or liabilities as a result of the French insolvency proceeding, including liabilities under guarantees aggregating approximately $460. The Company is also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect our consolidated financial position, liquidity or results of operations.
12. | 16. | Related-Party Transactions |
One of the Company’s subsidiaries leases office and factory space from a partnership consisting of one present and two former officers of the subsidiary, including Mark Gorder, a member of the Company’s Board of Directors and the President and Chief Executive Officer of the Company. The subsidiary is required to pay all real estate taxes and operating expenses. The total base rent expense, real estate taxes and other charges incurred under the lease were approximately $124 and $372 for the three and nine months ended September 30, 2017, respectively, and approximately $121 and $364 for the three and nine months ended September 30, 2016, respectively. The term of the lease runs to January 31, 2022. The partnership sold the property to an unaffiliated third party on October 13, 2017.
The Company uses the law firm of Blank Rome LLP for legal services. A partner of that firm is the son-in-law of the Chairman of the Company’s Board of Directors, however, on May 1, 2019, the Chairman retired from the Company’s Board of Directors. For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company paid that firm approximately $29$35 and $94, respectively,$106 for legal services and costs. For the three and ninesix months ended SeptemberJune 30, 2016,2018, the Company paid that firm approximately $50$72 and $183,$175, respectively, for legal services and costs. The prior Chairman of our Board of Directors iswas considered independent under applicable Nasdaq and Securities and Exchange Commission rules because (i) no payments were made to the Chairman or the partner directly in exchange for the services provided by the law firm and (ii) the amounts paid to the law firm did not exceed the thresholds contained in the Nasdaq standards. Furthermore, the aforementioned partner does not provide any legal services to the Company and is not involved in billing matters. The Company has a 50% ownership in Signison, which is a German based hearing health company. Signison owesIn January 2019, the Company a note receivable balancepurchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience, an entity in which we owned 49% of $465 asthe equity, for 1,750 Euros and the transfer back of September 30, 2017.our 49% ownership interest in Soundperience. See Note 9.
The following tables set forth, for the periods indicated, nettiming of revenue recognition by market: | | Three Months Ended | | | Nine Months Ended | | | | September 30, 2017 | | | September 30, 2016 | | | September 30, 2017 | | | September 30, 2016 | | | | | | | | | | | | | | | Medical | | $ | 14,840 | | | $ | 8,814 | | | $ | 39,904 | | | $ | 27,832 | | Hearing Health | | | 5,816 | | | | 4,927 | | | | 17,086 | | | | 16,722 | | Hearing Health Direct-to-Consumer | | | 1,763 | | | | — | | | | 4,588 | | | | — | | Professional Audio Communications | | | 1,615 | | | | 1,829 | | | | 4,505 | | | | 5,708 | | Total Revenue | | $ | 24,034 | | | $ | 15,570 | | | $ | 66,083 | | | $ | 50,262 | |
Timing of revenue recognition for the three months ended June 30, 2019: | | Products and services transferred at point in time | | | Products and services transferred over time | | | Total | | Medical Biotelemetry: | | | | | | | | | | | | | Diabetes | | $ | — | | | $ | 17,950 | | | $ | 17,950 | | Other Medical | | | — | | | | 2,942 | | | | 2,942 | | Hearing Health: | | | | | | | | | | | | | Value Based DTEC | | | 1,736 | | | | — | | | | 1,736 | | Value Based ITEC | | | 2,399 | | | | — | | | | 2,399 | | Legacy OEM | | | 2,540 | | | | — | | | | 2,540 | | Professional Audio Communications: | | | 1,769 | | | | — | | | | 1,769 | | Total Net Revenue | | $ | 8,444 | | | $ | 20,892 | | | $ | 29,336 | |
Timing of revenue recognition for the six months ended June 30, 2019: | | Products and services transferred at point in time | | | Products and services transferred over time | | | Total | | Medical Biotelemetry: | | | | | | | | | | | | | Diabetes | | $ | — | | | $ | 35,114 | | | $ | 35,114 | | Other Medical | | | — | | | | 6,571 | | | | 6,571 | | Hearing Health: | | | | | | | | | | | | | Value Based DTEC | | | 3,366 | | | | — | | | | 3,366 | | Value Based ITEC | | | 4,976 | | | | — | | | | 4,976 | | Legacy OEM | | | 5,343 | | | | — | | | | 5,343 | | Professional Audio Communications: | | | 3,536 | | | | — | | | | 3,536 | | Total Net Revenue | | $ | 17,221 | | | $ | 41,685 | | | $ | 58,906 | |
Timing of revenue recognition for the three months ended June 30, 2018: | | Products and services transferred at point in time | | | Products and services transferred over time | | | Total | | Medical Biotelemetry: | | | | | | | | | | | | | Diabetes | | $ | — | | | $ | 17,307 | | | $ | 17,307 | | Other Medical | | | — | | | | 2,891 | | | | 2,891 | | Hearing Health: | | | | | | | | | | | | | Value Based DTEC | | | 2,052 | | | | — | | | | 2,052 | | Value Based ITEC | | | 2,634 | | | | — | | | | 2,634 | | Legacy OEM | | | 3,044 | | | | — | | | | 3,044 | | Professional Audio Communications: | | | 1,520 | | | | — | | | | 1,520 | | Total Net Revenue | | $ | 9,250 | | | $ | 20,198 | | | $ | 29,448 | |
Timing of revenue recognition for the six months ended June 30, 2018: | | Products and services transferred at point in time | | | Products and services transferred over time | | | Total | | Medical Biotelemetry: | | | | | | | | | | | | | Diabetes | | $ | — | | | $ | 30,869 | | | $ | 30,869 | | Other Medical | | | — | | | | 5,262 | | | | 5,262 | | Hearing Health: | | | | | | | | | | | | | Value Based DTEC | | | 3,837 | | | | — | | | | 3,837 | | Value Based ITEC | | | 4,608 | | | | — | | | | 4,608 | | Legacy OEM | | | 6,101 | | | | — | | | | 6,101 | | Professional Audio Communications: | | | 3,349 | | | | — | | | | 3,349 | | Total Net Revenue | | $ | 17,895 | | | $ | 36,131 | | | $ | 54,026 | |
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations Business Overview Headquartered in Arden Hills, Minnesota, IntriCon Corporation (together with its subsidiaries referred to as the “Company”, “IntriCon,” “we”, “us” or “our”) is an international company engaged in designing, developing, engineering, manufacturing and distributing body-worn devices. In addition to its operations in Minnesota, the Company has facilities in Illinois, Singapore, Indonesia, Germany and the United Kingdom.Germany. In December 2016,On June 25, 2019, the Company’s Board of Directorsofficers, pursuant to delegated authority from the board, approved plans to discontinue the operations of its cardiac diagnostic monitoring business. The Company sold the cardiac diagnostic monitoring business on February 17, 2017 to Datrix, LLC.United Kingdom (UK) subsidiary within our body worn device segment. For all periods presented, the Company classified this business as discontinued operations, and accordingly, has reclassified historical financial data presented herein.
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The Company evaluates its voting and variable interests in entities on a qualitative and quantitative basis. The Company consolidates entities in which it concludes it has the power to direct the activities that most significantly impact an entity’s economic success and has the obligation to absorb losses or the right to receive benefits that could be significant to the entity. On January 19, 2017,The Company’s significant accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” of the Company announced that it had exercised its option to acquireCompany’s Annual Report on Form 10-K for the remaining 80 percent stake in HHE. The transaction is expected to closeyear ended December 31, 2018. In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842). Topic 842 supersedes the lease accounting guidance previously set forth in the fourth quarter of 2017. The results of HHE were consolidated into the Company’s financial statements beginning October 31, 2016.Accounting Standards Codification (ASC) Topic 840 “Leases,” and requires lessees to recognize a lease liability and a right-of-use asset for all leases that extend beyond one year. The Company allocates income and losses to the noncontrolling interest based on current ownership percentage, however, as partadopted Topic 842 with a date of the closing, IntriCon will likely absorb a portioninitial application of the losses previously allocated to the majority owner. The amount of losses previously allocated to the majority owner that we may have to absorb could range $500,000 and $700,000. Losses incurred by HHE to date include non-cash amortization, acquisition related costs and operating results, all of which are related to prior periods and have no future cash impact
In April 2017, the Company entered into an agreement to acquire a 49% stake in Soundperience for 1,200 Euros. As of September 30, 2017, the Company holds a 16% stake in Soundperience, which will increase to 49% upon the completion of certain milestones and payment of the purchase price for that equity. As of September 30, 2017, the Company has an equity investment and advance in Soundperience of $1,255. The Company does not anticipate the Soundperience business will have a notable financial impact on operating results, but rather will provide the company with exclusive access in the United States to critical software technology. Soundperience has designed self-fitting hearing aid technology. The Company’s self-fitting hearing aid technology is being used in the German market today, most notably through our Signison joint venture with the owner of Soundperience. Both Soundperience and Signison will be accounted for in the Company’s financial statements using the equity method.
January 1, 2019. Information contained in this section of this Quarterly Report on Form 10-Q and expressed in U.S. dollars is presented in thousands (000s), except for per share data and as otherwise noted. In addition, all information included in Item 2 is related to continuing operations unless otherwise noted. Market Overview IntriCon serves the body-worn device market by designing, developing, engineering, manufacturing and distributing micro-miniature products, microelectronics, micro-mechanical assemblies, complete assemblies and software solutions, primarily for the medical bio-telemetrybiotelemetry market, the emerging value based hearing healthcare market, the hearing health direct to consumerdirect-to-end-consumer market and the professional audio communication market. Revenue from markets is reported on the respective medical biotelemetry, hearing health, hearing health direct to consumerdirect-to-end-consumer and professional audio lines in the discussion of our results of operations in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1317 “Revenue by Market” to the Company’s consolidated condensed financial statements included herein. Value Based Hearing Healthcare Market
The Company believes the value based hearing healthcare (VBHH) market offers significant growth opportunities. In the United States alone, there are approximately 37.540 million adults that report some degree of hearing loss. In adults, the most common cause of hearing loss is aging and noise. In fact, by the age of 65, one out of three people have hearing loss. The hearing-impaired population is expected to grow significantly over the next decade due to an aging population and more frequent exposure to loud sounds that can cause noise-induced hearing loss. It is estimated that hearing aids can help more than 90 percent of people with hearing loss, however the current market penetration into the U.S. hearing impaired population is approximately 20 percent, a percentage that has remained essentially unchanged for the last four decades. The primary deterrents to greater penetration are cost and access. TheAlong with this, the legacy hearing aid distribution channel is an oligopoly of six large hearing aid manufacturers who utilize bricks and mortar and licensed audiologists to sell devices while controlling the channel dynamics. As a result, the average cost of a hearing aid sold in the US market today is over $2,400 per device, more than double the cost from twelvefifteen years ago. Approximately 70 percent of the hearing impaired have hearing loss in both ears (referred to as a binaural loss), driving the total cost to almost $5,000 on average for a set of hearing aids.
We believe a perfect vortex of factors has come together over the last few years to enable the emergence of a market disruptive,high-quality, low cost distribution model, including,continued consolidation of retail (causing escalating hearing aid prices), consumer outcry, consumer education, advancements in technology (such as behind-the-ear devices, advanced digital signal processing, low-power wireless, and self-fitting software) as well as regulatory actions and pronouncements by the U.S. Food and Drug Administration, the President’s Council of Advisors on Science and Technology and the National Academies of Science, Engineering and Medicine.
Today in the US market, the conventionallegacy channel pushes all hearing impaired through the same bloated,inefficient, costly channel. However, a very large portion of the hearing-impaired market – mostly notably those with mild to moderate losses – could be properlybetter served with the proper combination of high quality, outcome basedoutcome-based devices, advanced fitting software and consumer services/care best practices – all at much lower cost. We believefundamental change is needed and are excited about the opportunity that we created through thoughtful hard work and planning: a chance to deliver superior outcomes-based affordable hearing healthcare, by combining state-of-the-art devices and software technology, along with best practices customer service and at a much lower cost directly to consumers across the country, many of whom have not been able to afford care previously. In early January 2016,We believe a perfect vortex of factors has come together over the last few years to enable the emergence of a market disruptive, high-quality, low cost distribution model. These factors include the continued consolidation of retail (causing escalating hearing aid prices), consumer outcry, consumer education, advancements in technology (such as behind-the-ear devices, advanced digital signal processing, low-power wireless, and self-fitting software) as well as regulatory actions and pronouncements by the U.S. Food and Drug Administration (FDA), the President’s Council of Advisors on Science and Technology and the National Academies of Science, Engineering and Medicine.
In early January 2016, the FDA weighed in on low hearing aid penetration rates with an announcement that highlighted statistics from the National Institute on Deafness and Other Communication Disorders. They found that 37.5 million U.S. adults aged 18 and older report some form of hearing loss. However, only 30 percent of adults over 70, and 16 percent of those aged 20 to 69, who could benefit from wearing hearing aids, have ever used them. Based on these statistics, the FDA reopened the public comment period on draft guidance related to the agency’s premarket requirements for hearing aids and personal sound amplifiers (PSAPs). In April 2016, the FDA hosted a public workshop to, among other things, gather stakeholder and public input on draft guidance related to the agency’s premarket requirements for hearing aids and PSAPs. The FDA’s intent iswas to consider ways in which regulationit can support further device penetration into themost effectively regulate hearing market.aids to promote accessibility and affordability while encouraging innovation. In December 2016, thethe FDA announced important steps to better support consumer access to hearing aids. The agency issued a guidance document explaining that it does not intend to enforce the requirement that individuals age 18 and older receive a medical evaluation orsign a waiver prior to purchasing most hearing aids, effective immediately. It also announced its commitment to consider creating a category of over-the-counter (OTC) hearing aids that could deliver new, innovative and lower-cost products to millions of consumers.aids.
Furthermore, there have beenwere significant public policy developments during 2017. On August 18, 2017, President Donald Trump signed into law H.R. 2430, the U.S. Food and Drug Administration (FDA)FDA Reauthorization Act of 2017, which includesincluded a section concerning the Over-the-Counter (“OTC”) Hearing Aid Actregulation of 2017.OTC hearing aids. The legislationlaw is designed to enable adults with mild-mild to moderate-hearingmoderate hearing loss to access OTC hearing aids without being seen by a hearing care professional. The OTC Hearing Aid Actlaw requires the FDA to create and regulate a category of OTC hearing aids to ensure they meet the same high standards for safety, consumer labeling, and manufacturing protection that all other medical devices must meet. Additionally, the OTC Hearing Aid Actlaw mandates that the FDA establish an OTC hearing aid category for adults with “perceived” mild-mild to moderate-hearingmoderate hearing loss within three years of passage of the legislation. The FDA also must finalize a rule within 180 days after the close of the comment period, detailing what level of safety, labeling and consumer protections will be included. We believe this legislationlaw has the potential to remove the significant barriers existing today that prevent innovative hearing health solutions. We believe that this legislationlaw will invigorate competition, spur innovation and facilitate the development of an ecosystem of hearing health care that provides affordable and accessible solutions to millions of unserved or underserved Americans. Additionally, these public policy changes all further support our strategic focus to gain direct access to consumersToday, IntriCon serves both the value-based hearing healthcare channel and the underserved market.legacy hearing health channel.
Value-Based Hearing Healthcare The Company believes the value-based hearing healthcare (VBHH) market offers significant growth opportunities. In contrast to the legacy channel dynamics, the VBHH market channel is flexible and able to serve the end consumer through a variety of modalities which may include self-fitting, remote programing and adjustments, customer support call centers and bricks and mortar stores. The average price of a hearing aid sold through this channel is less than twenty-five percent of the average $2,400 device price typically sold through the legacy channel. The Company recently commissioned an ethnographic research study, which identified a $3+ billion annual VBHH market opportunity, fueled by an immediate addressable market of 6.8 million dissatisfied hearing aid users and 6.6 million current non-hearing aid users. In addition, this study assisted us in identifying our customer, various customer segmentations and personas. To best approach this market opportunity, we have focused our efforts to serve both the value-based Direct-to-End-Consumer (DTEC) and value-based Indirect-to-End-Consumer (ITEC) channels. Over the past decade we have invested in the final stages of commercializing its PhysioLink™ 2 wirelessmanufacturing footprint, product technology which will be incorporated into product platforms serving the traditional and value basedfitting software to provide individuals access to affordable, quality outcomes-based hearing healthcare markets. This technology is an integrated platform that incorporates IntriCon’s Audion™ 8 amplifier and 2.4 GHz Bluetooth® low energy, enabling wireless connectivity from any Bluetooth® enabled device operating IntriCon’s propriety software over distances up to ten meters.healthcare. We are also currently developingOur DTEC represents a channel that sells products and services directly to the end consumer, which today consists of our third generation PhysioLink™ technology, leveraging industry leading wireless IC technology to enable concurrent audio streaming and data transmission over Bluetooth® low energy. This technology will be incorporated into product platforms serving traditional and value based hearing healthcare markets, providing end users with an unprecedented experience through breakthrough audio and wireless performance.
HHE business. In OctoberDecember of 2016,2017, we purchased 20%the remaining 80% of HHE, a direct-to-consumerdirect-to-end-consumer mail order hearing aid provider. In January 2017, we exercised an optionHowever, the Company had been preparing to acquireaddress this market long before the remaining 80% equity interestacquisition of HHE and expect to close the transaction in the fourth quarter of 2017. HHE is a key next step in our value based hearing healthcare strategy. Overhas spent the last decade we have investedinvesting in the technology and low-cost manufacturing to design and build superior devices and fitting solutions, to address what we estimate to be a $1 billion annually value based hearing healthcare market.solutions. With this acquisition, we believe we now have the channel infrastructure to directly reach consumers and—importantly for millions—the ability to offer high-quality hearing healthcare at a fraction of the cost. The Company’s devices and technologies coupled with HHE’s high-touch care, outcomes based, and hassle free telemedicine model has created a complete eco-system of hearing healthcare in which the Company intends to serve the $3+ billion market. Through our other VBHH initiatives and tests, we have formed alliances with other key partners, which have given us experience and vital insight as we move aggressively into a more consumer-facing role. HHE provides an efficient, traditional direct-to-consumerdirect-to-end-consumer channel to reach consumers who likely do not have insurance that will covercovering hearing devices. This is a channel that we can build on and expand via technology—and one that is complementary with many of our existing relationships. In April 2017, we entered into an agreementThe Company is also focused on serving its value-based ITEC customers, who also sell products and services directly to acquirethe end consumer. We have established ourselves as a 49% stakeleader in Soundperience. As of September 30, 2017, we hold a 16% stake in Soundperience, which will increase to 49% upon the completion of certain milestones and paymentsupplying this portion of the purchase price for that equity. Soundperiencemarket with advanced, outcome-based products and accessories. The Company has designed self-fittingformed strong relationships with various customers in the channel, including insurance providers, and geriatric product retailers and other indirect-to-end-consumer hearing aid technology. This company’sproviders.
In January 2019, the Company purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience, positioning the Company to capitalize on the upcoming OTC hearing aid technologyregulations. Sentibo Smart Brain self-fitting software is being useddesigned to improve both channel productivity and the quality of first-time fittings, resulting in the German market today, most notably though our Signison joint venture with Soundperience. Currently, the Soundperience technology is PC basedlower prices, greater access and is wired to the hearing aid during programing. However, the system will be integrated with IntriCon’s wireless hearing aids over the next few months, and initially rolled out in Germany through our Signison joint venture.increased customer satisfaction.
We strongly believe strongly that incorporating self-fitting technology is a critical step in creating our high-quality, low-cost hearing healthcare ecosystem. Soundperience’sThe Sentibo Smart Brain self-fitting software technology has the potential to drastically reduce the price of hearing aids, drive greater access and increase customer satisfaction.
The Company also has various international VBHH initiatives. On November 3, 2015, the Company acquired the assets of PC Werth through its IntriCon UK subsidiary to gain direct access to the NHS and to have greater control over its efforts to accelerate new market penetration into the United Kingdom. IntriCon UK has been appointed as a supplier to the NHS Supply Chain’s National Framework. The NHS is widely seen as the most efficient hearing aid delivery system in the world, supplying an estimated 1.4 million hearing aids annually. We believe IntriCon is well positioned to serve their needs, and we are developing new technologies to further enhance delivery efficiencies and product standards in the future.Legacy Hearing Health Channel
We also believe there are niches in the conventionallegacy hearing health channel that will embrace our VBHH propositionoutcomes-based products and technologies in the United States and Europe. High costs of conventionallegacy devices and retail consolidation have constrained the growth potential of the independent audiologist and dispenser. We believe our software and product offering can provide independent audiologists and dispensers the ability to compete with larger retailers, such as Costco, and manufacturer owned retail distributors. In the third quarter of 2015, we announced a joint venture with The Academy of Doctors of Audiology (ADA) to provide hearing instruments and educational resources to audiologists and their patients. The joint venture operates as a limited liability company under the name “earVenture LLC”. EarVenture was officially launched in November 2015 at the ADA conference. To date, more than 400 of the 1,200 ADA members have registered to join the earVenture program and we have delivered initial units. In 2016, earVenture began rolling-out a comprehensive marketing and sales plan to convert those registered members to consistent customers, as well as solicit non-registered ADA members to join the program. While we do not view earVenture, near term, as a meaningful contributor to sales, it continues to provide valuable industry insights and has the potential for future value by connecting it to our emerging direct-to-consumer channel. Medical Bio-TelemetryBiotelemetry In the medical bio-telemetrybiotelemetry market, the Company is focused on sales of bio-telemetrybiotelemetry devices for life-critical diagnostic monitoring. Using our nanoDSP and BodyNet™ technology platforms, theThe Company manufactures microelectronics, micro-mechanical assemblies, high-precision injection-molded plastic components and complete bio-telemetrybiotelemetry devices for emergingleading and leadingemerging medical device manufacturers. The medical industry is faced with pressures to reduce the cost of healthcare. Driven by its core technologies, such as the IntriCon Physiolink™ that wirelessly connects patients and care givers in non-traditional ways, IntriCon helps shift the point of care from expensive traditional settings, such as hospitals, to less expensive non-traditional settings like the home. IntriCon currently serves this market by offering medical manufacturers the capabilities to design, develop, manufacture and distribute medical devices that are easier to use, are more miniature, use less power, and are lighter. Increasingly, the medical industry is looking for wireless, low-power capabilities in their devices.
IntriCon currently has a strong presence in the diabetes, cardiac and other bio-telemetrycatheter positioning markets. For diabetes, IntriCon has partneredworks with Medtronic to manufacture their wireless continuous glucose monitors (CGM), sensors,sensor assemblies, and accessories associated with Medtronic’s CGM system, including the MiniMed Connect, which links the MiniMed pump and CGM to certain smart devices providing users with a discrete and real-time view of their blood sugar information. Our Medtronic business posted record revenue in 2015, led by the MiniLink REAL-Time Transmitter and related accessories sales, which are incorporated in Medtronic’s MiniMed 530G insulin pump and CGM system. In August 2016, the FDA approved the MiniMed 630G system which willis intended to replace theMedtronic’s MiniMed 530G system. In addition toSeptember 2016, the MiniMed 630G system, IntriCon is also designed intoFDA approved the next generation MiniMed 670G insulin pump system, into which was approved by the FDA in September 2016.TheIntriCon components are also designed. The MiniMed 670G is the world’s first hybrid closed loop insulin delivery system and we are excited to bethat our components are designed into and supportingsupport such a revolutionary diabetes management system. In June 2017, the 670G was launched in the U.S. and Medtronic began fulfilling orders from patients enrolled in their Priority Access Program. In parallel, Medtronic began taking new orders from interested customers who want to be next in line to receive the system after the Priority Access orders are filled. In March 2018, the FDA approved the Guardian Connect, Medtronic’s standalone CGM system that allows patients to stay ahead of high and low glucose events. Looking ahead, we believe there are opportunities to expand our diabetes product offering with Medtronic, as well as move into new markets outside of the diabetes market. IntriCon has a suite of medical coils and micro coils that it offers to various original equipment manufacturing (OEM) customers. These products are currently used in pacemaker programming and interventional catheter positioning applications. We recently secured a new large medical customer for our proprietary medical coils to be used for pacemaker programming in their devices. IntriCon manufactures bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system as well as a family of safety needle products for an OEM customer that utilizes IntriCon’s insert and straight molding capabilities. These products are assembled using full automation, including built-in quality checks within the production lines.
Lastly, IntriConThroughout 2018, we expanded our infrastructure to support anticipated growth from current medical biotelemetry customers and future growth from increased business development. Expansion efforts in 2018 included a newly leased 37,000-square-foot medical biotelemetry manufacturing and clean room facility in Minnesota, an additional 10,000-square-foot medical assembly space in Singapore, 13 new molding presses and a high-speed printed circuit board assembly line. In addition to these investments, our current customers invested several million dollars in tooling and automation within our facilities. While we have begun limited production on certain products in our new facilities, we are still working with current medical biotelemetry customers to complete required validation and qualification of several key production lines. We anticipate having all validation and qualification of our equipment and production lines related to the recent expansion complete by the end of 2019.
The Company is targeting othercommitted to increasing investments to support its medical biotelemetry business development efforts. In early 2019, the Company hired a vice president of medical business development to leverage our core competencies and diversify our medical revenue base. The Company believes it has a significant opportunities to serve the emerging biotelemetry and home care markets that could benefit fromthrough its already developed core competencies and capabilities to develop devices that are more technologically advanced, smaller and lightweight. To do so, IntriCon is leveraging its resources in sales and marketing and research and development to expand its reach to other large medical device and health care companies. In order to focus financial and operational resources on value based hearing healthcare and the growing DTC opportunity, IntriCon made the strategic decision to divest its non-core CDM business in 2016. The Company sold the cardiac diagnostic monitoring business on February 17, 2017 to Datrix, LLC.
Professional Audio Communications IntriCon entered the high-quality audio communication device market in 2001, and now has a line of miniature, professional audio headset products used by customers focusing on emergency response needs. The line includes several communication devices that are extremely portable and perform well in noisy or hazardous environments. These products are well suited for applications in the fire, law enforcement, safety, aviation and military markets. In addition, the Company has a line of miniature ear- and head-worn devices used by performers and support staff in the music and stage performance markets. We believe performance in difficult listening environments and wireless operations will continue to improve as these products increasingly include our proprietary nanoDSP, wireless nanoLink and PhysioLink technologies. Core Technologies OverviewOverview: Our core technologies expertise is focused on threefour main markets: medical bio-telemetry, value basedbiotelemetry, hearing healthcarehealth, hearing health direct-to-end-consumer and professional audio communications. Over the past several years, the Company has increased investments in the continued development of five critical core technologies: Ultra-Low-Power (ULP) Digital Signal Processing (DSP), ULP Wireless, Fitting Software, ULP Wireless, Microminiaturization, and Miniature Transducers. These five core technologies serve as the foundation of current and future product platform development, designed to meet the rising demand for smaller, portable, more advanced devices and the need for greater efficiencies in the delivery models. The continued advancements in this area have allowed the Company to further enhance the mobility and effectiveness of miniature body-worn devices.
ULP DSP DSP converts real-world analog signals into a digital format. Through our nanoDSP™ technology, IntriCon offers an extensive range of ULP DSP amplifiers for hearing, medical and professional audio applications. Our proprietary nanoDSP incorporates advanced ultra-miniature hardware with sophisticated signal processing algorithms to produce devices that are smaller and more effective. The Company further expanded its DSP portfolio including improvements to its Reliant CLEAR™ feedback canceller, offering increased added stable gain and faster reaction time. Additionally, the DSP technologies are utilized in the Audion8™, our eight-channel hearing aid amplifier, and the Audion16™, our wide dynamic range compression sixteen-channel hearing aid amplifier announced in April 2016.amplifier. The amplifiers are feature-rich and are designed to fit a wide array of applications. In addition to multiple compression channels, the amplifiers have a complete set of proven adaptive features which greatly improve the user experience. ULP Wireless Wireless connectivity is fast becoming a required technology, and wireless capabilities are especially critical in new body-worn devices. IntriCon’s BodyNet™ ULPplatform of wireless technology including the nanoLink™ and PhysioLink™ wireless systems, offers solutions for transmitting the body’s activities to caregivers and wireless audio links for professional communications and surveillance products, including diabetes monitoring and audio streaming for hearing devices. IntriCon is inhas completed the final stagescommercialization of commercializing its PhysioLink2 and Physiolink3the third generation of Physiolink (Physiolink 3) wireless technology, which will be incorporated into product platforms serving the medical biotelemetry, hearing health, hearing health direct-to-end-consumer and professional audio communication markets. This system is based on 2.4GHz proprietary digital radio protocol in the industrial-scientific-medical (ISM) frequency band and enables audio and data streaming and command and control to ear-worn and body-worn applications over distances of up to fiveten meters. The Physiolink2Physiolink 3 technology can be used to increase productivity in the emerging VBHH channels through in office wireless programming, remote cloud based fitting and consumer directed self-fitting of hearing aids. This will provide both greater access and lower costs for patients. In addition, remote control functions will improve the patient experience while using the device especially for those with diminished dexterity. The Physiolink3Physiolink 3 technology builds on the Physiolink2Physiolink 2 capabilities by adding wireless streaming at, what we believe, are much lower power levels than any technology currently on the market. This will allow for accessories to enhance the user experience in noisy environments by allowing audio streaming directly to the hearing aid.
Fitting Software The ability to efficiently and effectively fit hearing aids is critical to building a value based eco-system of hearing healthcare. By developing more advanced fitting software systems, individuals can benefit from fittings that conform to their specific loss, while eliminating the need for an in-person appointment. In addition to the traditional fitting software, IntriFit, used in the conventional channel, IntriCon has made significant investments in various advanced fitting software solutions, including its purchase of the source code for the Sentibo Smart Brain self-fitting software, that can enable remote and self-fitting solutions. IntriCon believes these advanced fitting solutions, along with the other components of the eco-system, will drive access, affordability and superior customer satisfaction to the millions of individuals that cannot receive care today, primarily due to high cost and low access. In January 2019, the Company purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience. The Sentibo Smart Brain System is the first psycho-acoustic way of analyzing peripheral hearing and central hearing processing. It was developed by an international research team based on the latest scientific findings from the fields of audiology and brain research. We believe this software technology is a critical component to our domestic value-based hearing healthcare model. Sentibo, as well as our other proprietary fitting systems, are designed to improve both channel productivity and the quality of first-time fittings, resulting in lower prices, greater access and increased customer satisfaction. IntriCon will be introducingexpects to introduce our advanced fitting solutions through our various VBHH channels later in 2017.2019. Microminiaturization IntriCon excels at miniaturizing body-worn devices. We began honing our microminiaturization skills over 30 years ago, supplying components to the hearing health industry. Our core miniaturization technology allows us to make devices for our markets that are one cubic inch and smaller. We also are specialists in devices that run on very low power, as evidenced by our ULP wireless and DSP. Less power means a smaller battery, which enables us to reduce size even further, and develop devices that fit into the palm of one’s hand.
Miniature Transducers IntriCon’s advanced transducer technology has been pushing the limits of size and performance for over a decade. Included in our transducer line are our miniature medical coils and micro coils used in pacemaker programming and interventional catheter positioning applications. We believe that with the increase of greater interventional care, our coil technology harbors significant value. Forward-Looking and Cautionary Statements Certain statements included in this Quarterly Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission, which are not historical facts, or that include forward-looking terminology such as “may”, “will”, “believe”, “anticipate”, “expect”, “should”, “optimistic” “continue”, “estimate”, “intend”, “plan”, “would”, “could”, “guidance”, “potential”, “opportunity”, “project”, “forecast”, “confident”, “projections”, “schedule”, “designed”, “future”, “discussion”, “if” or the negative thereof or other variations thereof, are forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to the Company’s Condensed Consolidated Financial Statements” such as net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs, assumptions used to calculate future level of funding of employee benefit plans, the adequacy of insurance coverage and the impact of new accounting pronouncements and litigation. Forward-looking statements also include, without limitation, statements as to the Company’s expected future results of operations and growth, strategic alliances and their benefits, government regulation, potential increases in demand for the Company’s products, the Company’s ability to meet working capital requirements, the Company’s business strategy, the expected increases in operating efficiencies, anticipated trends in the Company’s markets, estimates of goodwill impairments and amortization expense of other intangible assets, the effects of changes in accounting pronouncements, the effects of litigation and the amount of insurance coverage, and statements as to trends or the Company’s or management’s beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Quarterly Report on Form 10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including, without limitation, the following: | ▪■ | our ability to successfully implement our business and growth strategy; |
| ▪■ | risks arising in connection with the insolvency of our former subsidiary, Selas SAS, and potential liabilities and actions arising in connection with the insolvency; |
| ▪■ | the volume and timing of orders received by the Company, particularly from Medtronic and hi HealthInnovations;Health; |
| ▪■ | changes in estimated future cash flows; |
| ▪■ | our ability to collect our accounts receivable; |
| ▪■ | foreign currency movements in markets that we serve; |
| ▪■ | changes in the global economy and financial markets; |
| ▪■ | weakening demand for our products due to general economic conditions; |
| ▪■ | changes in the mix of products sold; |
| ▪■ | our ability to meet demand; |
| ▪■ | changes in customer requirements; |
| ▪ | timing and extent of research and development expenses; |
| ▪■ | FDA approval, timely release and acceptance of our products and thosethe products of our customers; |
| ▪■ | competitive pricing pressures; |
| ▪■ | pending and potential future litigation; |
| ▪■ | cost and availability of electronic components and commodities for our products; |
| ▪■ | our ability to create and market products in a timely manner and develop products that are inexpensive to manufacture; |
| ▪ | our ability to comply with covenants in our debt agreements or to obtain waivers if we do not comply; |
| ▪ | our ability to repay debt when it comes due; |
| ▪ | our ability to obtain extensions of our current credit facility or a new credit facility; |
| ▪■ | the loss of one or more of our major customers; |
| ▪■ | our ability to identify, complete and integrate acquisitions; |
| ▪■ | effects of legislation; |
| ▪■ | effects of foreign operations; |
| ▪■ | our ability to develop new products; |
| ▪■ | our ability to recruit and retain engineering and technical personnel; |
| ▪■ | the costs and risks associated with research and development investments; |
| ▪ | the recent recessions in Europe and the debt crisis in certain countries in the European Union; |
| ▪■ | our ability and the ability of our customers to protect intellectual property; |
| ▪■ | loss of members of our senior management team; and |
| ▪■ | other risk factors set forth in our most recent Annual Report on Form 10-K or any prior Quarterly Report on Form 10-Q, which are incorporated by reference into this Report. |
For a description of these and other risks, see Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, and other risks described elsewhere in this Quarterly Report on Form 10-Q, or in other filings the Company makes from time to time with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Critical Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Certain accounting estimates and assumptions are particularly sensitive because their significance to the consolidated condensed financial statements and the possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions include the Company’s revenue recognition, accounts receivable reserves, inventory valuation, goodwill, long-lived assets, deferred taxes policies, and employee benefit obligations.obligations, lease assets and liabilities and investment securities. These and other significant accounting policies are described in and incorporated by reference from “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. 2018.
Results of Operations Sales,Revenue, net
Our net sales are comprised of two segments: our body-worn device segment (consisting of three main markets: medical, hearing health and professional audio) and our hearing health direct-to-consumer segment. Below is a summary of our salesrevenue by main markets for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
| | | | | | | | Change | | Three Months Ended September 30 | | 2017 | | | 2016 | | | Dollars | | | Percent | | Medical | | $ | 14,840 | | | $ | 8,814 | | | $ | 6,026 | | | | 68.4 | % | Hearing Health | | | 5,816 | | | | 4,927 | | | | 889 | | | | 18.0 | % | Hearing Health Direct-to-Consumer | | | 1,763 | | | | — | | | | 1,763 | | | | — | | Professional Audio Communications | | | 1,615 | | | | 1,829 | | | | (214 | ) | | | -11.7 | % | Consolidated Net Sales | | $ | 24,034 | | | $ | 15,570 | | | $ | 8,464 | | | | 54.4 | % |
Nine Months Ended September 30 | | | | | | | | | | | | | Medical | | $ | 39,904 | | | $ | 27,832 | | | $ | 12,072 | | | | 43.4 | % | Hearing Health | | | 17,086 | | | | 16,722 | | | | 364 | | | | 2.2 | % | Hearing Health Direct-to-Consumer | | | 4,588 | | | | — | | | | 4,588 | | | | — | | Professional Audio Communications | | | 4,505 | | | | 5,708 | | | | (1,203 | ) | | | -21.1 | % | Consolidated Net Sales | | $ | 66,083 | | | $ | 50,262 | | | $ | 15,821 | | | | 31.5 | % |
| | | | | | | | | | | | | | | Change | | Three Months Ended June 30 | | 2019 | | | 2018 | | | Dollars | | | Percent | | Medical Biotelemetry: | | | | | | | | | | | | | | | | | Diabetes | | $ | 17,950 | | | $ | 17,307 | | | $ | 643 | | | | 3.7 | % | Other Medical | | | 2,942 | | | | 2,891 | | | | 51 | | | | 1.8 | % | Total | | $ | 20,892 | | | $ | 20,198 | | | $ | 694 | | | | 3.4 | % | Hearing Health: | | | | | | | | | | | | | | | | | Value Based DTEC | | $ | 1,736 | | | $ | 2,052 | | | $ | (316 | ) | | | -15.4 | % | Value Based ITEC | | | 2,399 | | | | 2,634 | | | | (235 | ) | | | -8.9 | % | Legacy OEM | | | 2,540 | | | | 3,044 | | | | (504 | ) | | | -16.6 | % | Total | | $ | 6,675 | | | $ | 7,730 | | | $ | (1,055 | ) | | | -13.6 | % | Professional Audio Communications | | $ | 1,769 | | | $ | 1,520 | | | $ | 249 | | | | 16.4 | % | Total Net Revenue | | $ | 29,336 | | | $ | 29,448 | | | $ | (112 | ) | | | -0.4 | % |
| | | | | | | | | | | | | | | Change | | Six Months Ended June 30 | | 2019 | | | 2018 | | | Dollars | | | Percent | | Medical Biotelemetry: | | | | | | | | | | | | | | | | | Diabetes | | $ | 35,114 | | | $ | 30,869 | | | $ | 4,245 | | | | 13.8 | % | Other Medical | | | 6,571 | | | | 5,262 | | | | 1,309 | | | | 24.9 | % | Total | | $ | 41,685 | | | $ | 36,131 | | | $ | 5,554 | | | | 15.4 | % | Hearing Health: | | | | | | | | | | | | | | | | | Value Based DTEC | | $ | 3,366 | | | $ | 3,837 | | | $ | (471 | ) | | | -12.3 | % | Value Based ITEC | | | 4,976 | | | | 4,608 | | | | 368 | | | | 8.0 | % | Legacy OEM | | | 5,343 | | | | 6,101 | | | | (758 | ) | | | -12.4 | % | Total | | $ | 13,685 | | | $ | 14,546 | | | $ | (861 | ) | | | -5.9 | % | Professional Audio Communications | | $ | 3,536 | | | $ | 3,349 | | | $ | 187 | | | | 5.6 | % | Total Net Revenue | | $ | 58,906 | | | $ | 54,026 | | | $ | 4,880 | | | | 9.0 | % |
For the three and ninesix months ended SeptemberJune 30, 2017,2019, we experienced increasesan increase of 68.4%3.7% and 43.4%13.8% in net salesrevenue in the diabetes medical biotelemetry market compared to the same periodsperiod in 2016.2018. Medtronic revenues were up significantlyyear-over-year driven by market share growth for legacy products and the three and nine months ended September 30, 2017 while the restintroduction of the medical segment remained relatively stable.new products. IntriCon currently serves this market by offering medical manufacturers the capabilities to design, develop and manufacture medical devices that are easier to use, are more miniature, use less power, and are lighter. IntriCon has a strong presence in the diabetes market with its Medtronic partnership. The Company believes there are growth opportunities in this market as well as other emerging biotelemetry and home care markets that could benefit from its capabilities to develop devices that are more technologically advanced, smaller and lightweight. Net sales in our hearing health businessAll other medical net revenue for the three and ninesix months ended SeptemberJune 30, 20172019 increased 18.0%1.8% and 2.2%24.9%, respectively, compared to the same periodsperiod in 2016.2018. The increases forincrease was driven by the three and nine months ended September 30, 2017 were primarily due to increases in the value based hearing healthcare and hi Health markets partially offset by decreasesaddition of a new customer in our traditional hearing health market. The Company is very optimistic about the progress that has been made and the long-term prospects of the value based hearing healthcare market. Market dynamics, such as low penetration rates, an aging population, regulatory scrutiny, and the need for reduced cost and convenience, have resulted in the emergence of alternative care models, such the insurance channel and PSAP channel. IntriCon believes it is very well positioned to serve these value based hearing healthcare market channels. The Company will be aggressively pursuing larger customers who can benefit from our value proposition. Over the past several years, the Company has invested heavily in core technologies, product platforms and its global manufacturing capabilities geared to provide high-tech, lower-cost hearing devices.medical coils business.
Net salesrevenue in our hearing health direct-to-consumervalue based direct-to-end-consumer business for the three and ninesix months ended SeptemberJune 30, 2017 increased due2019 decreased 15.4% and 12.3%, respectively, compared to the acquisition of the 20% equity interest and control of HHE during the fourth quarter of 2016.same period in 2018. Net salesrevenue in our hearing health value based indirect-to-end-consumer business for the three and six months ended June 30, 2019 decreased 8.9% and increased 8.0%, respectively, compared to the same period in 2018. The modest revenue decrease during the quarter was largely due order delays associated with restructuring activity within a large insurance customer’s hearing health business. Net revenue in our hearing health legacy business for the three and six months ended June 30, 2019 decreased 16.6% and 12.4%, respectively, compared to the same period in 2018. Net revenue to the professional audio device sector decreased 11.7%increased 16.4% and 21.1%5.6% for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, compared to the same periodsperiod in 2016.2018. IntriCon will continue to leverage its core technology in professional audio to support existing customers, as well as pursue related hearing health and medical product opportunities. Gross profit Gross profit, both in dollars and as a percent of sales,revenue, for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, was as follows: | | 2017 | | | 2016 | | | Change | | | | | | | Percent | | | | | | Percent | | | | | | | | Three Months Ended September 30 | | Dollars | | | of Sales | | | Dollars | | | of Sales | | | Dollars | | | Percent | | Gross Profit | | $ | 7,565 | | | | 31.5 | % | | $ | 3,542 | | | | 22.7 | % | | $ | 4,023 | | | | 113.6 | % | Nine Months Ended September 30 | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | $ | 19,822 | | | | 30.0 | % | | $ | 12,473 | | | | 24.8 | % | | $ | 7,349 | | | | 58.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | | 2018 | | | Change | | | | | | | | Percent | | | | | | | Percent | | | | | | | | Three Months Ended June 30 | | Dollars | | | of Revenue | | | Dollars | | | of Revenue | | | Dollars | | | Percent | | Gross Profit | | $ | 8,215 | | | | 28.0 | % | | $ | 9,721 | | | | 33.0 | % | | $ | (1,506 | ) | | | -15.5 | % |
| | | | | | | | | | | | | | | 2019 | | | 2018 | | | Change | | | | | | | | Percent | | | | | | | Percent | | | | | | | | | | Six Months Ended June 30 | | Dollars | | | of Revenue | | | Dollars | | | of Revenue | | | Dollars | | | Percent | | Gross Profit | | $ | 16,773 | | | | 28.5 | % | | $ | 17,824 | | | | 33.0 | % | | $ | (1,051 | ) | | | -5.9 | % |
The 20172019 gross profit increase as a percentage of salesdecreased over the comparable prior year periods wasperiod primarily due to the ongoing validation and qualification expense as well as excess capacity related to the recent manufacturing expansion to meet the higher sales volume the additionrequirements of our direct-to-consumer businessexisting and favorable sales mix. future customers.
Sales and Marketing, General and Administrative and Research and Development Expenses Sales and marketing, general and administrative and research and development expenses for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 were as follows: | | 2017 | | | 2016 | | | Change | | Three Months Ended September 30 | | Dollars | | | Percent of Sales | | | Dollars | | | Percent of Sales | | | Dollars | | | Percent | | Sales and Marketing | | $ | 2,342 | | | | 9.7 | % | | $ | 1,041 | | | | 6.7 | % | | $ | 1,301 | | | | 125.0 | % | General and Administrative | | | 2,698 | | | | 11.2 | % | | | 2,221 | | | | 14.3 | % | | | 477 | | | | 21.5 | % | Research and Development | | | 1,047 | | | | 4.4 | % | | | 1,076 | | | | 6.9 | % | | | (29 | ) | | | -2.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended September 30 | | | | | | | | | | | | | | | | | | | | | | | | | Sales and Marketing | | $ | 6,857 | | | | 10.4 | % | | $ | 3,357 | | | | 6.7 | % | | $ | 3,500 | | | | 104.3 | % | General and Administrative | | | 7,961 | | | | 12.0 | % | | | 6,570 | | | | 13.1 | % | | | 1,391 | | | | 21.2 | % | Research and Development | | | 3,312 | | | | 5.0 | % | | | 3,562 | | | | 7.1 | % | | | (250 | ) | | | -7.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | 2019 | | | 2018 | | | Change | | | | | | | | Percent | | | | | | | Percent | | | | | | | | | | Three Months Ended June 30 | | Dollars | | | of Revenue | | | Dollars | | | of Revenue | | | Dollars | | | Percent | | Sales and Marketing | | $ | 3,072 | | | | 10.5 | % | | $ | 2,637 | | | | 9.0 | % | | $ | 435 | | | | 16.5 | % | General and Administrative | | | 3,650 | | | | 12.4 | % | | | 2,751 | | | | 9.3 | % | | | 899 | | | | 32.7 | % | Research and Development | | | 1,097 | | | | 3.7 | % | | | 1,316 | | | | 4.5 | % | | | (219 | ) | | | -16.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | 2019 | | | 2018 | | | Change | | | | | | | | Percent | | | | | | | Percent | | | | | | | | | | Six Months Ended June 30 | | Dollars | | | of Revenue | | | Dollars | | | of Revenue | | | Dollars | | | Percent | | Sales and Marketing | | $ | 6,461 | | | | 11.0 | % | | $ | 5,240 | | | | 9.7 | % | | $ | 1,221 | | | | 23.3 | % | General and Administrative | | | 6,836 | | | | 11.6 | % | | | 5,502 | | | | 10.2 | % | | | 1,334 | | | | 24.2 | % | Research and Development | | | 2,062 | | | | 3.5 | % | | | 2,475 | | | | 4.6 | % | | | (413 | ) | | | -16.7 | % |
Sales and marketing expenses increased over the prior year periods due to the addition of HHE during 2017.increased DTEC marketing, support costs and wages. General and administrative expenses were greater than the prior year periodperiods primarily due to increased other outside services, support costs along with costs at HHE.and non-cash stock compensation expense. Research and development decreased over the prior year periods due to decreaseda reduction in outside service and support costs. Restructuring chargesImpairment loss
During the three and nine months ended September 30, 2016, the Company incurred restructuring charges of $0 and $132, related to IntriCon UK’s facility moving costs.
Interest expense
Net interest expenseImpairment loss for the three and ninesix months ended SeptemberJune 30, 20172019 was $177$3,765. There were no impairment losses identified for the comparable prior year periods. The impairment losses related to a write-off of goodwill and $548intangible assets due to negative cash flows within our Hearing Help Express reporting unit.
Interest income (expense), net Interest income (expense), net for the three and six months ended June 30, 2019 was $248 and $463 compared to $135($211) and $387($405) for the comparable three and ninesix month periods in 2016. The2018. This increase in interest expense was primarily due to higher averagethe payoff of all of our credit facility debt in 2018 which reduced our interest ratesexpense along with interest expenses generated from HHE that were not incurredincome earned in the priorcurrent year comparable period. Other expenseon our investment accounts.
Other expense, net Other expense, net for the three and ninesix months ended SeptemberJune 30, 20172019 was $337$272 and $328$406 compared to other expense of $181$196 and $472$401 for the same periodsperiod in 2016. The change in other expense primarily related to changes in the currency exchange rate along with losses incurred in our 50% owned Signison partnership.2018. Income tax expense Income tax expense for the three and ninesix months ended SeptemberJune 30, 20172019 was $47$116 and $165$247 compared to $33$269 and $119$455 for the same periodsperiod in 2016. The expense for the three and nine months ended September 30, 2016 was primarily due to taxable income generated by foreign operations and a minimum domestic state tax payment made in the current year.2018.
Liquidity and Capital Resources As of SeptemberJune 30, 2017,2019, we had $332$9,801 of cash on hand. Sources of our cash for the ninesix months ended SeptemberJune 30, 2017 were2019 have been from our operating activities, as described below. The Company’s cash flows from operating, investing and financing activities, as reflected in the statement of cash flows, are summarized as follows: | | Nine Months Ended | | | | September 30, 2017 | | | September 30, 2016 | | Cash provided by (used in): | | | | | | | | | Operating activities | | $ | 3,163 | | | $ | (574 | ) | Investing activities | | | (1,714 | ) | | | (1,721 | ) | Financing activities | | | (2,101 | ) | | | 2,732 | | Effect of exchange rate changes on cash | | | 317 | | | | (202 | ) | Net increase (decrease) in cash | | $ | (335 | ) | | $ | 235 | |
| | | | | | Six Months Ended | | | | June 30, 2019 | | | June 30, 2018 | | Cash provided by (used in) from continuing operations: | | | | | | | | | Operating activities | | $ | 2,175 | | | $ | 1,026 | | Investing activities | | | (196 | ) | | | (2,147 | ) | Financing activities | | | (100 | ) | | | 2,156 | | Effect of exchange rate changes on cash | | | (8 | ) | | | (96 | ) | | | | | | | | | | Net increase in cash from continuing operations | | $ | 1,871 | | | $ | 939 | |
NetThe most significant items that contributed to the $2,175 of cash provided by operations of $3,163 was primarily driven by net income,operating activities were non-cash add backs for non-cashimpairment loss, depreciation and stockamortization and stock-based compensation along with increasesexpense, as well as a decrease in accounts receivable and other current assets partially offset by decreases in accounts payable and accrued expenses partially offset byas well as increases in other assets and inventory.contract assets.
Net cash used in investing activities of $1,714($196) primarily consisted primarily of $984 of purchases of property, plantmachinery and equipment, investment securities and $631other assets along with our investments in partnerships partially offset by proceeds from sale and maturity of an investment in Soundperience.securities. Net cash used in financing activities of $2,101($100) was comprised primarily from the withholding of repaymentsshares from vesting RSU awards to pay withholding taxes and the payment of borrowings under our credit facilitiesfinancing leases partially offset by proceedscash received from long-term borrowings.the exercise of stock options and employee stock purchase plan shares. The Company had the following bank arrangements: | | September 30, 2017 | | | December 31, 2016 | | | | | | | | | Total borrowing capacity under existing facilities | | $ | 13,667 | | | $ | 15,287 | | | | | | | | | | | Facility borrowings: | | | | | | | | | Domestic revolving credit facility | | | 1,755 | | | | 3,218 | | Domestic term loan | | | 4,500 | | | | 5,250 | | Foreign overdraft and letter of credit facility | | | 1,256 | | | | 1,243 | | Total borrowings and commitments | | | 7,511 | | | | 9,711 | | | | | | | | | | | Remaining availability under existing facilities | | $ | 6,156 | | | $ | 5,576 | |
Domestic Credit Facilities The Company and its domestic subsidiaries are parties to a credit facility with The PrivateBank and Trust Company.CIBC Bank USA. The credit facility, as amended through SeptemberJune 30, 2017,2019, provides for:for a $7,000 revolving credit facility, with a $200 sub facility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Company’s eligible trade receivables and eligible inventory, and eligible equipment less a reserve. The credit facility matures on December 15, 2022. | ▪ | a $9,000 revolving credit facility, with a $200 sub facility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Company’s eligible trade receivables and eligible inventory, and eligible equipment less a reserve; and |
| ▪ | a term loan in the original amount of $6,000. |
On March 9, 2017,April 17, 2019, the Company and its domestic subsidiary, IntriCon, Inc., entered into a TenthThirteenth Amendment to the Loan and Security Agreement and Waiver (the “Tenth Amendment”) with The PrivateBank and Trust Company. The Tenth Amendment, among other things: | ▪ | amended the minimum EBITDA (as defined in the Loan and Security Agreement), funded debt to EBITDA ratio and fixed charge coverage ratio covenants; and |
| ▪ | waived defaults in the funded debt to EBITDA ratio and fixed charge coverage ratio covenants as of December 31, 2016.; |
All of the borrowings under this agreement have been characterized as either a current or long-term liability on our balance sheet in accordance with the repayment terms described more fully below.
Weighted average interest onwith CIBC Bank USA which: reduced our borrowing capacity to its current $7,000 level; lessened restrictions surrounding acquisitions, business investments, distributions and disposition of assets; eliminated the revolving credit facility was 7.11% for the nine months ended September 30, 2017 and 4.36% for the year ended December 31, 2016. The outstanding balance of the revolving credit facility was $1,755 and $3,218 at September 30, 2017 and December 31, 2016, respectively. The total availability on the revolving credit facility was approximately $5,632 and $5,121 at September 30, 2017 and December 31, 2016, respectively.
The outstanding principal balance of the term loan, as amended, is payable in quarterly installments of $250. Any remaining principal and accrued interest is payable on February 28, 2019. IntriCon is also requiredmandatory prepayment requirement with respect to use 100% of the net cash proceeds of certainfrom asset sales (excluding inventory and certain other dispositions), sale of capital securities or issuance ofand debt to pay downfinancings; and eliminated the term loan.annual capital expenditure covenant.
The Company was in compliance with the financialall applicable covenants under the credit facility as of SeptemberJune 30, 2017.2019. Foreign Credit Facility In addition to its domestic credit facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., entered intohas an international senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for an asset basedasset-based line of credit. Borrowings bear interest at a rate of .75% to 2.5% over the lender’s prevailing prime lending rate. Weighted average interest on the international credit facilities was 3.95% and 3.50% for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. The outstanding balance was $1,256 and $1,243 at September 30, 2017 and December 31, 2016, respectively. The total remaining availability on the international senior secured credit agreement was approximately $524 and $455 at September 30, 2017 and December 31, 2016, respectively. Note Payable
HHE has a $2,000 note payable to the party holding 80% of its equity interest. The note is secured by substantially all of the assets of HHE. The note is payable over 48 months in quarterly installments with interest at 5% per year, except that interest only will be paid in the first twelve months, with the deferred payments to be made at maturity.
Capital Adequacy We believe that funds raised from our August 2018 public offering, funds expected to be generated from operations theand funds available borrowing capacity throughunder our revolving credit loan facilities, the ability of the Company to meet its financial covenants and the control of capital spendingfacility will be sufficient to meet our anticipated cash requirements for operating needs and for repayment of maturing debt for at least the next 12 months. If, however, we do not generate sufficient cash from operations, or if we incur additional unanticipated liabilities, we may be required to seek additional financing or sell equity or debt on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity or debt will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. Furthermore, if we fail to meet our financial and other covenants under our loan agreements, absent waiver, we will be in default of the loan agreements and our lenders could take action that would adversely affect our business. There can be no assurance that our lenders will provide a waiver of any default in our loan covenants. While management believes that we will be able to meet our liquidity needs for at least the next 1412 months, no assurance can be given that we will be able to do so. As of June 30, 2019, and December 31, 2018, the Company had a total borrowing capacity of $9,575 and $13,884, respectively, with no borrowings outstanding at each reporting period.
ITEM 3.Quantitative and Qualitative Disclosures About Market Risk Not applicable.
ITEM 4.Controls and Procedures The Company’s management, with the participation of its chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of SeptemberJune 30, 20172019 (the “Disclosure Controls Evaluation”). Based on the Disclosure Controls Evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective to provide a reasonable level of assurance that: (i) information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed in the reports the Company files or submits under Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure, all in accordance with Exchange Act Rule 13a-15(e). ThereExcept for the implementation of certain internal controls related to the adoption of the new lease standard (Topic 842), there were no changes in the Company’sour internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the quarter ended SeptemberJune 30, 2017,2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II - OTHER INFORMATION ITEM 1.Legal Proceedings The information contained in note 11Note 15 to the Consolidated Condensed Financial Statements in Part I of this quarterly report is incorporated by reference herein. ITEM 1A.Risk Factors In addition to the foregoing and the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2018, which could materially affect the Company’s business, financial condition or future results. The risk factors in the Company’s Annual Report on Form 10-K have not materially changed. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds None. ITEM 3.Defaults upon Senior Securities None. ITEM 4.Mine Safety Disclosures. Not applicable. ITEM 5.Other Information None. ITEM 6.Exhibits
10.1 | 31.1*Thirteenth Amendment to Loan and Security Agreement among the Company, IntriCon, Inc., Hearing Help Express, Inc. and CIBC Bank USA (formerly known as The PrivateBank and Trust Company), dated as of April 17, 2019 (incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019). | | | 10.2 | Amended and Restated Revolving Note from the Company, IntriCon, Inc. and Hearing Help Express, Inc. to CIBC Bank USA (formerly known as The PrivateBank and Trust Company), dated April 17, 2019 (incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019). | | | 31.1* | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | 101* | The following materials from IntriCon Corporation’s Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2017,2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets as of SeptemberJune 30, 2017,2019, (Unaudited) and December 31, 2016;2018; (ii) Consolidated Condensed Statements of Operations (Unaudited) for the Three and NineSix Months Ended SeptemberJune 30, 2017,2019, and 2016;2018; (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited) for the Three and NineSix Months Ended SeptemberJune 30, 2017,2019, and 2016;2018; (iv) Consolidated Condensed Statements of Equity (Unaudited) for the Six Months Ended June 30, 2019, and 2018; (v) Consolidated Condensed Statements of Cash Flows (Unaudited) for the NineSix Months Ended SeptemberJune 30, 2017,2019, and 2016;2018; and (v)(vi) Notes to Consolidated Condensed Financial Statements (Unaudited)* |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTRICON CORPORATION
(Registrant)
| | | | | | INTRICON CORPORATION | | | (Registrant) | | | | | Date: November 14, 2017August 9, 2019 | By: | /s/ Mark S. Gorder | | | Mark S. Gorder | | | President and Chief Executive Officer | | (principal executive officer) |
| | | | Date: November 14, 2017August 9, 2019 | | | | | By: | /s/ Scott Longval | | | Scott Longval | | | Executive Vice President, Chief Operating Officer, Chief Financial Officer and TreasurerSecretary | | (principal financial officer) |
EXHIBIT INDEX
| 101* | The following materials from IntriCon Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets as of September 30, 2017, (Unaudited) and December 31, 2016; (ii) Consolidated Condensed Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2017, and 2016; (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2017, and 2016; (iv) Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2017, and 2016; and (v) Notes to Consolidated Condensed Financial Statements (Unaudited)* |
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