Company Quick10K Filing
Intricon
Price22.77 EPS-1
Shares9 P/E-44
MCap200 P/FCF114
Net Debt-9 EBIT-4
TEV191 TEV/EBIT-45
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-22
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8-K 2020-06-25
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8-K 2018-08-10
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8-K 2018-04-26
8-K 2018-02-12

IIN 10Q Quarterly Report

Part I: Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures.
Item 5. Other Information
Item 6. Exhibits
EX-31.1 intricon200861_ex31-1.htm
EX-31.2 intricon200861_ex31-2.htm
EX-32.1 intricon200861_ex32-1.htm
EX-32.2 intricon200861_ex32-2.htm

Intricon Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
12510075502502012201420172020
Assets, Equity
3526178-1-102012201420172020
Rev, G Profit, Net Income
553413-8-29-502012201420172020
Ops, Inv, Fin

10-Q 1 intricon200861_10q.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

 

or

 

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

For the transition period from    _____ to _____

 

Commission File Number: 1-5005

 

 

 

                                                             

INTRICON CORPORATION

(Exact name of registrant as specified in its charter)

 

Pennsylvania

 

23-1069060

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

 

 

1260 Red Fox Road

 

 

Arden Hills, Minnesota

 

55112

(Address of principal executive offices)

 

(Zip Code)

 

(651) 636-9770

 

(Registrant’s telephone number, including area code)

 

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 every Interactive Data File required to be submitted 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

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 April 30, 2020 was 8,821,752. 

 

 

 

1

 

 

INTRICON CORPORATION

 

I N D E X

 

        Page
Numbers
         
PART I: FINANCIAL INFORMATION    
         
  Item 1. Financial Statements    
         
    Consolidated Condensed Balance Sheets (Unaudited) as of March 31, 2020 and December 31, 2019   4
         
    Consolidated Condensed Statements of Operations (Unaudited) for the Three Months Ended March 31, 2020 and 2019   5
         
    Consolidated Condensed Statements of Comprehensive (Loss) Income (Unaudited) for the Three Months Ended March 31, 2020 and 2019   6
         
    Consolidated Condensed Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2020 and 2019   7
         
    Consolidated Condensed Statements of Equity (Unaudited) for the Three Months Ended March 31, 2020 and 2019   8
         
    Notes to Consolidated Condensed Financial Statements (Unaudited)   9-21
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   22-34
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   34
         
  Item 4. Controls and Procedures   34
         
PART II: OTHER INFORMATION    
         
  Item 1. Legal Proceedings   35
         
  Item 1A. Risk Factors   35
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   36
         
  Item 3. Defaults Upon Senior Securities   36
         
  Item 4. Mine Safety Disclosures   36
         
  Item 5. Other Information   36
         
  Item 6. Exhibits   37
         
  Signatures     38

 

 

2

 

 

EXPLANATORY NOTE

 

On March 4, 2020, the U.S. Securities and Exchange Commission (the “SEC”) issued an order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions of the Exchange Act and certain rules thereunder. On March 25, 2020, the order was modified and superseded by a new SEC order (Release No. 34-88465) that provides conditional relief to public companies that are unable to timely comply with their filing obligations as a result of the novel coronavirus (“COVID-19”) outbreak (as modified, the “SEC Order”).

 

IntriCon Corporation (“Company,” “we,” “our” or “us”) is filing this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”)  in reliance on the SEC Order due to circumstances related to the COVID-19 outbreak.  In particular, we could not file this Quarterly Report within the time period specified under the Exchange Act due to process disruptions directly related to COVID-19 and related precautionary actions we undertook that caused limited access to our facilities and remote working arrangements and disrupted normal interactions among our accounting personnel and other staff involved in the preparation of the Quarterly Report. These restrictions slowed the completion of our internal reviews, including the evaluation of the various impacts of COVID-19 on our financial statements, and the preparation and completion of the Quarterly Report in a timely manner.

 

Pursuant to the requirements of the SEC Order, we filed a Current Report on Form 8-K with the SEC on May 8, 2020 indicating our intention to rely upon the SEC Order with respect to the filing of this Quarterly Report, which would have otherwise been required to have been filed by May 11, 2020. This Quarterly Report is being filed within the 45-day extension period provided by the SEC Order.

 

 

3

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

INTRICON CORPORATION

Consolidated Condensed Balance Sheets

(In Thousands, Except Per Share Amounts)

(unaudited)

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,177

 

 

$

8,523

 

Restricted cash

 

 

616

 

 

 

639

 

Short-term investment securities

 

 

16,889

 

 

 

23,451

 

Accounts receivable, less allowance for doubtful accounts of $331 at March 31, 2020 and $325 at December 31, 2019

 

 

8,241

 

 

 

8,993

 

Inventories

 

 

19,115

 

 

 

16,377

 

Contract assets

 

 

10,079

 

 

 

10,237

 

Other current assets

 

 

1,426

 

 

 

1,975

 

Current assets of discontinued operations

 

 

 

 

 

80

 

Total current assets

 

 

71,543

 

 

 

70,275

 

 

 

 

 

 

 

 

 

 

  Machinery and equipment

 

 

42,944

 

 

 

41,073

 

Less:  Accumulated depreciation

 

 

28,213

 

 

 

27,522

 

Net machinery and equipment

 

 

14,731

 

 

 

13,551

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

9,551

 

 

 

9,551

 

Operating lease right-of-use assets, net

 

 

3,862

 

 

 

4,372

 

Investment in partnerships

 

 

750

 

 

 

1,160

 

Long-term investment securities

 

 

5,379

 

 

 

8,629

 

Other assets, net

 

 

5,902

 

 

 

6,055

 

Total assets

 

$

111,718

 

 

$

113,593

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current financing leases

 

$

88

 

 

$

101

 

Current operating leases

 

 

1,605

 

 

 

1,729

 

Accounts payable

 

 

10,392

 

 

 

9,876

 

Accrued salaries, wages and commissions

 

 

2,736

 

 

 

2,274

 

Other accrued liabilities

 

 

2,474

 

 

 

2,869

 

Liabilities of discontinued operations

 

 

 

 

 

77

 

Total current liabilities

 

 

17,295

 

 

 

16,926

 

 

 

 

 

 

 

 

 

 

Noncurrent financing leases

 

 

15

 

 

 

30

 

Noncurrent operating leases

 

 

2,503

 

 

 

2,937

 

Other postretirement benefit obligations

 

 

371

 

 

 

382

 

Accrued pension liabilities

 

 

651

 

 

 

655

 

Other long-term liabilities

 

 

2,106

 

 

 

2,171

 

Total liabilities

 

 

22,941

 

 

 

23,101

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $1.00 par value per share; 20,000 shares authorized; 8,819 and 8,781 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

 8,819

 

 

 

 8,781

 

Additional paid-in capital

 

 

 86,978

 

 

 

 86,770

 

Accumulated deficit

 

 

 (6,265

)

 

 

 (4,286

)

Accumulated other comprehensive loss

 

 

 (502

)

 

 

 (520

)

Total shareholders’ equity

 

 

 89,030

 

 

 

 90,745

 

Non-controlling interest

 

 

 (253

)

 

 

 (253

)

Total equity

 

 

 88,777

 

 

 

 90,492

 

Total liabilities and equity

 

$

 111,718

 

 

$

 113,593

 

 

(See accompanying notes to the consolidated condensed financial statements)

 

4

 

 

INTRICON CORPORATION

Consolidated Condensed Statements of Operations

 (In Thousands, Except Per Share Amounts)

 

 

Three Months Ended

 

(unaudited)

 

March 31,

 

 

March 31,

 

 

 

 

2020

 

 

 

2019

 

Revenue, net

 

$

21,503

 

 

$

29,570

 

Cost of goods sold

 

 

16,931

 

 

 

21,012

 

Gross profit

 

 

4,572

 

 

 

8,558

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

1,993

 

 

 

3,389

 

General and administrative

 

 

3,416

 

 

 

3,186

 

Research and development

 

 

1,201

 

 

 

965

 

Total operating expenses 

 

 

6,610

 

 

 

7,540

 

Operating (loss) income

 

 

(2,038

)

 

 

1,018

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

184

 

 

 

215

 

Other expense, net

 

 

(107

)

 

 

(134

)

(Loss) income from continuing operations before income taxes and discontinued operations

 

 

(1,961

)

 

 

1,099

 

Income tax expense

 

 

18

 

 

 

131

 

(Loss) income from continuing operations before discontinued operations

 

 

(1,979

)

 

 

968

 

Loss from discontinued operations (Note 3)

 

 

 

 

 

(193

)

Net (loss) income

 

$

(1,979

)

 

$

775

 

 

 

 

 

 

 

 

 

 

Basic (loss) income per share:

 

 

 

 

 

 

 

 

Continuing operations

 

$

 (0.22

)

 

$

 0.11 

 

Discontinued operations

 

 

 

 

 

 (0.02

)

Net (loss) income per share:

 

$

 (0.22

)

 

$

 0.09 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per share:

 

 

 

 

 

 

 

 

Continuing operations

 

$

 (0.22

)

 

$

 0.10 

 

Discontinued operations

 

 

 

 

 

 (0.02

)

Net (loss) income per share:

 

$

 (0.22

)

 

$

 0.08 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

8,813

 

 

 

8,705

 

Diluted

 

 

8,813

 

 

 

9,382

 

 

(See accompanying notes to the consolidated condensed financial statements)

 

5

 

 

INTRICON CORPORATION

Consolidated Condensed Statements of Comprehensive (Loss) Income

(In Thousands)

 

 

 

Three Months Ended

 

(unaudited)

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(1,979

)

 

$

775

 

Foreign currency translation adjustment, net of taxes of $0

 

 

13

 

 

 

7

 

Pension and postretirement obligations, net of taxes of $0

 

 

5

 

 

 

5

 

Investment in partnerships, net of taxes of $0

 

 

 

 

 

118

 

Comprehensive (loss) income

 

$

(1,961

)

 

$

905

 

 

 

 

 

 

 

 

 

 

(See accompanying notes to the consolidated condensed financial statements)

 

6

 

 

INTRICON CORPORATION

Consolidated Condensed Statements of Cash Flows

 (In Thousands)

 

 

 

Three Months Ended

 

(unaudited)

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 Net (loss) income

 

$

(1,979

)

 

$

775

 

 Loss from discontinued operations

 

 

 

 

 

193

 

 (Loss) income from continuing operations

 

 

(1,979

)

 

 

968

 

 Adjustments to reconcile net (loss) income from continuing operations to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

921

 

 

 

797

 

Equity in loss of partnerships

 

 

45

 

 

 

65

 

Stock-based compensation

 

 

376

 

 

 

329

 

Change in allowance for doubtful accounts

 

 

6

 

 

 

(439

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

  Accounts receivable

 

 

746

 

 

 

1,438

 

  Inventories

 

 

(2,738

)

 

 

(220

)

 Contract assets

 

 

158

 

 

 

(696

)

 Other assets

 

 

488

 

 

 

877

 

  Accounts payable

 

 

327

 

 

 

(983

)

  Accrued expenses

 

 

340

 

 

 

(1,453

)

  Other liabilities

 

 

71

 

 

 

29

 

 Net cash (used in) provided by operating activities of continuing operations

 

 

(1,239

)

 

 

712

 

 Net cash provided by (used in) operating activities of discontinued operations

 

 

3

 

 

 

(277

)

 Net cash (used in) provided by operating activities

 

 

(1,236

)

 

 

435

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of machinery and equipment

 

 

(1,678

)

 

 

(938

)

Payments for acquisition of other assets

 

 

(91

)

 

 

(586

)

Purchase of investment securities

 

 

(76

)

 

 

(34,516

)

Proceeds from sale of investment securities

 

 

 

 

 

38,015

 

Proceeds from maturities of investment securities

 

 

9,850

 

 

 

3,464

 

Investment in partnerships

 

 

 

 

 

(568

)

Net cash provided by investing activities of continuing operations

 

 

8,005

 

 

 

4,871

 

Net cash used in investing activities of discontinued operations

 

 

 

 

 

(16

)

Net cash provided by investing activities

 

 

8,005

 

 

 

4,855

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of financing leases

 

 

 (28

)

 

 

 (32

)

Exercise of stock options and employee stock purchase plan shares

 

 

 68 

 

 

 

 88 

 

Withholding of common stock upon vesting of restricted stock units

 

 

 (198

)

 

 

 (235

)

 Net cash (used in) financing activities

 

 

 (158

)

 

 

 (179

)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

 20 

 

 

 

 32 

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

 6,631 

 

 

 

 5,143 

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

 9,162 

 

 

 

 8,047 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash, end of period

 

$

 15,793 

 

 

$

 13,190 

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing:

 

 

 

 

 

 

 

 

Acquisition of machinery and equipment in accounts payable

 

$

 187 

 

 

$

 160 

 

Fitting software other asset through liabilities incurred and exchange of investment in partnership

 

 

 

 

 

 3,093 

 

 

(See accompanying notes to the consolidated condensed financial statements)

 

7

 

 

INTRICON CORPORATION

Consolidated Condensed Statements of Equity

(In Thousands)

 

  

Shareholders’ Equity, Three Months Ended March 31, 2020 (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, 2019

 

 

8,781

 

 

$

8,781

 

 

$

86,770

 

 

$

(4,286

)

 

$

(520

)

 

$

(253

)

 

$

90,492

 

Exercise of stock options, net

 

 

11

 

 

 

11

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

15

 

Withholding of common stock upon vesting of restricted stock units

 

 

22

 

 

 

22

 

 

 

(220

)

 

 

 

 

 

 

 

 

 

 

 

(198

)

Shares issued under the employee stock purchase plan

 

 

5

 

 

 

5

 

 

 

48

 

 

 

 

 

 

 

 

 

 

 

 

53

 

Stock-based compensation

 

 

 

 

 

 

 

 

376

 

 

 

 

 

 

 

 

 

 

 

 

376

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(1,979

)

 

 

 

 

 

 

 

 

(1,979

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

 

 

 

 

 

18

 

Balance March 31, 2020

 

 

8,819

 

 

$

8,819

 

 

$

86,978

 

 

$

(6,265

)

 

$

(502

)

 

$

(253

)

 

$

88,777

 

 

 

 





















  

Shareholders’ Equity, Three Months Ended March 31, 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

 

 

 (See accompanying notes to the consolidated financial statements)

 

 

8

 

 

INTRICON CORPORATION

 

Notes to Consolidated Condensed Financial Statements (Unaudited) (In Thousands, Except Per Share Data)

 

1.   General

 

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 condensed financial position as of March 31, 2020 and December 31, 2019, and the consolidated condensed results of its operations, statements of equity and cash flows for the three months ended March 31, 2020 and 2019. 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. The preparation of consolidated condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates particularly as it relates to estimates reliant on forecasts and other assumptions impacted by the COVID-19 pandemic.

 

In March 2020, the World Health Organization categorized COVID-19 (coronavirus) as a pandemic and the President of the United States declared the outbreak a national emergency. The Company considered the impacts of COVID-19 on the assumptions and estimates used, including reviewing our long-lived assets for impairment, and determined that for the three months ended March 31, 2020, COVID-19 did not have a material adverse impact. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2019 Annual Report on Form 10-K filed with the SEC.

 

On June 25, 2019, the Company’s officers, pursuant to delegated authority from the board, approved plans to discontinue the operations of its 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 condensed 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.

 

2.   New Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses Topic 326, which requires certain financial assets to be measured at amortized cost net of an allowance for estimated credit losses, such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions, and reasonable and supportable forecasts that affect the collectability of the amounts. Topic 326 is effective for interim and annual periods beginning January 1, 2022 for smaller reporting companies. This standard update is not expected to have a material impact on our financial position, results of operations and cash flows. 

 

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes as part of its overall simplification initiative to reduce costs and complexity in applying accounting standards while maintaining or improving the usefulness of the information provided to users of the financial statements. Amendments include removal of certain exceptions to the general principals of ASC 740, Income Taxes, and simplification in several other areas such as accounting for franchise tax (or similar tax) that is partially based on income. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020. This standard update is not expected to have a material impact on our financial position, results of operations and cash flows. 

 

 

9

 

 

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under ASC 323, Investments – Equity Method and Joint Venture, for the purposes of applying the measurement alternative in accordance with ASC 321, Investments – Equity Securities, immediately before applying or upon discontinuing the equity method. ASU 2020-01 is effective for interim and annual periods beginning after December 15, 2020. This standard update is not expected to have a material impact on our financial position, results of operations and cash flows. 

 

In April 2020, the FASB issued ASU 2020-04, Reference Rate Reform Topic 848, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. Topic 848 provides optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. This standard update is not expected to have a material impact on our financial position, results of operations and cash flows. 

 

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. Prior to March 31, 2020, the remaining assets and liabilities of the subsidiary were settled.

 

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 from discontinued operations, in the accompanying consolidated condensed statements of operations, comprehensive (loss) income and cash flows. Current assets and liabilities of the discontinued operations have been reclassified and reflected on the accompanying consolidated condensed balance sheets as “Current assets of discontinued operations,” and “Liabilities of discontinued operations”, respectively. Prior periods relating to our discontinued operations have been reclassified to reflect consistency within our consolidated condensed financial statements. There was no income tax expense or benefit related to our discontinued operations for any period presented.

 

The total assets and liabilities of the UK subsidiary at December 31, 2019 were as follows:

 


 

December 31,



 

2019


Other current assets

 

$

80


Other accrued liabilities

 


77


Net assets (liabilities)

 

$

3


 

The following table shows the results of the UK subsidiary’s discontinued operations:

 

Three Months Ended


March 31, 2019


Revenue, net

 

$

539


Cost of goods sold

 


346


Gross profit

 


193


      Sales and marketing

 


147


      General and administrative

 


239


Total operating expenses 

 


386


Loss from discontinued operations

 

$

(193

)

 

 

10

 

 

4.  Segment Reporting

 

The Company currently operates in two reportable segments: body-worn devices and hearing health direct-to-end-consumer (DTEC). The nature of distribution and services has been deemed separately identifiable. Therefore, segment reporting has been applied. The following table summarizes certain data from continuing operations by reportable segment:

 

For the Three Months Ended March 31, 2020


Body Worn Devices



Hearing Health DTEC



Total


Revenue, net

 

$

20,330


 

$

1,173


 

$

21,503


Loss from continuing operations before income taxes and discontinued operations

 


(1,078

)

 


(883

)

 


(1,961

)

Depreciation and amortization

 


895


 


26


 


921


Capital expenditures

 


1,678


 



 


1,678



For the Three Months Ended March 31, 2019



Body Worn Devices




Hearing Health DTEC




Total


Revenue, net

 

$

27,940


 

$

1,630


 

$

29,570


Income (loss) from continuing operations before income taxes and discontinued operations

 


2,581


 


(1,482

)

 


1,099


Depreciation and amortization

 


736


 


61


 


797


Capital expenditures

 


918


 


20


 


938


 

The following table summarizes the identifiable assets (excluding goodwill) and goodwill by reportable segment as of the following dates:

 

 

 

March 31,


 

December 31,


 

 

2020


 

2019


Body Worn Devices:

 




 




Identifiable assets (excluding goodwill)

 

$

99,802


 

$

101,311


Goodwill

 


9,551


 


9,551


Hearing Health DTEC:

 




 




Identifiable assets (excluding goodwill)

 


2,365


 


2,651


 

11

 

 

5.    Geographic Information

 

The geographical distribution of long-lived assets to geographical areas consisted of the following at:



 

March 31,


 

December 31,



 

2020


 

2019


United States

 

$

13,421


 

$

12,215


Singapore

 


1,247


 


1,263


Other

 


63


 


73


Consolidated

 

$

14,731


 

$

13,551


 

Long-lived assets consist of machinery and equipment. Excluded from long-lived assets are investments in partnerships, patents, goodwill, operating lease right-of-use (ROU) assets and certain other assets. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These assets are periodically reviewed to ensure 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 revenue to geographical areas for the three months ended March 31, 2020 and 2019 were as follows:

 


 

Three Months Ended


Net Revenue to Geographical Areas


March 31, 2020



March 31, 2019


United States

 

$

17,788


 

$

24,215


Europe

 


1,187


 


1,664


Asia

 


2,200


 


3,509


All other countries

 


328


 


182


Consolidated  

 

$

21,503


 

$

29,570


 

Geographic net revenue is allocated based on the location of the customer.

 

For the three months ended March 31, 2020, and 2019, one customer accounted for 63% and 58%, respectively, of the Company’s consolidated net revenue.

 

Two customers combined accounted for 54% and 51% of the Company’s consolidated accounts receivable at March 31, 2020 and December 31, 2019, respectively.

 

One customer accounted for 91% and 86% of the Company’s consolidated contract assets at March 31, 2020 and December 31, 2019, respectively.

 

6.   Investment in Partnerships

 

Investment in partnerships consisted of the following:

 


 

March 31,


 

December 31,



 

2020


 

2019


Investment in Signison

 

$

473


 

$

852


Other

 


277


 


308


Total

 

$

750


 

$

1,160


 

 

12

 

 

The Company has a 50% ownership interest in Signison as of March 31, 2020. Signison is accounted for in the Company’s consolidated financial statements using the equity method.

 

7.   Investment Securities

 

The Company invests in commercial paper, corporate notes and bonds with original maturities of less 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, using level 1 inputs.

 

The maturity dates of our investments as of March 31, 2020 are as follows:

 


 

Less than one year


 

1-5 years


 

Total


Commercial Paper Original Maturities of 91 Days or More

 

$

1,897


 

$


 

$

1,897


Corporate Notes and Bonds

 


14,992


 


5,379


 


20,371


Total Investments

 

$

16,889


 

$

5,379


 

$

22,268


 

The maturity dates of our investments as of December 31, 2019 are as follows:

 


 

Less than one year


 

1-5 years


 

Total


Commercial Paper Original Maturities of 91 Days or More

 

$

8,461


 

$


 

$

8,461


Corporate Notes and Bonds

 


14,990


 


8,629


 


23,619


Total Investments

 

$

23,451


 

$

8,629


 

$

32,080


 

The Company also maintains excess funds within level 2 money market accounts included within cash and cash equivalents. Cash available in our money market accounts at March 31, 2020 and December 31, 2019 was $14,821 and $7,200, respectively.

 

8.   Inventories

 

Inventories consisted of the following at:

 


 

Raw materials


 

Work-in process


 

Finished products and components


 

Total


March 31, 2020

 




 




 




 




Domestic

 

$

11,341


 

$

3,501


 

$

1,160


 

$

16,002


Foreign

 


2,583


 


341


 


189


 


3,113


Total

 

$

13,924


 

$

3,842


 

$

1,349


 

$

19,115



 




 




 




 




December 31, 2019

 




 




 




Domestic

 

$

10,379


 

$

736


 

$

2,375


 

$

13,490


Foreign

 


2,482


 


215


 


190


 


2,887


Total

 

$

12,861


 

$

951


 

$

2,565


 

$

16,377


 

13

 

 

9.  Other Assets, Net

 

       Other assets, net consisted of the following at:

 


 

March 31,


 

December 31,



 

2020


 

2019


Self-fitting software

 

$

3,679


 

$

3,679


Technology access

 


1,768


 


1,866


Other

 


455


 


510


Total

 

$

5,902


 

$

6,055


 

The estimated useful life for the self-fitting software and technology access is 5-7 years. The self-fitting software is expected to begin amortizing in the second quarter of 2020. Accumulated amortization for the technology access asset is $982 and $884 as of March 31, 2020 and December 31, 2019, respectively.

 

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. The Company has capitalized the self-fitting software within other assets, net based on the cost of the consideration transferred and will 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 due in Euros and the related liabilities will be revalued based on exchange rates as of each reporting period. As of March 31, 2020, outstanding liabilities consist of $238 other accrued current liabilities and $857 other long-term liabilities.

 

10. Other Accrued Liabilities

 

Other accrued liabilities consisted of the following at:

 


 

March 31,
2020


 

December 31,
2019


Pension

 

$

120


 

$

120


Postretirement benefit obligation

 


71


 


71


Deferred revenue

 


327


 


327


Self-fitting software liability

 


238


 


285


Technology access liability

 


989


 


1,236


Other

 


729


 


830


Total

 

$

2,474


 

$

2,869


 

Technology access liabilities are due in equal quarterly installments through January 2022.

 

14

 

 

11.

Leases

 

The Company’s 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 2022, one leased facility in Singapore that expires in 2020, one leased facility in Indonesia that expires in 2024, 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, are included in the determination of the ROU asset and lease liability. Our Indonesia lease includes embedded forward starting leases that will begin in 2022 and 2024 for additional square footage, which will result in the recognition of an additional ROU asset and lease liability in those periods of approximately $103 and $72, respectively. The Company also leases equipment that include bargain purchase options at termination. These leases have been classified as finance leases.

 

As of March 31, 2020, the Company has a weighted-average lease term of 1.2 years for its finance leases, and 2.9 years for its operating leases. As of March 31, 2020, the Company has a weighted-average discount rate of 5.56% for its finance leases, and 5.26% for its operating leases. Discount rates are determined based on 5 year term incremental borrowing rates at inception of the lease. Operating cash flows for the three months ended March 31, 2020 from operating leases were $507. Financing lease assets are classified as machinery and equipment within the consolidated balance sheet.

 

 The following tables summarizes lease costs by type:

 

Three Months Ended

 

March 31, 2020

 

 

March 31, 2019

 

Lease cost

 

 

 

 

 

 

 

 

Finance lease cost:

 

 

 

 

 

 

 

 

Amortization of right-of-use assets

 

$

26

 

 

$

25

 

Interest on lease liabilities

 

 

2

 

 

 

3

 

 

 

 

 

 

 

 

 

 

Operating lease cost

 

 

481

 

 

 

460

 

Variable lease cost*

 

 

151

 

 

 

138

 

Total lease cost

 

$

660

 

 

$

626

 

 

*Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our domestic and foreign building leases.

 

 Maturities of lease liabilities are as follows as of March 31, 2020:

 

 

 

Operating
Leases

 

 

Financing
Leases

 

 

Total

 

2020

 

$

1,375

 

 

$

73

 

 

$

1,448

 

2021

 

 

1,567

 

 

 

31

 

 

 

1,598

 

2022

 

 

1,003

 

 

 

3

 

 

 

1,006

 

2023

 

 

396

 

 

 

 

 

 

396

 

2024

 

 

80

 

 

 

 

 

 

80

 

2025 and thereafter

 

 

 

 

 

 

 

 

 

Total lease payments

 

 

4,421

 

 

 

107

 

 

 

4,528

 

Less: Interest

 

 

(313

)

 

 

(4

)

 

 

(317

)

Present value of lease liabilities

 

$

4,108

 

 

$

103

 

 

$

4,211

 

 

 

15

 

 

12.

Income Taxes

 

Income tax expense for the three months ended March 31, 2020 was $18 compared to $131 for the same period in 2019. The expense was largely due to our foreign operations. The Company has net operating loss carryforwards for U.S. federal income tax purposes. The Company has recorded a full valuation allowance against the deferred tax asset as of March 31, 2020.

 

The following was the (loss) income from continuing operations before income taxes and discontinued operations for each jurisdiction in which the Company has operations for the three months ended March 31, 2020 and 2019.

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

United States

 

$

(1,842

)

 

$

885

 

Singapore

 

 

(153

)

 

 

117

 

Indonesia

 

 

18

 

 

 

21

 

Germany

 

 

16

 

 

 

76

 

(Loss) income from continuing operations before income taxes and discontinued operations

 

$

(1,961

)

 

$

1,099

 

 

CARES Act

 

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which contained in part, an allowance for deferral of the employer portion of Social Security employment tax liabilities until 2021 and 2022, as well as a COVID-19 employee retention tax credit (“CRC”) of up to $5,000 per eligible employee.

 

Based on the timing of the CARES Act, for the three months ended March 31, 2020, the related tax benefits from the CARES Act were not material. We are currently reviewing the potential future benefits related to employee retention tax credits and the payroll tax deferral provision to assess the impact on our financial position, results of operations and cash flows.

 

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. Under all awards, the terms are fixed on the grant date.

 

 

16

 

 

For the three months ended March 31, 2020, the Company granted 66 RSUs with a weighted average closing price on the date of grant of $17.48. 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 year period beginning on the first anniversary of the date of grant and have a maximum term of 10 years.

 

Stock award activity as of and during the three months ended March 31, 2020 was as follows:

 

 

 

Outstanding Awards

 

 

Stock Option
Weighted-

 

 

Aggregate

 

 

 

Stock Options

 

 

RSUs

 

 

Total

 

 

Average
Exercise Price (a)

 

 

Intrinsic
Value

 

Outstanding at December 31, 2019

 

 

746

 

 

 

128

 

 

 

874

 

 

$

6.39

 

 

 

 

 

 Awards granted

 

 

 

 

 

66

 

 

 

66

 

 

 

 

 

 

 

 

 Awards exercised or released

 

 

(15

)

 

 

(33

)

 

 

(48

)

 

 

4.72

 

 

 

 

 

Outstanding at March 31, 2020

 

 

731

 

 

 

161

 

 

 

892

 

 

$

6.43

 

 

$

5,802

 

Exercisable at March 31, 2020

 

 

695

 

 

 

 

 

 

695

 

 

$

6.37

 

 

$

3,751

 

Available for future grant at December 31, 2019

 

 

 

 

 

 

 

 

 

 

183

 

 

 

 

 

 

 

 

 

Available for future grant at March 31, 2020

 

 

 

 

 

 

 

 

 

 

131

 

 

 

 

 

 

 

 

 

 

(a) The weighted average exercise price calculation does not include outstanding RSUs

 

The number of shares available for future grants at March 31, 2020 does not include a total of up to 357 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 a net exercise of such options.

 

The Company recorded $376 and $329 of non-cash stock compensation expense for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, there was $2,730 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 2.13 years. The total intrinsic value of options exercised during the three months ended March 31, 2020 was $189.

 

The Company also has an Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, as amended, through March 31, 2020, provides that a maximum of 300 shares may be sold under the Purchase Plan. There were 5 and 3 shares purchased under the plan for the three months ended March 31, 2020 and 2019, respectively.

 

 

17

 

 

14.

Income Per Share

 

The following table presents a reconciliation between basic and diluted earnings per share:

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Numerator:

 

 

 

 

 

 

 

 

(Loss) income from continuing operations before discontinued operations

 

$

(1,979

)

 

$

968

 

Loss from discontinued operations (Note 3)

 

 

 

 

 

(193

)

Net (loss) income

 

$

(1,979

)

 

$

775

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Basic – weighted shares outstanding

 

 

8,813

 

 

 

8,705

 

Weighted shares assumed upon exercise of stock awards

 

 

 

 

 

677

 

Diluted – weighted shares outstanding

 

 

8,813

 

 

 

9,382

 

 

 

 

 

 

 

 

 

 

Basic (loss) income per share attributable to IntriCon shareholders:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.22

)

 

$

0.11

 

Discontinued operations

 

 

 

 

 

(0.02

)

Net (loss) income per share:

 

$

(0.22

)

 

$

0.09

 

 

 

 

 

 

 

 

 

 

Diluted (loss) income per share attributable to IntriCon shareholders:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.22

)

 

$

0.10

 

Discontinued operations

 

 

 

 

 

(0.02

)

Net (loss) income per share:

 

$

(0.22

)

 

$

0.08

 

 

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 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.

 

For the three months ended March 31, 2020, weighted average options and RSU’s outstanding of 893 were excluded from the dilutive calculation as their effect would have been antidilutive based on losses in the period. No options or RSUs were excluded from the dilutive calculation for the three months ended March 31, 2019.

 

 

18

 

 

15.

Legal Proceedings

 

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 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.

 

16.

Related-Party Transactions

 

The Company has a 50% ownership in Signison, a German based hearing health company. Signison owes the Company a notes receivable, net of allowances, of $473 which is included in investment in partnership on the balance sheet as of March 31, 2020.    

 

17.

Revenue, Net

 

Medical market revenue recognition- Customer orders from the medical market consist of a specified number of assembled and customized parts that the customer further integrates into their production process to produce market ready products. Customer orders do not include additional follow-on goods or services. Each order is for a series of distinct units that comprise a single performance obligation.

 

With the exception of prompt payment discounts, the transaction price for medical market products is the invoiced amount. Variable consideration in the form of refunds, credits, rebates, price concessions, pricing incentives or other items impacting transaction price are not present.

 

All of the Company’s products manufactured for the medical market are designed to each customer’s specifications, do not have an alternative use and cannot be sold or redirected by the Company to others. The Company considers contractual arrangements, laws and legal precedent in determining enforceable right. The Company has an enforceable right to payment for any finished or in-process units, including a reasonable margin, if the customer terminates the contract for reasons other than the Company’s failure to perform as promised within our medical diabetes market and a select customer within our other medical market. For contractual arrangements in which an enforceable right exists, control of these units is deemed to transfer to the customer over time during the manufacturing process, using the same measure of progress toward satisfying the promise to deliver the units to the customer. Consequently, the transaction price is recognized as revenue over time for contractual arrangements with an enforceable right, based on actual costs incurred in the manufacturing process to date relative to total expected costs to produce all ordered units. The transaction price for contractual arrangements without an enforceable right to payment for any finished or in-process units including a reasonable margin is recognized as revenue at a point in time.

 

Medical market products are invoiced when shipped and paid within normal commercial terms. The Company records a contract asset for revenue recognized over time in the production process for customized products that have not been shipped or invoiced to the customer.

 

The following tables set forth, for the periods indicated, timing of revenue recognition by market:

 

 

19

 

 

Timing of revenue recognition for the three months ended March 31, 2020:

 

 

 

Products and services
transferred at point in
time

 

 

Products and services
transferred over time

 

 

Total

 

 Medical:

 

 

 

 

 

 

 

 

 

 

 

 

 Diabetes

 

$

 

 

$

13,530

 

 

$

13,530

 

 Other Medical (a)

 

 

1,820

 

 

 

1,008

 

 

 

2,828

 

 Hearing Health:

 

 

 

 

 

 

 

 

 

 

 

 

 Value Based DTEC

 

 

1,173

 

 

 

 

 

 

1,173

 

 Value Based ITEC

 

 

744

 

 

 

 

 

 

744

 

 Legacy OEM

 

 

1,964

 

 

 

 

 

 

1,964

 

 Professional Audio Communications:

 

 

1,264

 

 

 

 

 

 

1,264

 

Total Revenue, net

 

$

6,965

 

 

$

14,538

 

 

$

21,503

 

 

(a) During the quarter ended March 31, 2020, we recorded a cumulative adjustment of $1.2 million to reduce revenue within our other medical market to correct an error related to prior periods as a result of our determination that a portion of our sales being recognized over time needed to be recognized at a point in time. The adjustment included a reduction of the related cost of goods sold of $0.8 million and related impacts to reduce the contract asset and an increase to inventory. The adjustment was not material to our Consolidated Financial Statements for any quarterly or annual period.

 

Timing of revenue recognition for the three months ended March 31, 2019:

 

 

 

Products and services
transferred at point in
time

 

 

Products and services
transferred over time

 

 

Total

 

  Medical:

 

 

 

 

 

 

 

 

 

 

 

 

 Diabetes

 

$

 

 

$

17,164

 

 

$

17,164

 

 Other Medical

 

 

 

 

 

3,629

 

 

 

3,629

 

  Hearing Health:

 

 

 

 

 

 

 

 

 

 

 

 

 Value Based DTEC

 

 

1,630

 

 

 

 

 

 

1,630

 

 Value Based ITEC

 

 

2,577

 

 

 

 

 

 

2,577

 

 Legacy OEM

 

 

2,803

 

 

 

 

 

 

2,803

 

  Professional Audio Communications:

 

 

1,767

 

 

 

 

 

 

1,767

 

Total Revenue, net

 

$

8,777

 

 

$

20,793

 

 

$

29,570

 

 

 

20

 

 

18. Subsequent Events

 

Amendment to Credit Facility

 

On May 13, 2020, the Company and its domestic subsidiaries entered into a Fourteenth Amendment to Loan and Security Agreement and Waiver (the “Fourteenth Amendment”) with CIBC Bank USA. The Fourteenth Amendment, among other things:

 

 

Increased the Company’s revolving loan borrowing capacity to $12.0 million from its then current capacity of $7.0 million;

 

Added provisions addressing interest rates following the unavailability of the London Interbank Offered Rate or LIBOR;

 

Waived a default in the fixed charge coverage ratio covenant as of March 31, 2020;

 

Eliminated the funded debt to EBITDA ratio and fixed charge coverage ratio for the quarter ending June 30, 2020;

 

Added a financial covenant requiring that at all times until September 30, 2020, the borrowers maintain at least $15.0 million of liquidity, calculated as the sum of (a) cash on hand, plus (b) cash equivalent investments, plus (c) available borrowing capacity under the revolving credit facility.

 

After giving effect to the waiver in the Fourteenth Amendment, the Company was in compliance with all applicable covenants under the credit facility as of March 31, 2020.

 

Strategic Restructuring Plan

 

On May 15, 2020, the management of the Company committed the Company to, and began executing on, a strategic restructuring plan designed to accelerate the Company’s future growth by focusing resources on the highest potential growth areas. The plan, which was supported by the Company’s Board of Directors, is expected to be completed by the end of the 2020 second quarter. 

 

Following the Company’s decision last quarter to no longer pursue a direct-to-end-consumer approach to the hearing health market, we recently made the decision to transition our remaining direct-to-end-consumer operations at Hearing Help Express to solely support our partnership initiatives. In addition, while continued uncertainties remain from the COVID-19 pandemic, we are taking many significant steps to decrease our expenditure profile and current spending run-rate. The following are significant items included in our strategic restructuring plan:

 

 

We completed a global net workforce reduction of approximately 35 positions, including many of the previously furloughed positions, resulting in an annual cost savings of approximately $2.4 million

 

We changed our focus to seeking partners in the hearing health market, resulting in approximately $2.0 million reduction in Hearing Help Express consumer advertising expense in 2020 as compared to 2019

 

In connection with the strategic restructuring plan, we anticipate incurring a $1.2 million to $1.5 million restructuring charge during the second quarter ending June 30, 2020 related to one-time employee termination costs, asset impairment charges and other operations-related expenses.

 

Acquisition of Emerald Medical Services

 

On May 18, 2020, IntriCon Pte. Ltd. (“Buyer”), a wholly-owned subsidiary of the Company, acquired all of the outstanding shares of Emerald Medical Services Pte., Ltd., a Singapore company (“Emerald”), pursuant to a Share Purchase Agreement dated the same date among Buyer, Emerald and the direct and indirect owners of Emerald. Emerald, based in Singapore, is a provider of joint development medical device manufacturing services for complex catheter applications. The Share Purchase Agreement provides for a purchase price consisting of:

 

 

a cash payment paid at closing of $7,128, subject to a post-closing working capital adjustment;

 

80 thousand shares of the Company’s common stock issued at closing, which shares will be held in an escrow account for a period of 18 months to resolve any post-closing claims by the Buyer;

 

a cash payment of $500 payable in the event that regulatory approval in Japan is obtained for a particular product within twelve months of closing;

 

an earn-out payment of between $333 and $1,000 if Emerald has net revenues ranging from $9,000 to $11,000 during the first year after closing; and

 

additional earn-out payments equal to 28% of net revenues arising from the sale of certain products or to certain customers for each of the first three years after closing.

 

The cash portion of the purchase was paid from Company internal funds.

 

COVID-19 Pandemic

 

There are many uncertainties regarding the COVID-19 pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it will impact its customers, employees, suppliers, vendors, and business partners. We are unable to predict the impact that COVID-19 will have on our financial position and operating results due to numerous uncertainties. The Company expects to continue to assess the evolving impact of COVID-19 and intends to make adjustments to its responses accordingly.

 

 

21

 

 

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 herein as the “Company”, or “IntriCon”, “we”, “us” or “our”) is an international company engaged in designing, developing, engineering and manufacturing miniature interventional, implantable and body-worn medical devices. In addition to its operations in Minnesota, the Company has facilities in Illinois, Singapore, Indonesia, and Germany.

 

On June 25, 2019, the Company’s officers, pursuant to delegated authority from the board, approved plans to discontinue the operations of its 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.

 

The Company’s significant accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 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, information in Item 2 excludes discontinued operations unless otherwise noted.

 

COVID-19 Pandemic and Uncertainties

 

The COVID-19 (coronavirus) outbreak has created unique and unprecedented challenges. The outbreak of the novel COVID-19 has evolved into a global pandemic. COVID-19 has spread to many regions of the world, including North America, Asia and Europe. The full extent to which COVID-19 impacts our business, operating results and financial condition will depend on future developments that are highly uncertain, cannot be accurately predicted and may be beyond our control. Uncertain factors relating to COVID-19 include the duration of the outbreak, the severity of the virus, and the actions, or perception of actions that may be taken, to contain or treat its impact, including declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations.

 

22

 

 

 

The Company’s priority remains the health and safety of its employees, its customers and their patients, as well as the communities we serve. As the unprecedented threat of COVID-19 emerged, IntriCon began implementing measures in an effort to address and prioritize the health and safety of its employees and their communities, while at the same time continuing to support customers and partners. These measures included the following:

 

 

Health and Safety: Based on the expertise and recommendations from federal and local government and health agencies, IntriCon has implemented remote and flexible work arrangements for employees wherever possible. We have also implemented other measures, such as restricting travel, to protect the health and safety of our customers, their patients and our employees.

 

Maintaining Operations: Consistent with applicable exceptions, we are maintaining streamlined manufacturing, assembly and other related operations at all sites in order to continue providing products to our customers and partners. For our employees involved in such operation-critical processes, we have implemented several other recommended best practices to protect the health and safety of our workforce. In addition, we have modified the shifts of employees involved in other operation-critical processes to minimize risk for these employees.

 

Clinical: We have postponed our anticipated “Self-fitting Software” clinical trial until such time as we can ensure the health and safely of trial participants.

 

Expense Reduction: Given the current business climate, executive management has taken steps to strengthen our balance sheet and reduce our cost structure including the deferral of non-strategic investments as well as furloughs and salary reductions. These measures are expected to be temporary in nature and only in effect until their objectives have been accomplished.

 

Although our operating facilities remain open as of March 31, 2020, the effects of a COVID-19 outbreak could include the temporary shutdown of our facilities in the United States, Asia or Europe, disruptions or restrictions on the ability to ship our products to our customers as well as disruptions that may affect our customers and suppliers.

 

Further, as a result of COVID-19 and the measures designed to contain its spread, our sales could be negatively impacted as a result of disruption in demand by our customers, which could have a material and adverse effect on our business, results of operations and financial condition. Similarly, our suppliers may not have the materials, capacity, or capability to supply us according to our schedule and specifications. If our suppliers’ operations are impacted, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers, each of which would affect our results of operations. The duration of the disruptions to our customers and to our supply chain, and related financial impact to us, cannot be estimated at this time. If such disruptions continue for an extended period of time, the impact could have a material adverse effect on our business, results of operations and financial condition.

 

U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures of certain assets and liabilities. These estimates and assumptions utilize historical and forward-looking assumptions that the Company believes are reasonable, including but not limited to the potential impacts arising from the recent coronavirus pandemic. As we learn more about the extent and duration of the pandemic, the Company’s estimates and assumptions may evolve. Actual results could differ significantly from those estimates.

 

In summary, while our business is likely to be impacted in the coming year by global business conditions, including the delay of non-essential medical procedures, device upgrades and new product launches, we have a strong balance sheet that we believe will allow us to maintain our operations and preserve our ability to realize future growth.

 

Market Overview

 

IntriCon serves as a joint development partner (“JDM”) to leading medical device original equipment manufacturers (“OEMs”) by designing, developing, engineering, manufacturing and distributing micro-miniature products, microelectronics, micro-mechanical assemblies, complete assemblies and software solutions, primarily for high growth markets, such as diabetes, drug delivery, surgical navigation, hearing health and the professional audio communication market. Revenue from these markets is reported on the respective diabetes, other medical, hearing health value based direct-to-end-consumer, value based indirect-to-end-consumer and legacy OEM, 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 17 “Revenue by Market” to the Company’s consolidated condensed financial statements included herein.

 

23

 

 

 

Diabetes, Drug Delivery, and Surgical Navigation Markets

 

The Company manufactures microelectronics, micro-mechanical assemblies, high-precision injection-molded plastic components and complete devices for leading and emerging medical device manufacturers. The medical industry is faced with pressures to reduce the cost of healthcare. Driven by its core technologies, 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 presence in the diabetes, drug delivery and surgical navigation markets. For diabetes, IntriCon works with Medtronic to manufacture their wireless continuous glucose monitors (CGM), sensor assemblies, and accessories associated with Medtronic’s insulin pump and CGM system. In September 2016, the FDA approved Medtronic’s current generation insulin pump system, the MiniMed 670G system. The MiniMed 670G is the world’s first hybrid closed loop insulin delivery system and we are excited that our components are designed into and support 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 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. In late 2019, Medtronic received approval and began distributing the 670G system in select European countries.

 

IntriCon has a suite of medical coils and micro coils technology that it offers to various OEM customers. These products are currently used in surgical navigation markets, such as interventional pulmonology and electrophysiology. On May 18, 2020 IntriCon acquired privately held Emerald Medical Services Pte Ltd. (EMS). EMS, based in Singapore, provides joint engineering and manufacturing services for complex medical devices, including catheters covering a range of applications for cardiology, peripheral vascular, neurology, radiology and pulmonology. EMS’s production capability consists of design, development, manufacturing, testing and non-sterile packaging services. The acquisition expands IntriCon’s medical coil and micro-miniature medical device engineering and manufacturing capabilities in surgical navigation and accelerates diversification into potential new end-markets.

 

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.

 

The Company is committed to increasing investments to support its medical business development efforts. In early 2019, the Company hired a vice president of medical business development, and in connection with the EMS acquisition, has engaged a corporate development consultant aimed to leverage our core competencies and diversify our medical revenue base. The Company believes it has significant opportunities to serve the emerging home care markets through its already developed core competencies and capabilities to develop devices that are more technologically advanced, smaller and lightweight.

 

Hearing Healthcare Market

 

In the United States alone, there are approximately 40 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. Along with this, the legacy hearing aid distribution channel is an oligopoly of six large hearing aid manufacturers who utilize brick-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 fifteen 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.

 

Today in the US market, the legacy channel pushes all hearing-impaired through the same inefficient, costly channel. However, a very large portion of the hearing-impaired market – mostly notably those with mild to moderate losses – could be properly served with the proper combination of high quality, outcome-based devices, advanced fitting software and consumer services/care best practices – all at much lower cost. We believe fundamental 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.

 

24

 

 

We believe several factors have 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. 

 

On August 18, 2017, President Donald Trump signed into law H.R. 2430, the FDA Reauthorization Act of 2017, which includes a section concerning the regulation of OTC hearing aids. The law is designed to enable adults with mild to moderate hearing loss to access OTC hearing aids without being seen by a hearing care professional. The law 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. Today, IntriCon serves both the value-based hearing healthcare channel and the 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 brick-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. In 2018, the Company commissioned an ethnographic research study, which identified a $3+ billion annual VBHH market opportunity. To best approach this market opportunity, the Company has sharpened its Indirect-to-end-Consumer (ITEC) focus to identify potential high-profile partners that value its ability to deliver superior hearing aids, self-fitting software and customer care to the U.S. market. Moreover, the Company has refocused its Direct-to-End-Consumer (DTEC) efforts towards supporting product development and as a testing platform. Over the past decade we have invested in the manufacturing footprint, product technology and fitting software to provide individuals access to affordable, quality outcomes-based hearing healthcare.

 

The Company is also focused on serving its current value-based ITEC customers, who also sell products and services directly to the end consumer. We have established ourselves as a leader in supplying this portion of the market with advanced, outcome-based products and accessories. The Company has formed strong relationships with various customers in the channel, including geriatric product retailers and other indirect-to-end-consumer hearing aid providers.

 

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 pending over-the-counter (OTC) hearing aid regulation. Sentibo Smart Brain self-fitting software is designed to improve both channel productivity and the quality of first-time fittings, resulting in lower prices, greater access and increased customer satisfaction. This software is being used in the German market today, most notably through Signison, the Company’s joint venture with the owner of Soundperience.  

 

25

 

We strongly believe that incorporating self-fitting technology is a critical step in creating our high-quality, low-cost hearing healthcare ecosystem. The 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.

 

Legacy OEM Hearing Health Channel

 

We also believe there are niches in the legacy hearing health channel that will embrace our outcomes-based products and technologies in the United States and Europe. High costs of legacy 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.

 

26

 

 

 

 

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 focused on emergency response needs. The line includes several communication devices that are extremely portable and perform well in noisy and/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.

 

Core Technologies Overview

 

Over the past several years, the Company has increased investments in the continued development of critical core technologies: Microminiaturization, Miniature Transducers, Ultra-Low-Power (ULP) Digital Signal Processing (DSP), ULP Wireless and Fitting Software. These 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. 

 

Microminiaturization 

IntriCon excels at miniaturizing miniature interventional, implantable and body-worn medical 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 is a suite of medical coils and micro coils technology that are currently used in surgical navigation markets, such as interventional pulmonology and electrophysiology. The recent EMS acquisition expands IntriCon’s medical coil and micro-miniature medical device engineering and manufacturing capabilities in surgical navigation and accelerates diversification into potential new end markets.

 

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, the Audion16™ and Audion16+™, our wide dynamic range compression sixteen-channel hearing aid 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 with proven outcomes.

 

ULP Wireless  

Wireless connectivity is fast becoming a required technology, and wireless capabilities are especially critical in new body-worn devices. IntriCon’s BodyNet™ ULP 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.

 

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, AccuFit, 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.

 

 

27

 

 

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 Consolidated Condensed Financial Statements” such as estimates of future results, the expected results and impacts of the Emerald acquisition, statements regarding the estimated costs and expenses of the restructuring and estimated annual expense savings, 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 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:

 

 

the adverse economic conditions associated with the COVID-19 global health pandemic and the associated financial crisis;

 

 

 

 

stay-at-home and other orders, which could cause material delays and cancellations of elective procedures, curtailed or delayed spending by customers and result in disruptions to our supply chain, closure of our facilities, delays in product launches or diversion of management and other resources to respond to the COVID-19 pandemic;

 

 

 

 

the impact of global and regional economic and credit market conditions on healthcare spending;

 

 

 

 

the risk that the COVID-19 pandemic disrupts local economies and causes economies to enter prolonged recessions;

 

 

 

 

our ability to identify, complete and integrate acquisitions, including integrating our acquisition of Emerald Medical Services, and any unknown liabilities of Emerald Medical Services that may arise;

 

 

 

 

our ability to successfully implement our business and growth strategy, including our restructuring strategy;

 

 

 

 

the volume and timing of orders received by the Company, particularly from Medtronic;

 

 

 

 

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;

 

 

28

 

 

 

 

 

 

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;

 

 

 

 

FDA approval, timely release and acceptance of our products and the 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;

 

 

 

 

the loss of one or more of our major customers;

 

 

 

 

effects of legislation and regulation, including the timing and terms of the final OTC regulations;

 

 

 

 

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;

 

 

 

 

our ability and the ability of our customers to protect intellectual property;

 

 

 

 

cybersecurity threats;

 

 

 

 

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, 2019 and the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2020, 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. Actual results could differ from those estimates particularly as it relates to estimates reliant on forecasts and other assumptions impacted by the COVID-19 pandemic.

 

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, inventory valuation, goodwill, and certain long-lived assets. 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, 2019.

 

 

29

 

 

Strategic Restructuring Plan

 

As previously announced, on May 15, 2020, the management of the Company committed the Company to, and began executing on, a strategic restructuring plan designed to accelerate the Company’s future growth by focusing resources on the highest potential growth areas. The plan, which was supported by the Company’s Board of Directors, is expected to be completed by the end of the 2020 second quarter. 

 

Following the Company’s decision last quarter to no longer pursue a direct-to-end-consumer approach to the hearing health market, we recently made the decision to transition our remaining direct-to-end-consumer operations at Hearing Help Express to solely support our partnership initiatives. In addition, while continued uncertainties remain from the COVID-19 pandemic, we are taking many significant steps to decrease our expenditure profile and current spending run-rate. The following are significant items included in our strategic restructuring plan:

 

We completed a global net workforce reduction of approximately 35 positions, including many of the previously furloughed positions, resulting in an annual cost savings of approximately $2.4 million

We changed our focus to seeking partners in the hearing health market, resulting in approximately $2.0 million reduction in Hearing Help Express consumer advertising expense in 2020 as compared to 2019

In connection with the strategic restructuring plan, we anticipate incurring a $1.2 million to $1.5 million restructuring charge during the second quarter ending June 30, 2020 related to one-time employee termination costs, asset impairment charges and other operations-related expenses.

 

Results of Operations

 

Revenue, net

 

Below is a summary of our revenue by main markets for the three months ended March 31, 2020 and 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change

 

Three Months Ended March 31,

 

2020

 

 

2019

 

 

Dollars

 

 

Percent

 

   Medical:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Diabetes

 

$

13,530

 

 

$

17,164

 

 

$

(3,634

)

 

 

-21.2

%

      Other Medical

 

 

2,828

 

 

 

3,629

 

 

 

(801

)

 

 

-22.1

%

         Total

 

$

16,358

 

 

$

20,793

 

 

$

(4,435

)

 

 

-21.3

%

  Hearing Health:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Value Based DTEC

 

$

1,173

 

 

$

1,630

 

 

$

(457

)

 

 

-28.0

%

      Value Based ITEC

 

 

744

 

 

 

2,577

 

 

 

(1,833

)

 

 

-71.1

%

      Legacy OEM

 

 

1,964

 

 

 

2,803

 

 

 

(839

)

 

 

-29.9

%

         Total

 

$

3,881

 

 

$

7,010

 

 

$

(3,129

)

 

 

-44.6

%

  Professional Audio Communications

 

$

1,264

 

 

$

1,767

 

 

$

(503

)

 

 

-28.5

%

Total Net Revenue

 

$

21,503

 

 

$

29,570

 

 

$

(8,067

)

 

 

-27.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

For the three months ended March 31, 2020, we experienced a decrease of 21.2% in net revenue in the diabetes medical market compared to the same period in 2019 driven by the timing of certain international orders filtering through various local regulatory requirements as well as a delay in orders due to uncertainty surrounding the COVID-19 pandemic. Although we cannot predict the specific extent or duration of the impact of COVID-19 on our financial and operating results, we anticipate a notable reduction to inventory levels for our largest customer in the second quarter and the potential for future impact on various product lines in our medical diabetes market. We continue to closely monitor revenue, particularly in states that have implemented more restrictive stay-at-home executive orders or recommendations.  We have proactively communicated with customers to understand their needs and forecast the financial implications from these conversations.

 

All other medical net revenue for the three months ended March 31, 2020 decreased 22.1% compared to the same period in 2019. The decrease was driven by a one-time revenue adjustment, partially offset by medical coil demand. During the quarter ended March 31, 2020, we recorded a cumulative adjustment of $1.2 million to reduce revenue within our other medical market to correct an error related to prior periods as a result of our determination that a portion of our sales being recognized over time needed to be recognized at a point in time. The adjustment included a reduction of the related cost of goods sold of $0.8 million and related impacts to reduce the contract asset and an increase to inventory. The adjustment was not material to our Consolidated Financial Statements for any quarterly or annual period.

 

Net revenue in our hearing health value based direct-to-end-consumer (DTEC) business for the three months ended March 31, 2020 decreased 28% compared to the same period in 2019 due to reductions in advertising spend in an effort to control costs.  

 

Net revenue in our hearing health value based indirect-to-end-consumer (ITEC) business for the three months ended March 31, 2020 decreased 71.1% compared to the same period in 2019. The revenue decline was largely attributed to the absence of hiHealthInnovations revenue in 2020.

 

Net revenue in our hearing health legacy OEM business for the three months ended March 31, 2020 decreased 29.9% compared to the same period in 2019 due to sales mix and decreased demand, due in part to the impact of COVID-19.

 

As it relates to our overall Hearing Health business, we believe that the FDA could be delayed in promulgating regulations regarding OTC hearing aids due to COVID-19 priorities at the FDA, which delay will likely have an adverse impact on hearing health markets over the course of 2020.

 

Net revenue to the professional audio device sector decreased 28.5% for the three months ended March 31, 2020 compared to the same period in 2019 due to order delays as a result of COVID-19. 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 revenue, for the three months ended March 31, 2020 and 2019, was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

 

 

 

Percent

 

 

 

 

 

Percent

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Dollars

 

 

of Revenue

 

 

Dollars

 

 

of Revenue

 

 

Dollars

 

 

Percent

 

Gross Profit

 

$

4,572

 

 

 

21.3

%

 

$

8,558

 

 

 

28.9

%

 

$

(3,986

)

 

 

-46.6

%

 

Gross profit for  the quarter ended March 31, 2020 decreased over the comparable prior year period primarily due to lower revenues, changes in product mix, excess capacity related to the recent manufacturing expansion to meet the higher volume requirements of our existing and future customers as well as inefficiencies and excess capacity due to COVID-19.

 

 

31

 

 

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 months ended March 31, 2020 and 2019 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

Change

 

 

 

 

 

 

Percent

 

 

 

 

 

Percent  

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Dollars

 

 

of Revenue

 

 

Dollars

 

 

of Revenue

 

 

Dollars

 

 

Percent

 

Sales and Marketing

 

$

1,993

 

 

 

9.3

%

 

$

3,389

 

 

 

11.5

%

 

$

(1,396

)

 

 

-41.2

%

General and Administrative

 

 

3,416

 

 

 

15.9

%

 

 

3,186

 

 

 

10.8

%

 

 

230

 

 

 

7.2

%

Research and Development

 

 

1,201

 

 

 

5.6

%

 

 

965

 

 

 

3.3

%

 

 

236

 

 

 

24.5

%

 

Sales and marketing expense for the three months ended March 31, 2020 decreased compared to the same period in 2019. The decrease was due to lower DTEC marketing, support costs, wages and bad debt expenses.

 

General and administrative expenses were greater than the prior year periods primarily due to increased other outside services, support costs, non-cash stock compensation and severance expense.

 

Research and development increased over the prior year periods due to increases in outside service and support costs as well as continued production efforts related to our self-fitting software enhancements.

 

Interest income, net

 

Interest income, net for the three months ended March 31, 2020 was $184 compared to $215 for the comparable three  month period in 2019 due to an overall reduction in our investment balance. The investment balance has decreased as we have deposited proceeds of maturing securities into a money market account in order to maintain liquidity until the impacts of COVID-19 become more certain. 

 

Other expense, net

 

Other expense, net for the three months ended March 31, 2020 was $107 compared to $134 for the same period in 2019.

 

Income tax expense

 

Income tax expense for the three months ended March 31, 2020 was $18 compared to $131 for the same period in 2019. The change in income tax expense relates to a reduction of foreign income taxes paid in the current period.

 

Liquidity and Capital Resources

 

During the COVID-19 pandemic, we continue to maintain adequate liquidity to operate our businesses. As of March 31, 2020, we had $15,177 of cash on hand as well as $16,889 of short-term investment securities maturing within the next twelve months. Sources of our cash for the three months ended March 31, 2020 have been from our investing 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: 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Cash provided by (used in) continuing operations:

 

 

 

 

 

 

 

 

Operating activities

 

$

(1,239

)

 

$

712

 

Investing activities

 

 

8,005

 

 

 

4,871

 

Financing activities

 

 

(158

)

 

 

(179

)

Effect of exchange rate changes on cash

 

 

20

 

 

 

32

 

Net increase in cash from continuing operations

 

 

6,628

 

 

 

5,436

 

Cash provided by (used in) discontinued operations, net

 

 

3

 

 

 

(293

)

Net increase in cash

 

$

6,631

 

 

$

5,143

 

 

 

32

 

 

The most significant items that contributed to the $1,239 of cash used in operating activities were increases in inventory primarily related to order delays due to the uncertainty surrounding COVID-19. The increase in inventory was partially offset by add backs for non-cash depreciation and amortization, stock-based compensation and increases to accounts receivable and other assets.

 

Net cash provided by investing activities of $8,005 primarily consisted of proceeds from maturing investment securities partially offset by purchases of machinery and equipment. We have temporarily ceased reinvestments of maturing investment securities in order to maintain liquidity until the impacts of COVID-19 become more certain. The purchase of machinery and equipment primarily relates to automation equipment purchased in relation to the supply agreement with our largest customer.

 

Net cash used in financing activities of ($158) was comprised primarily from the withholding of shares from vesting RSU awards to pay withholding taxes and the payment of financing leases partially offset by cash received from the exercise of stock options and employee stock purchase plan shares.

 

The Company had the following bank arrangements:

 

Domestic Credit Facilities

 

The Company and its domestic subsidiaries are parties to a credit facility with CIBC Bank USA. The credit facility, as amended through the date of this filing, 2020, provides for a $12,000 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.

 

On May 13, 2020, the Company and its domestic subsidiaries entered into a Fourteenth Amendment to Loan and Security Agreement and Waiver (the “Fourteenth Amendment”) with CIBC Bank USA. The Fourteenth Amendment, among other things:

 

Increased the Company’s revolving loan borrowing capacity to $12.0 million from its then current capacity of $7.0 million;

Added provisions addressing interest rates following the unavailability of the London Interbank Offered Rate or LIBOR;

Waived a default in the fixed charge coverage ratio covenant as of March 31, 2020;

Eliminated the funded debt to EBITDA ratio and fixed charge coverage ratio for the quarter ending June 30, 2020;

Added a financial covenant requiring that at all times until September 30, 2020, the borrowers maintain at least $15.0 million of liquidity, calculated as the sum of (a) cash on hand, plus (b) cash equivalent investments, plus (c) available borrowing capacity under the revolving credit facility.  

 

After giving effect to the waiver in the Fourteenth Amendment, the Company was in compliance with all applicable covenants under the credit facility as of March 31, 2020.

 

Foreign Credit Facility

 

In addition to its domestic credit facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., has 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.

 

 

33

 

 

Capital Adequacy

 

We believe that funds expected to be generated from operations, funds maintained in liquid investments and funds available under our revolving credit loan facility will be sufficient to meet our anticipated cash requirements for operating needs for at least the next 12 months. While management believes that we will be able to meet our liquidity needs for at least the next 12 months, no assurance can be given that we will be able to do so.

 

As of March 31, 2020, and December 31, 2019, the Company had a total borrowing capacity of $9,446 and $9,589, 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 March 31, 2020 (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).

 

There were no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the quarter ended March 31, 2020 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.

 

 

34

 

 

PART II - OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

 

The information contained in Note 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, 2019 and in our Current Reports on Form 8-K filed with the Securities and Exchange Commission on May 8, 2020 and on May 20, 2020, with the following risk factor, which could materially affect the Company’s business, financial condition or future results.  The risks described in our Annual Report on Form 10-K, our Current Reports on Form 8-K and below 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.

 

The Company’s business, financial condition and results of operations for fiscal year 2020 and beyond could be materially adversely affected by the ongoing COVID-19 (coronavirus) outbreak.

 

The outbreak of the novel COVID-19 (coronavirus) has evolved into a global pandemic. COVID-19 has spread to many regions of the world, including North America, Asia and Europe. The full extent to which COVID-19 impacts our business, operating results and financial condition will depend on future developments that are highly uncertain, cannot be accurately predicted and may be beyond our control. Uncertain factors relating to COVID-19 include the duration of the outbreak, the severity of the virus, and the actions, or perception of actions that may be taken, to contain or treat its impact, including declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/or other similar restrictions and limitations.

 

We cannot predict the duration or scope of the pandemic, actions that may be taken by governments and businesses in response to the pandemic, or the impacts of the pandemic on healthcare systems. These impacts and associated responses of the COVID-19 pandemic could materially adversely impact our business, financial condition and results of operations in a number of ways, including but not limited to:

 

Temporary shutdown of our facilities in Minnesota, Singapore and Indonesia as a result of employee illness or government restrictions, disruptions or restrictions on the ability to ship our products to our customers as well as disruptions that may affect our customers and suppliers;

 

Reduced revenues as a result of disruptions in our operations or in demand by our customers, including our major customers. For example, our revenues in the first quarter of 2020 declined, in part due to delays in orders from our clients as a result of the uncertainty surrounding the COVID-19 pandemic;

 

Our suppliers may not have the materials, capacity, or capability to supply us according to our schedule and specifications. If our suppliers’ operations are impacted, we may need to seek alternate suppliers, which may be more expensive, may not be available or may result in delays in shipments to us and subsequently to our customers; 

 

Reduced cash flow from our operations due to reductions in revenues or collections from our customers and increases in operating costs related to actions taken in response to the pandemic. For example, we have experienced higher operating costs associated with newly added health screenings, temperature checks and enhanced cleaning and sanitation protocols to protect our employees, which we expect could continue or could increase in these or other areas;

 

Reduced revenues or earnings may require us to perform impairment assessments of our long-lived assets, goodwill and other assets and result in charges to earnings;

 

Reduced business productivity due to inefficiencies in employees working from home or increasing physical distancing and other pandemic response protocols in our production facilities;

 

Diminished ability, or inability, to complete clinical trials and other activities required to achieve regulatory clearing for our products under development due to lack of access to healthcare facilities, healthcare providers and patients. For example, we have postponed our anticipated “self-fitting software” clinical trial until such time as we can ensure the health and safely of trial participants; this delay could adversely affect our hearing health business;

 

 

35

 

 

Increased susceptibility to the risk of information technology security breaches and other disruptions due to increased volumes of remote access to our information systems from our employees working at home;

 

National or global economic recessions, including those brought on by the COVID-19 outbreak, which may have a negative effect on the demand for our products and our operating results; 

 

Potential delays in the over-the-counter hearing aid regulations required to be promulgated by the U.S. Food and Drug Administration due to COVID-19 priorities, which delay will likely have an adverse impact on our hearing health business over the course of 2020 and beyond; 

 

Diminished ability to retain personnel over concerns about workplace exposure to COVID-19, or to hire and effectively train new personnel, due to physical distancing protocols; and

 

Increased volatility in our stock price due to financial market instability.

 

The duration of the disruptions to our customers and to our supply chain, and related financial impact to us, cannot be estimated at this time. If such disruptions continue for an extended period of time, the impact could have a material adverse effect on our business, results of operations and financial condition.

 

These and other impacts of the COVID-19 pandemic could have the effect of heightening many of the other risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. The ultimate impact depends on the severity and duration of the current COVID-19 pandemic and actions taken by governmental authorities and other third parties in response, each of which is uncertain, rapidly changing and difficult to predict. Any of these disruptions could materially adversely impact our business, financial condition and results of operations.

 

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

 

Not applicable.

 

 

36

 

 

ITEM 6.  Exhibits

 

(a)

Exhibits