Company Quick10K Filing
Intricon
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 9 $199
10-Q 2019-11-08 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-10 Quarter: 2019-03-31
10-K 2019-03-14 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-03-13 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-15 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-12 Quarter: 2016-03-31
10-K 2016-03-11 Annual: 2015-12-31
10-Q 2015-11-12 Quarter: 2015-09-30
10-Q 2015-08-13 Quarter: 2015-06-30
10-Q 2015-05-13 Quarter: 2015-03-31
10-K 2015-03-06 Annual: 2014-12-31
10-Q 2014-11-12 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-13 Quarter: 2014-03-31
10-K 2014-03-12 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-Q 2013-05-13 Quarter: 2013-03-31
10-K 2013-03-13 Annual: 2012-12-31
10-Q 2012-08-13 Quarter: 2012-06-30
10-Q 2012-05-07 Quarter: 2012-03-31
10-K 2012-03-14 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-06 Quarter: 2011-03-31
10-K 2011-03-08 Annual: 2010-12-31
10-Q 2010-11-10 Quarter: 2010-09-30
10-Q 2010-08-12 Quarter: 2010-06-30
10-Q 2010-05-17 Quarter: 2010-03-31
10-K 2010-03-16 Annual: 2009-12-31
8-K 2019-11-04 Earnings, Regulation FD, Exhibits
8-K 2019-08-06 Earnings, Regulation FD, Exhibits
8-K 2019-07-12 Enter Agreement, Earnings, Regulation FD, Exhibits
8-K 2019-06-25 Exit Costs, Impairments
8-K 2019-05-01 Shareholder Vote
8-K 2019-04-26 Earnings, Officers, Regulation FD, Exhibits
8-K 2019-04-17 Enter Agreement, Off-BS Arrangement
8-K 2019-02-19 Earnings, Regulation FD, Exhibits
8-K 2018-11-05 Earnings, Regulation FD, Exhibits
8-K 2018-08-15 Enter Agreement, Regulation FD, Other Events, Exhibits
8-K 2018-08-10 Enter Agreement, Regulation FD, Other Events, Exhibits
8-K 2018-07-25 Enter Agreement, Earnings, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-05-07 Earnings, Regulation FD, Exhibits
8-K 2018-04-26 Shareholder Vote
8-K 2018-02-12 Earnings, Regulation FD, Exhibits
IIN 2019-09-30
Part I: Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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-10.1 a192156_ex10-1.htm
EX-31.1 a192156_ex31-1.htm
EX-31.2 a192156_ex31-2.htm
EX-32.1 a192156_ex32-1.htm
EX-32.2 a192156_ex32-2.htm

Intricon Earnings 2019-09-30

IIN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
IIN 199 116 27 120 36 -1 2 190 30% 102.9 -1%
TRNS 193 114 53 167 40 7 16 215 24% 13.7 7%
SPA 178 225 149 389 80 2 24 177 21% 7.4 1%
FEIM 102 95 32 51 23 7 7 100 44% 13.4 8%
NNDM 99 20 5 0 0 0 0 95 0%
SMTX 90 213 168 328 31 -2 17 145 9% 8.6 -1%
RFIL 84 36 5 43 13 3 5 71 30% 15.2 9%
BLNK 67 17 4 3 1 -9 -8 57 34% -6.9 -51%
IEC 65 109 80 147 20 12 17 93 13% 5.5 11%
INTT 58 61 17 71 35 -0 5 50 49% 10.7 -1%

10-Q 1 a192156_10q.htm FORM 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 September 30, 2019

 

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 October 31, 2019 was 8,778,963. 

 

 

 

 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 September 30, 2019 and December 31, 2018   3
         
    Consolidated Condensed Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018   4
         
    Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2019 and 2018   5
         
    Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and 2018   6
         
    Consolidated Condensed Statements of Equity (Unaudited) for the Nine Months Ended September 30, 2019 and 2018   7
         
    Notes to Consolidated Condensed Financial Statements (Unaudited)   8-20
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   21-31
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   31
         
  Item 4. Controls and Procedures   31
         
PART II: OTHER INFORMATION    
         
  Item 1. Legal Proceedings   32
         
  Item 1A. Risk Factors   32
         
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   32
         
  Item 3. Defaults Upon Senior Securities   32
         
  Item 4. Mine Safety Disclosures   32
         
  Item 5. Other Information   32
         
  Item 6. Exhibits   33
         
  Signatures     34

  

 2

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. Financial Statements 

           
INTRICON CORPORATION
Consolidated Condensed Balance Sheets
(In Thousands, Except Per Share Amounts)

 

   September 30,   December 31, 
   2019   2018 
   (Unaudited)   (Unaudited) 
Current assets:          
Cash, cash equivalents and restricted cash  $8,688   $8,047 
Short-term investments   20,315    38,093 
Accounts receivable, less allowance for doubtful accounts of $306 at September 30, 2019 and $807 at December 31, 2018   8,425    11,266 
Inventories   17,883    18,163 
Contract assets   8,513    5,624 
Other current assets   2,290    2,146 
Current assets of discontinued operations   239    1,205 
Total current assets   66,353    84,544 
           
   Machinery and equipment   40,525    36,725 
Less: Accumulated depreciation   26,867    25,303 
Net machinery and equipment   13,658    11,422 
           
Goodwill   9,551    10,808 
Intangible assets, net       2,585 
Operating lease right of use assets, net   4,749     
Investment in partnerships   1,409    2,091 
Long-term investments   13,764     
Other assets, net   6,196    3,427 
Noncurrent assets of discontinued operations       371 
Total assets  $115,680   $115,248 
           
Current liabilities:          
Current financing leases  $108   $ 
Current operating leases   1,790     
Accounts payable   11,407    12,871 
Accrued salaries, wages and commissions   3,063    4,409 
Other accrued liabilities   4,033    4,031 
Liabilities of discontinued operations   393    336 
Total current liabilities   20,794    21,647 
           
Noncurrent financing leases   55     
Noncurrent operating leases   3,296     
Other postretirement benefit obligations   343    377 
Accrued pension liabilities   725    706 
Other long-term liabilities   1,162    544 
Total liabilities   26,375    23,274 
Commitments and contingencies          
Shareholders’ equity:          
Common stock, $1.00 par value per share; 20,000 shares authorized; 8,778 and 8,664 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively   8,778    8,664 
Additional paid-in capital   86,358    84,999 
Accumulated deficit   (5,054)   (509)
Accumulated other comprehensive loss   (524)   (927)
Total shareholders’ equity   89,558    92,227 
Non-controlling interest   (253)   (253)
Total equity   89,305    91,974 
Total liabilities and equity  $115,680   $115,248 

 

(See accompanying notes to the consolidated condensed financial statements)

 

 3

 

 

                 
INTRICON CORPORATION
Consolidated Condensed Statements of Operations
(In Thousands, Except Per Share Amounts)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2019   2018   2019   2018 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Revenue, net  $26,893   $29,566   $85,800   $83,590 
Cost of goods sold   20,120    20,236    62,253    56,435 
Gross profit   6,773    9,330    23,547    27,155 
                     
Operating expenses:                    
Sales and marketing   2,609    2,784    9,071    8,023 
General and administrative   3,715    2,921    10,551    8,429 
Research and development   840    1,251    2,902    3,693 
Impairment loss (Note 10)           3,765     
Total operating expenses   7,164    6,956    26,289    20,145 
Operating income (loss)   (391)   2,374    (2,742)   7,010 
                     
Interest income (expense), net   240    (48)   703    (453)
Other expense, net   (52)   (221)   (458)   (650)
Income (loss) from continuing operations before income taxes and discontinued operations   (203)   2,105    (2,497)   5,907 
Income tax expense (benefit)   87    (97)   334    358 
Income (loss) from continuing operations before discontinued operations   (290)   2,202    (2,831)   5,549 
Loss on disposal of discontinued operations (Note 3)           (1,116)    
Loss from discontinued operations, net of income taxes (Note 3)       (299)   (597)   (870)
Net income (loss)  $(290)  $1,903   $(4,544)  $4,679 
                     
Basic income (loss) per share:                    
Continuing operations  $(0.03)  $0.28   $(0.32)  $0.77 
Discontinued operations       (0.04)   (0.20)   (0.12)
Net income (loss) per share:  $(0.03)  $0.24   $(0.52)  $0.65 
                     
Diluted income (loss) per share:                    
Continuing operations  $(0.03)  $0.25   $(0.32)  $0.66 
Discontinued operations       (0.03)   (0.20)   (0.10)
Net income (loss) per share:  $(0.03)  $0.22   $(0.52)  $0.56 
                     
Average shares outstanding:                    
Basic   8,764    7,825    8,738    7,249 
Diluted   8,764    8,822    8,738    8,360 

 

(See accompanying notes to the consolidated condensed financial statements)

 

 4

 

 

                       
INTRICON CORPORATION
Consolidated Condensed Statements of Comprehensive Income (Loss)
 (In Thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30,   September 30,   September 30, 
   2019   2018   2019   2018 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Net income (loss)  $(290)  $1,903   $(4,544)  $4,679 
Realized foreign currency translation loss from discontinued operations previously unrealized, net of taxes of $0           280     
Unrealized foreign currency translation adjustment from continuing operations, net of taxes of $0   9    9    (10)   (171)
Interest rate swap, net of taxes of $0       (4)       (1)
Investment in partnerships, net of taxes of $0           118     
Pension and postretirement obligations, net of taxes of $0   5    5    15    15 
Comprehensive income (loss)  $(276)  $1,913   $(4,141)  $4,522 

 

(See accompanying notes to the consolidated condensed financial statements)

 

 5

 

 

INTRICON CORPORATION
Consolidated Condensed Statements of Cash Flows
(In Thousands)
 
   Nine Months Ended 
   September 30,   September 30, 
   2019   2018 
   (Unaudited)   (Unaudited) 
Cash flows from operating activities:          
Net income (loss)  $(4,544)  $4,679 
Loss from discontinued operations, net of tax   1,713    870 
Income (loss) from continuing operations   (2,831)   5,549 
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:          
Depreciation and amortization   2,448    2,107 
Impairment loss   3,765     
Equity in loss of partnerships   206    300 
Stock-based compensation   1,514    1,025 
Change in allowance for doubtful accounts   (501)   368 
Changes in operating assets and liabilities:          
 Accounts receivable   3,394    (5,110)
 Inventories   110    (4,856)
 Contract assets   (2,889)   (3,345)
 Other assets   (165)   (391)
Accounts payable   (1,773)   2,722 
Accrued expenses   (1,372)   49 
Other liabilities   (123)   (146)
 Net cash provided by (used in) operating activities of continuing operations   1,783    (1,728)
 Net cash (used in) operating activities of discontinued operations   (24)   (984)
 Net cash provided by (used in) operating activities   1,759    (2,712)
           
Cash flows from investing activities:          
Purchases of machinery and equipment   (3,787)   (3,496)
Payments for acquisition of other assets   (696)    
Purchase of investment securities   (40,590)    
Proceeds from sale of investment securities   38,015     
Proceeds from maturities of investment securities   6,425     
Investment in partnerships   (296)   (843)
Net cash (used in) investing activities of continuing operations   (929)   (4,339)
Net cash (used in) investing activities of discontinued operations   (16)    
Net cash (used in) investing activities   (945)   (4,339)
           
Cash flows from financing activities:          
Proceeds from long-term debt       14,195 
Repayments of long-term debt       (25,539)
Proceeds from issuance of common stock, net of costs       88,967 
Payments for repurchase of common stock and related costs       (25,907)
Payment of financing leases   (82)    
Exercise of stock options and employee stock purchase plan shares   263    584 
Withholding of common stock upon vesting of restricted stock units   (304)    
Net cash provided by (used in) financing activities   (123)   52,300 
           
Effect of exchange rate changes on cash of continuing operations   (46)   (24)
Effect of exchange rate changes on cash of discontinued operations   (4)   (2)
Effect of exchange rate changes on cash   (50)   (26)
           
Net increase in cash   641    45,223 
Cash, cash equivalents and restricted cash, beginning of period   8,047    1,017 
           
Cash, cash equivalents and restricted cash, end of period  $8,688   $46,240 
           
Non-cash investing and financing:          
Acquisition of machinery and equipment in accounts payable  $305   $2,098 
Investment in partnership through liability incurred       86 
Fitting software other asset through liabilities incurred and exchange of investment in partnership   3,093     

 

 (See accompanying notes to the consolidated condensed financial statements)

 

 6

 

  

                                       
INTRICON CORPORATION
Consolidated Condensed Statements of Equity
 (In Thousands)

                             
   Shareholders’ Equity, Nine Months Ended September 30, 2019 (Unaudited)         
   Common
Stock
Number
of Shares
   Common
Stock
Amount
   Additional
Paid-in
Capital
   Retained
Earnings
(Accumulated
Deficit)
   Accumulated
Other
Comprehensive Loss
   Non-Controlling Interest   Total
Equity
 
Balance December 31, 2018   8,664   $8,664   $84,999   $(509)  $(927)  $(253)  $91,974 
Exercise of stock options, net   27    27    (9)               18 
Withholding of common stock upon vesting of restricted stock units   20    20    (255)               (235)
Shares issued under the employee stock purchase plan   3    3    67                70 
Stock-based compensation           329                329 
Net income               775            775 
Comprehensive income                   130        130 
Balance March 31, 2019   8,714   $8,714   $85,131   $266   $(797)  $(253)  $93,061 
Exercise of stock options, net   29    29    22                51 
Withholding of common stock upon vesting of restricted stock units   6    6    (6)                
Shares issued under the employee stock purchase plan   2    2    48                50 
Stock-based compensation   3    3    534                537 
Net (loss)               (5,030)           (5,030)
Comprehensive income                   259        259 
Balance June 30, 2019   8,754   $8,754   $85,729   $(4,764)  $(538)  $(253)  $88,928 
Exercise of stock options, net   12    12    16                28 
Withholding of common stock upon vesting of restricted stock units   10    10    (79)               (69)
Shares issued under the employee stock purchase plan   2    2    44                46 
Stock-based compensation           648                648 
Net (loss)               (290)           (290)
Comprehensive income                   14        14 
Balance September 30, 2019   8,778   $8,778   $86,358   $(5,054)  $(524)  $(253)  $89,305 
                                    
   Shareholders’ Equity, Nine Months Ended September 30, 2018 (Unaudited)           
   Common
Stock
Number
of Shares
   Common
Stock
Amount
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Accumulated
Other
Comprehensive Loss
   Non-Controlling
Interest
   Total
Equity
 
Balance December 31, 2017   6,900   $6,900   $21,581   $(6,056)  $(733)  $(253)  $21,439 
Exercise of stock options, net   41    41    167                208 
Shares issued under the employee stock purchase plan   3    3    57                60 
Stock-based compensation           333                333 
Net income               757            757 
Comprehensive income                   86        86 
Balance March 31, 2018   6,944   $6,944   $22,138   $(5,299)  $(647)  $(253)  $22,883 
Exercise of stock options, net   92    92    (37)               55 
Shares issued under the employee stock purchase plan   1    1    54                55 
Stock-based compensation           334                334 
Net income               1,992            1,992 
Comprehensive (loss)                   (252)       (252)
Balance June 30, 2018   7,037   $7,037   $22,489   $(3,307)  $(899)  $(253)  $25,067 
Exercise of stock options, net   377    377    (227)               150 
Shares issued under the employee stock purchase plan   1    1    55                56 
Stock-based compensation           358                358 
Issuance of common stock   1,725    1,725    87,242                88,967 
Repurchase of common stock   (500)   (500)   (25,407)               (25,907)
Net income               1,903            1,903 
Comprehensive income                   10        10 
Balance September 30, 2018   8,640   $8,640   $84,510   $(1,404)  $(889)  $(253)  $90,604 

 

(See accompanying notes to the consolidated financial statements)

 

 7

 

 

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 financial position as of September 30, 2019 and December 31, 2018, the consolidated results of its operations for the three and nine months ended September 30, 2019 and 2018 and the consolidated statements of equity and cash flows for the nine months ended September 30, 2019 and 2018. Results of operations for the interim periods are not necessarily indicative of the results of operations expected for the full year or any other interim period. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2018 Annual Report on Form 10-K filed with the SEC.

 

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 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 has evaluated subsequent events occurring after the date of the consolidated financial statements for events requiring recording or disclosure in the consolidated financial statements.

 

2.Changes in Accounting Policies

 

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, 2018. In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842). Topic 842 supersedes the lease accounting guidance previously set forth in the Accounting Standards Codification (ASC) Topic 840 “Leases,” and requires lessees to recognize a lease liability and a right-of-use asset (ROU) for all leases that extend beyond one year. The Company adopted Topic 842 with a date of initial application of January 1, 2019, which resulted in a ROU asset and lease liability of approximately $6.0M.

 

The Company did not apply Topic 842 retrospectively using the transition option in ASU 2018-11, “Targeted Improvements” to ASC 842, to not restate comparative periods in transition and instead to use the effective date of ASC 842, “Leases”, as the date of initial application of transition. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification.

 

Changes to the Company’s accounting policies as a result of adopting Topic 842 are discussed below:

 

Short-term lease recognition exemption. The Company adopted the short-term lease recognition exemption as an accounting policy. Accordingly, the Company will not recognize a lease liability and ROU asset for short-term leases in transition and, post-effective date, will continue to recognize short-term leases as expense on a straight-line basis over the lease term. Renewal and purchase options for a lease will be reassessed upon the occurrence of certain discrete reassessment events: (1) the lease term is extended more than 12 months beyond the end of the previously determined lease term or (2) the lessee now concludes that the lessee’s exercise of a purchase option is reasonably certain. When a lease no longer qualifies for the short-term lease exemption, the Company will apply ASC 842 guidance on initial recognition and measurement; the commencement date of the lease for this purpose is the date of the change in circumstances.

 

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Accounting for certain leases at a portfolio level. The Company accounts for leases at a portfolio level when the criteria described below are met and it reasonably expects that the application of the lease model to the portfolio will not differ materially from the application to the individual leases in that portfolio. If the applicable criteria are met, the start of the lease term is expected to be the first of the month. The criteria are: 

1.Leases are similar in nature (e.g. similar underlying asset such as vehicles);

2.Leases have identical or nearly identical contract provisions, including same lessor; and

3.Leases with effective dates that fall within a narrow window of time (month or quarter) and have the same lease term.

 

For purposes of arriving at the transition adjustment on the effective date, a total of seven vehicle leases were combined into three portfolios.

 

Combining lease and non-lease components into a single component. The Company elected to adopt this practical expedient for all asset classes. As a result of this election, the consideration included in the lease payments for these asset classes will be greater, resulting in a larger lease liability and ROU asset.

 

3.Discontinued Operations

 

On June 25, 2019, the Company’s officers, pursuant to delegated authority from the board, approved plans to discontinue the operations of its UK subsidiary within the body worn device segment. As of September 30, 2019, we continue to settle the remaining assets and liabilities of the subsidiary. The final closing of the UK subsidiary is expected to occur during the fourth quarter of 2019.

 

At June 30, 2019, the net realizable value of certain assets was less than their carrying value resulting in a loss on disposal of $1.0M. There were no further adjustments made to the net realizable value of assets during the period ended September 30, 2019.

 

As the disposal meets the definition of a strategic shift in accordance with ASC 205, the results of the UK operations have been classified as loss on discontinued operations, net of income taxes, in the accompanying Consolidated Condensed Statements of Operations, Comprehensive Income (Loss) and Cash Flows. Current assets, noncurrent assets, and liabilities of the discontinued operations have been reclassified and reflected on the accompanying Consolidated Condensed Balance Sheets as “Current assets of discontinued operations,” “Noncurrent assets of discontinued operations,” and “Liabilities of discontinued operations”, respectively. Prior periods relating to our discontinued operations have also been reclassified to reflect consistency within our condensed consolidated financial statements.

 

The total assets and liabilities of the UK subsidiary at September 30, 2019 and December 31, 2018 were as follows:

 

  September 30,
2019
  December 31,
2018
 
Accounts receivable, net $1  $213 
Inventories  21   818 
Other current assets  217   174 
Current assets of discontinued operations  239   1,205 
         
 Machinery and equipment     436 
 Less: Accumulated depreciation     126 
 Net machinery and equipment     310 
         
Other assets, net     61 
Total assets $239  $1,576 
         
Accounts payable     320 
Other accrued liabilities  393   16 
Current liabilities of discontinued operations  393   336 
Net assets (liabilities) $(154) $1,240 

 

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The loss on disposal of discontinued operations, as a result of the plan to discontinue the operations of the UK, for the nine months ended September 30, 2019 was computed as follows:

 

Cash and cash equivalents $5 
Accounts receivable, net  72 
Write-down of inventory to net realizable value  278 
Write-down of property, plant and equipment to salvage value  298 
Other assets and liabilities, net  71 
Realized loss on foreign currency  280 
Net assets disposed  1,004 
Additional disposal costs, net  112 
Loss on disposal of discontinued operations $1,116 

 

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

 

  Three Months Ended  Nine Months Ended 
  September 30,
2019
  September 30,
2018
  September 30,
2019
  September 30,
2018
 
Revenue, net $  $568  $1,068  $2,067 
Cost of goods sold     373   667   1,296 
Gross profit     195   401   771 
Sales and marketing     225   314   706 
General and administrative     311   684   1,005 
Total operating expenses     536   998   1,711 
Other income, net     42      70 
Loss from discontinued operations, net of taxes $  $(299) $(597) $(870)

 

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 industry segment:

 

For the Three Months Ended September 30, 2019   Body Worn Devices  Hearing Health
DTEC
  Total 
Revenue, net   $25,383  $1,510  $26,893 
Income (loss) from continuing operations before income taxes and discontinued operations    750   (953)  (203)
Depreciation and amortization    712   108   820 
Capital expenditures    1,374   54   1,428 
               

 

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For the Nine Months Ended September 30, 2019    Body Worn Devices   Hearing Health
DTEC
   Total 
Revenue, net $80,924  $4,876  $85,800 
Impairment loss     (3,765)  (3,765)
Income (loss) from continuing operations before income taxes and discontinued operations  5,106   (7,603)  (2,497)
Depreciation and amortization  2,210   238   2,448 
Capital expenditures    3,651   136   3,787 

 

            
For the Three Months Ended September 30, 2018   Body Worn Devices  Hearing Health
DTEC
  Total 
Revenue, net $28,076  $1,490  $29,566 
Income (loss) from continuing operations before income taxes and discontinued operations  3,146   (1,041)  2,105 
Depreciation and amortization  642   55   697 
Capital expenditures  1,884   4   1,888 
               

 

For the Nine Months Ended September 30, 2018   Body Worn Devices  Hearing Health
DTEC
  Total 
Revenue, net   $78,263  $5,327  $83,590 
Income (loss) from continuing operations before income taxes and discontinued operations  7,899   (1,992)  5,907 
Depreciation and amortization  1,952   155   2,107 
Capital expenditures    3,426   70   3,496 

 

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

 

  September 30,
2019
  December 31,
2018
 
Body Worn Devices:        
Identifiable assets (excluding goodwill) $103,158  $97,725 
Goodwill  9,551   9,551 
Hearing Health DTEC:        
Identifiable assets (excluding goodwill)  2,732   5,139 
Goodwill     1,257 

 

5.Geographic Information

 

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

 

  September 30,
2019
  December 31,
2018
 
United States $12,264  $10,065 
Singapore  1,311   1,240 
Other  83   117 
Consolidated $13,658  $11,422 

 

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Long-lived assets consist of machinery and equipment. Excluded from long-lived assets are investments in partnerships, patents, goodwill, operating lease 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 and nine months ended September 30, 2019 and 2018 were as follows:

 

  Three Months Ended  Nine Months Ended 
Net Revenue to Geographical Areas September 30,
2019
  September 30,
2018
  September 30,
2019
  September 30,
2018
 
United States $22,483  $25,157  $71,059  $70,871 
Europe  1,248   1,500   4,480   4,163 
Asia  2,780   2,472   9,508   7,639 
All other countries  382   437   753   917 
Consolidated $26,893  $29,566  $85,800  $83,590 

 

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

 

For the three and nine months ended September 30, 2019, one customer accounted for 59% of the Company’s consolidated net revenue. For the three and nine months ended September 30, 2018, one customer accounted for 56% and 57%, respectively, of the Company’s consolidated net revenue.

 

Two customers combined accounted for 43% and 52% of the Company’s consolidated accounts receivable at September 30, 2019 and December 31, 2018, respectively.

 

One customer accounted for 84% and 78% of the Company’s consolidated contract assets at September 30, 2019 and December 31, 2018, respectively.

 

6.Investment in Partnerships

 

Investment in partnerships consisted of the following:

 

  September 30,
2019
  December 31,
2018
 
Investment in Signison $1,246  $865 
Investment in and cash advance for Soundperience     1,022 
Other  163   204 
Total $1,409  $2,091 

 

The Company has a 50% ownership interest in Signison as of September 30, 2019. Signison is accounted for in the Company’s consolidated financial statements using the equity method.

 

As of December 31, 2018, the Company held a 49% ownership interest in Soundperience, which was accounted for using the equity method. In January 2019, the Company purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience in exchange for 1,750 Euros, our 49% ownership in Soundperience and the related license agreement. See Note 9.

 

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7.Investment Securities

 

The Company currently invests in commercial paper, US government agencies and corporate notes and bonds with original maturities of not more than two years. The Company classifies these investments as held to maturity based on our intent and ability to hold these investments until maturity. As a result, these investments are recorded at amortized cost, which approximates fair value as of September 30, 2019. As of December 31, 2018, the Company invested in certain liquid investment securities which were classified as available for sale investments and measured at fair value based on Level 1 inputs.

 

The maturity dates of our investments as of September 30, 2019 are as follows:

 

  Less than one
year
  1-5 years  Total 
Commercial Paper Original Maturities of 91 Days or More $6,824  $  $6,824 
US Government Agencies     1,900   1,900 
Corporate Notes and Bonds  13,491   11,864   25,355 
Total Investments $20,315  $13,764  $34,079 

 

8.Inventories

 

Inventories consisted of the following at:

 

   Raw materials  Work-in process  Finished products
and components
  Total 
September 30, 2019                 
Domestic   $11,579  $3,103  $405  $15,087 
Foreign    2,315   368   113   2,796 
Total   $13,894  $3,471  $518  $17,883 
                  
December 31, 2018                 
Domestic   $10,657  $2,484  $1,583  $14,724 
Foreign    2,671   653   115   3,439 
Total   $13,328  $3,137  $1,698  $18,163 

 

9.Other Assets, Net

 

Other assets, net consisted of the following at:

 

  September 30,
2019
  December 31,
2018
 
Fitting Software $3,679  $—  
NXP Tech  1,964   2,259 
Other  553   1,168 
Total $6,196  $3,427 

 

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In January 2019, the Company purchased the source code for self-fitting software from Soundperience for 1,750 Euros and also transferred our 49% ownership interest in Soundperience to the majority owner, positioning the Company to capitalize on the upcoming over-the-counter (OTC) hearing aid regulations. The Company has capitalized the self-fitting software within other assets, net based on the cost of the consideration transferred and 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 September 30, 2019, outstanding liabilities are $1,260.

 

10.Goodwill and Intangible Assets

 

As of and for the period ended June 30, 2019, the fair value of the goodwill within our Hearing Help Express reporting unit was less than its carrying amount and resulted in a non-cash impairment charge on goodwill of $1,257 and intangible assets of $2,508. There were no further adjustments made to the carrying amount of goodwill and intangible assets as of September 30, 2019.

 

The following summarizes the consolidated carrying amount of goodwill by period:

 

Carrying amount at December 31, 2018 $10,808 
Impairment of goodwill of Hearing Help Express  (1,257)
Carrying amount at September 30, 2019 $9,551 

 

The following summarizes the consolidated carrying amounts of intangible assets by period:

 

Carrying amount at December 31, 2018 $2,585 
Amortization of intangible assets of Hearing Help Express  (77)
Impairment of intangible assets of Hearing Help Express  (2,508)
Carrying amount at September 30, 2019 $ 

 

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 2021, 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 various computer equipment that include bargain purchase options at termination. These leases have been classified as finance leases.

 

As of September 30, 2019, the Company has a weighted-average lease term of 1.6 years for its finance leases, and 3.3 years for its operating leases. As of September 30, 2019, the Company has a weighted-average discount rate of 5.56% for its finance leases, and 5.25% for its operating leases. Operating cash flows from continuing operations for the nine months ended September 30, 2019 from operating leases were $1,406. Operating cash flows from discontinued operations for the nine months ended September 30, 2019 from operating leases were $84. Non-cash increases for the nine months ended September 30, 2019, to the operating lease ROU assets, lease incentive other assets and lease liabilities from continuing operations were $772, $150, and $922, respectively. During the nine months ended September 30, 2019, we derecognized approximately $761 of non-cash operating lease ROU assets and liabilities from our discontinued operations. Financing lease assets are classified as machinery and equipment within the consolidated balance sheet. Short term leases are not significant.

 

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The following tables summarizes lease costs by type:

 

   Three Months
Ended
 September 30, 2019
   Nine Months
Ended
 September 30, 2019
 
Lease cost          
Finance lease cost:          
Amortization of right-of-use assets  $27   $76 
Interest on lease liabilities   3    8 
           
Operating lease cost*   462    1,379 
Variable lease cost**   138    417 
Total lease cost  $630   $1,880 

 

*Operating lease cost excludes $0 and $86 related to discontinued operations of the UK for the three and nine months ended September 30, 2019, respectively.

 

**Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our domestic and foreign building leases, excluding approximately $0 and $11 related to discontinued operations of the UK for the three and nine months ended September 30, 2019, respectively.            

 

Maturities of lease liabilities are as follows:

 

   Operating Leases  Financing Leases  Total 
2019  $503  $29  $532 
2020   1,919   105   2,024 
2021   1,588   31   1,619 
2022   1,023   3   1,026 
2023   416      416 
2024 and thereafter   93      93 
Total lease payments   5,542   168   5,710 
Less: Interest   (456)  (5)  (461)
Present value of lease liabilities  $5,086  $163  $5,249 

 

As previously disclosed in Note 20 of the Notes to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, prior to the adoption of ASU 2016-02, Leases (Topic 842), the future minimum payments required under lease agreements as of December 31, 2018 were 2019 - $2,417; 2020 - $2,255; 2021 - $1,689; 2022 - $950; 2023 - $188.

 

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12.Income Taxes

 

Income tax expense (benefit) for the three and nine months ended September 30, 2019 was $87 and $334 compared to ($97) and $358 for the same period in 2018. The expense was largely due to our foreign operations. The Company has net operating loss carryforwards for U.S. federal income tax purposes. Due to the new tax legislation, there are limitations on the use of certain of the carryforwards. The Company has recorded a full valuation allowance against the deferred tax asset as of September 30, 2019.

 

The following was the income (loss) from continuing operations before income taxes and discontinued operations for each jurisdiction in which the Company has operations for the three and nine months ended September 30, 2019 and 2018.

                 
   Three Months Ended   Nine Months Ended 
   September 30,
2019
   September 30,
2018
   September 30,
2019
   September 30,
2018
 
United States  $(261)  $1,575   $(3,015)  $4,876 
Singapore   (90)   378    131    724 
Indonesia   18    18    58    60 
Germany   130    134    329    247 
Income (loss) from continuing operations before income taxes and discontinued operations  $(203)  $2,105   $(2,497)  $5,907 

  

The Company expects impairment losses to be an adjustment to the net loss for the three and nine months ended September 30, 2019 for income tax purposes.

 

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.

 

The Company granted 4 and 79 RSUs for the three and nine months ended September 30, 2019, respectively. The weighted average closing price of the Company’s common stock on the date of grant was $19.19 and $23.83, respectively, for the RSUs granted in the three and nine months ended September 30, 2019. The RSUs vest in equal, annual installments over a three year period beginning on the first anniversary of the date of grant at which time common stock is issued with respect to vested units.

 

The Company has also granted stock options under the plans. Options granted under the plans generally vest in equal, annual installments over a three 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 nine months ended September 30, 2019 was as follows:

                     
   Outstanding Awards  

Stock Option

 Weighted-

      
   Stock
Options
   RSUs   Total   Average
Exercise Price (a)
   Aggregate
Intrinsic Value
 
                          
Outstanding at December 31, 2018   830    98    928   $6.25      
Forfeited, cancelled or expired   (3)       (3)   6.42      
Granted       79    79          
Exercised or vested   (79)   (49)   (128)   4.87      
Outstanding at September 30, 2019   748    128    876   $6.39   $12,241 
                          
Exercisable at September 30, 2019   670        670   $6.30   $8,799 
                          
Available for future grant at December 31, 2018             249           
                          
Available for future grant at September 30, 2019             183           

 

 

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

 

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The number of shares available for future grants at September 30, 2019 does not include a total of up to 369 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 $648 and $1,514 of non-cash stock compensation expense for the three and nine months ended September 30, 2019, respectively. The Company recorded $358 and $1,025 of non-cash stock compensation expense for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, there was $2,321 of total unrecognized compensation costs related to non-vested stock option and RSU awards that are expected to be recognized over a weighted-average period of 1.99 years. The total intrinsic value of options exercised during the three and nine months ended September 30, 2019 was $196 and $1,609, respectively.

 

The Company also has an Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, as amended, through September 30, 2019, provides that a maximum of 300 shares may be sold under the Purchase Plan. There were 2 and 7 shares purchased under the plan for the three and nine months ended September 30, 2019, respectively, and a total of 1 and 5 shares purchased for the three and nine months ended September 30, 2018, respectively.

 

14.Income Per Share

 

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

 

                 
                 
   Three Months Ended   Nine Months Ended 
         
   September 30, 2019   September 30, 2018   September 30, 2019  

September 30, 2018

 
Numerator:                
Income (loss) from continuing operations before discontinued operations  $(290)  $2,202   $(2,831)  $5,549 
Loss on disposal of discontinued operations (Note 3)           (1,116)    
Loss from discontinued operations, net of income taxes (Note 3)       (299)   (597)   (870)
Net income (loss)  $(290)  $1,903   $(4,544)  $4,679 
                     
Denominator:                    
Basic – weighted shares outstanding   8,764    7,825    8,738    7,249 
Weighted shares assumed upon exercise of stock awards       997        1,111 
Diluted – weighted shares outstanding   8,764    8,822    8,738    8,360 
                     
Basic income (loss) per share attributable to IntriCon shareholders:                    
Continuing operations  $(0.03)  $0.28   $(0.32)  $0.77 
Discontinued operations       (0.04)   (0.20)   (0.12)
Net income (loss) per share:  $(0.03)  $0.24   $(0.52)  $0.65 
                     
Diluted income (loss) per share attributable to IntriCon shareholders:                    
Continuing operations  $(0.03)  $0.25   $(0.32)  $0.66 
Discontinued operations       (0.03)   (0.20)   (0.10)
Net income (loss) per share:  $(0.03)  $0.22   $(0.52)  $0.56 

 

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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. Individual components of basic and diluted income per share may not sum to the total income per share due to rounding.

 

For the three and nine months ended September 30, 2019, weighted average options and RSU’s outstanding of 755 and 125, and 778 and 125 were excluded from the dilutive calculation, respectively, as their effect would have been antidilutive based on losses in the period.

 

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 uses the law firm of Blank Rome LLP for legal services. A partner of that firm is the son-in-law of the Chairman of the Company’s Board of Directors, however, on May 1, 2019, the Chairman retired from the Company’s Board of Directors. For the three and nine months ended September 30, 2019, the Company paid that firm approximately $63 and $169 for legal services and costs. For the three and nine months ended September 30, 2018, the Company paid that firm approximately $238 and $413, respectively, for legal services and costs. The prior Chairman of our Board of Directors was considered independent under applicable Nasdaq and Securities and Exchange Commission rules because (i) no payments were made to the Chairman or the partner directly in exchange for the services provided by the law firm and (ii) the amounts paid to the law firm did not exceed the thresholds contained in the Nasdaq standards. Furthermore, the aforementioned partner does not provide any legal services to the Company and is not involved in billing matters.

 

 18

 

 

In January 2019, the Company purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience, an entity in which we owned 49% of the equity, for 1,750 Euros and the transfer back of our 49% ownership interest in Soundperience. See Note 9.

 

17.Revenue by Market

 

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

             
Timing of revenue recognition for the three months ended September 30, 2019:
 
   Products and services
transferred at point in
time
   Products and services
transferred over
time
   Total 
 Medical Biotelemetry:               
 Diabetes  $   $15,723   $15,723 
 Other Medical       3,376    3,376 
 Hearing Health:               
 Value Based DTEC   1,510        1,510 
 Value Based ITEC   2,443        2,443 
 Legacy OEM   2,405        2,405 
  Professional Audio Communications:   1,436        1,436 
Total Net Revenue  $7,794   $19,099   $26,893 

 

Timing of revenue recognition for the nine months ended September 30, 2019:                        

 

   Products and services
transferred at point in
time
   Products and services
transferred over
time
   Total 
 Medical Biotelemetry:               
 Diabetes  $   $50,837   $50,837 
 Other Medical       9,947    9,947 
 Hearing Health:               
 Value Based DTEC   4,876        4,876 
 Value Based ITEC   7,419        7,419 
 Legacy OEM   7,749        7,749 
  Professional Audio Communications:   4,972        4,972 
Total Net Revenue  $25,016   $60,784   $85,800 
                
Timing of revenue recognition for the three months ended September 30, 2018: 
                
   Products and services transferred at point in time   Products and services transferred over time   Total 
 Medical Biotelemetry:               
 Diabetes  $   $16,662   $16,662 
 Other Medical       2,694    2,694 
 Hearing Health:               
 Value Based DTEC   1,490        1,490 
 Value Based ITEC   3,660        3,660 
 Legacy OEM   3,056        3,056 
  Professional Audio Communications:   2,004        2,004 
Total Net Revenue  $10,210   $19,356   $29,566 

 

 19

 

 

Timing of revenue recognition for the nine months ended September 30, 2018: 
                
   Products and services transferred at point in time   Products and services transferred over time   Total 
 Medical Biotelemetry:               
 Diabetes  $   $47,531   $47,531 
 Other Medical       7,956    7,956 
 Hearing Health:               
 Value Based DTEC   5,327        5,327 
 Value Based ITEC   8,923        8,923 
 Legacy OEM   8,500        8,500 
 Professional Audio Communications:   5,353        5,353 
Total Net Revenue  $28,103   $55,487   $83,590 

 

 20

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Business Overview

 

Headquartered in Arden Hills, Minnesota, IntriCon Corporation (together with its subsidiaries referred to as the “Company”, “IntriCon,” “we”, “us” or “our”) is an international company engaged in designing, developing, engineering, manufacturing and distributing body-worn devices. In addition to its operations in Minnesota, the Company has facilities in Illinois, Singapore, Indonesia, 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, 2018. In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic 842). Topic 842 supersedes the lease accounting guidance previously set forth in the Accounting Standards Codification (ASC) Topic 840 “Leases,” and requires lessees to recognize a lease liability and a right-of-use asset for all leases that extend beyond one year. The Company adopted Topic 842 with a date of initial application of January 1, 2019.

 

Information contained in this section of this Quarterly Report on Form 10-Q and expressed in U.S. dollars is presented in thousands (000s), except for per share data and as otherwise noted. In addition, information in Item 2 excludes discontinued operations unless otherwise noted.

 

Market Overview

 

IntriCon serves the body-worn device market by designing, developing, engineering, manufacturing and distributing micro-miniature products, microelectronics, micro-mechanical assemblies, complete assemblies and software solutions, primarily for the medical biotelemetry market, the emerging value based hearing healthcare market, the hearing health direct-to-end-consumer and indirect-to-end-consumer markets and the professional audio communication market. Revenue from markets is reported on the respective medical biotelemetry, hearing health, hearing health direct-to-end-consumer and indirect-to-end-consumer and professional audio lines in the discussion of our results of operations in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17 “Revenue by Market” to the Company’s consolidated condensed financial statements included herein.

 

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 bricks and mortar and licensed audiologists to sell devices while controlling the channel dynamics. As a result, the average cost of a hearing aid sold in the US market today is over $2,400 per device, more than double the cost from 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 better 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.

 

We believe a perfect vortex of factors has come together over the last few years to enable the emergence of a market disruptive, high-quality, low cost distribution model. These factors include the continued consolidation of retail (causing escalating hearing aid prices), consumer outcry, consumer education, advancements in technology (such as behind-the-ear devices, advanced digital signal processing, low-power wireless, and self-fitting software) as well as regulatory actions and pronouncements by the U.S. Food and Drug Administration (FDA), the President’s Council of Advisors on Science and Technology and the National Academies of Science, Engineering and Medicine.

 

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In early January 2016, the FDA weighed in on low hearing aid penetration rates with an announcement that highlighted statistics from the National Institute on Deafness and Other Communication Disorders. They found that 37.5 million U.S. adults aged 18 and older report some form of hearing loss. However, only 30 percent of adults over 70, and 16 percent of those aged 20 to 69, who could benefit from wearing hearing aids, have ever used them. Based on these statistics, the FDA reopened the public comment period on draft guidance related to the agency’s premarket requirements for hearing aids and personal sound amplifiers (PSAPs). In April 2016, the FDA hosted a public workshop to, among other things, gather stakeholder and public input on draft guidance related to the agency’s premarket requirements for hearing aids and PSAPs. The FDA’s intent was to consider ways in which it can most effectively regulate hearing aids to promote accessibility and affordability while encouraging innovation. In December 2016, the FDA announced important steps to better support consumer access to hearing aids. The agency issued a guidance document explaining that it does not intend to enforce the requirement that individuals age 18 and older receive a medical evaluation or sign a waiver prior to purchasing most hearing aids, effective immediately. It also announced its commitment to consider creating a category of over-the-counter (OTC) hearing aids.

 

Furthermore, there were significant public policy developments during 2017. On August 18, 2017, President Donald Trump signed into law H.R. 2430, the FDA Reauthorization Act of 2017, which included 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. Additionally, the law mandates that the FDA establish an OTC hearing aid category for adults with “perceived” mild to moderate hearing loss within three years of passage of the legislation. The FDA also must finalize a rule within 180 days after the close of the comment period, detailing what level of safety, labeling and consumer protections will be included. We believe this law has the potential to remove the significant barriers existing today that prevent innovative hearing health solutions. We believe that this law will invigorate competition, spur innovation and facilitate the development of an ecosystem of hearing health care that provides affordable and accessible solutions to millions of unserved or underserved Americans. 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 bricks and mortar stores. The average price of a hearing aid sold through this channel is less than twenty-five percent of the average $2,400 device price typically sold through the legacy channel. The Company recently commissioned an ethnographic research study, which identified a $3+ billion annual VBHH market opportunity, fueled by an immediate addressable market of 6.8 million dissatisfied hearing aid users and 6.6 million current non-hearing aid users. In addition, this study assisted us in identifying our customer, various customer segmentations and personas. To best approach this market opportunity, we have focused our efforts to serve both the value-based Direct-to-End-Consumer (DTEC) and value-based Indirect-to-End-Consumer (ITEC) channels. Over the past decade we have invested in the manufacturing footprint, product technology and fitting software to provide individuals access to affordable, quality outcomes-based hearing healthcare.

 

Our DTEC represents a channel that sells products and services directly to the end consumer, which today consists of our Hearing Help Express (HHE) business. In December of 2017, we purchased the remaining 80% of HHE, a direct-to-end-consumer mail order hearing aid provider. However, the Company had been preparing to address this market long before the acquisition of HHE and has spent the last decade investing in the technology and low-cost manufacturing to design and build superior devices and fitting solutions. With this acquisition, we believe we now have the channel infrastructure to directly reach consumers and—importantly for millions—the ability to offer high-quality hearing healthcare at a fraction of the cost. The Company’s devices and technologies coupled with HHE’s high-touch care, outcomes based, and hassle free telemedicine model has created a complete eco-system of hearing healthcare in which the Company intends to serve the $3+ billion market. Through our other VBHH initiatives and tests, we have formed alliances with other key partners, which have given us experience and vital insight as we move aggressively into a more consumer-facing role. HHE provides an efficient, direct-to-end-consumer channel to reach consumers who likely do not have insurance covering hearing devices. This is a channel that we can build on and expand via technology—and one that is complementary with many of our existing relationships.

 

22 

 

 

The Company is also focused on serving its 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 upcoming OTC hearing aid regulations. 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.

 

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 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.

 

Medical Biotelemetry

 

In the medical biotelemetry market, the Company is focused on sales of biotelemetry devices for life-critical diagnostic monitoring. The Company manufactures microelectronics, micro-mechanical assemblies, high-precision injection-molded plastic components and complete biotelemetry 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.

 

IntriCon currently has a presence in the diabetes, cardiac 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 standalone CGM system. In September 2016, the FDA approved the MiniMed 670G, 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 MiniMed 670G was launched in the U.S. and Medtronic began fulfilling orders from patients enrolled in their Priority Access Program. In addition to the continued roll-out in the U.S., we anticipate seeing momentum of continuous glucose monitoring adoption and increased penetration in international markets commencing in the next few months following clearance in Germany, and other targeted EU countries. On the standalone CGM front, in March 2018, the FDA approved the Guardian Connect, Medtronic’s standalone CGM system that allows patients to stay ahead of high and low glucose events. Looking ahead, we believe there are opportunities to expand our diabetes product offering with Medtronic, as well as move into new markets outside of the diabetes market.

 

IntriCon has a suite of medical coils and micro coils that it offers to various original equipment manufacturing (OEM) customers. These products are currently used in pacemaker programming and interventional catheter positioning applications. In 2019, we secured a new large medical customer for our proprietary medical coils to be used for pacemaker programming in their devices.

 

IntriCon manufactures bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system as well as a family of safety needle products for an OEM customer that utilizes IntriCon’s insert and straight molding capabilities. These products are assembled using full automation, including built-in quality checks within the production lines.

 

23 

 

 

Throughout 2018, we expanded our infrastructure to support anticipated growth from current medical biotelemetry customers and future growth from increased business development. Expansion efforts in 2018 included a newly leased 37,000-square-foot medical biotelemetry manufacturing and clean room facility in Minnesota, an additional 10,000-square-foot medical assembly space in Singapore, 13 new molding presses and a high-speed printed circuit board assembly line. In addition to these investments, our current customers invested several million dollars in tooling and automation within our facilities. While we have begun limited production on certain products in our new facilities, we are still working with current medical biotelemetry customers to complete required validation and qualification of several key production lines.

 

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

 

Professional Audio Communications

 

IntriCon entered the high-quality audio communication device market in 2001, and now has a line of miniature, professional audio headset products used by customers focusing on emergency response needs. The line includes several communication devices that are extremely portable and perform well in noisy or hazardous environments. These products are well suited for applications in the fire, law enforcement, safety, aviation and military markets. In addition, the Company has a line of miniature ear- and head-worn devices used by performers and support staff in the music and stage performance markets.

 

Core Technologies Overview:

 

Our core technologies expertise is focused on four main markets: medical biotelemetry, hearing health, hearing health direct-to-end-consumer and professional audio communications. Over the past several years, the Company has increased investments in the continued development of five critical core technologies: Ultra-Low-Power (ULP) Digital Signal Processing (DSP), ULP Wireless, Fitting Software, Microminiaturization, and Miniature Transducers. These five core technologies serve as the foundation of current and future product platform development, designed to meet the rising demand for smaller, portable, more advanced devices and the need for greater efficiencies in the delivery models. The continued advancements in this area have allowed the Company to further enhance the mobility and effectiveness of miniature body-worn devices.

 

ULP DSP

DSP converts real-world analog signals into a digital format. Through our nanoDSP™ technology, IntriCon offers an extensive range of ULP DSP amplifiers for hearing, medical and professional audio applications. Our proprietary nanoDSP incorporates advanced ultra-miniature hardware with sophisticated signal processing algorithms to produce devices that are smaller and more effective. The Company further expanded its DSP portfolio including improvements to its Reliant CLEAR™ feedback canceller, offering increased added stable gain and faster reaction time. Additionally, the DSP technologies are utilized in the Audion8™, our eight-channel hearing aid amplifier, and the Audion16™, our wide dynamic range compression sixteen-channel hearing aid amplifier. The amplifiers are feature-rich and are designed to fit a wide array of applications. In addition to multiple compression channels, the amplifiers have a complete set of proven adaptive features which greatly improve the user experience.

 

ULP Wireless

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

 

24 

 

 

IntriCon has completed the commercialization of the third generation of Physiolink (Physiolink 3) wireless technology, which will be incorporated into product platforms serving the medical biotelemetry, hearing health, hearing health direct-to-end-consumer and professional audio communication markets. This system is based on 2.4GHz proprietary digital radio protocol in the industrial-scientific-medical (ISM) frequency band and enables audio and data streaming and command and control to ear-worn and body-worn applications over distances of up to ten meters. The Physiolink 3 technology can be used to increase productivity in the emerging VBHH channels through in office wireless programming, remote cloud based fitting and consumer directed self-fitting of hearing aids. This will provide both greater access and lower costs for patients. In addition, remote control functions will improve the patient experience while using the device especially for those with diminished dexterity. The Physiolink 3 technology builds on the Physiolink 2 capabilities by adding wireless streaming at, what we believe, are much lower power levels than any technology currently on the market. This will allow for accessories to enhance the user experience in noisy environments by allowing audio streaming directly to the hearing aid.

 

Fitting Software

The ability to efficiently and effectively fit hearing aids is critical to building a value based eco-system of hearing healthcare. By developing more advanced fitting software systems, individuals can benefit from fittings that conform to their specific loss, while eliminating the need for an in-person appointment. In addition to the traditional fitting software, IntriFit, used in the conventional channel, IntriCon has made significant investments in various advanced fitting software solutions, including its purchase of the source code for the Sentibo Smart Brain self-fitting software, that can enable remote and self-fitting solutions. IntriCon believes these advanced fitting solutions, along with the other components of the eco-system, will drive access, affordability and superior customer satisfaction to the millions of individuals that cannot receive care today, primarily due to high cost and low access.

 

In January 2019, the Company purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience. The Sentibo Smart Brain System is the first psycho-acoustic way of analyzing peripheral hearing and central hearing processing. It was developed by an international research team based on the latest scientific findings from the fields of audiology and brain research. We believe this software technology is a critical component to our domestic value-based hearing healthcare model. Sentibo, as well as our other proprietary fitting systems, are designed to improve both channel productivity and the quality of first-time fittings, resulting in lower prices, greater access and increased customer satisfaction. IntriCon expects to expand its advanced fitting solutions in select domestic VBHH channels in 2020.

 

Microminiaturization

IntriCon excels at miniaturizing body-worn devices. We began honing our microminiaturization skills over 30 years ago, supplying components to the hearing health industry. Our core miniaturization technology allows us to make devices for our markets that are one cubic inch and smaller. We also are specialists in devices that run on very low power, as evidenced by our ULP wireless and DSP. Less power means a smaller battery, which enables us to reduce size even further, and develop devices that fit into the palm of one’s hand.

 

Miniature Transducers

IntriCon’s advanced transducer technology has been pushing the limits of size and performance for over a decade. Included in our transducer line are our miniature medical coils and micro coils used in pacemaker programming and interventional catheter positioning applications. We believe that with the increase of greater interventional care, our coil technology harbors significant value.

 

Forward-Looking and Cautionary Statements

 

Certain statements included in this Quarterly Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission, which are not historical facts, or that include forward-looking terminology such as “may”, “will”, “believe”, “anticipate”, “expect”, “should”, “optimistic” “continue”, “estimate”, “intend”, “plan”, “would”, “could”, “guidance”, “potential”, “opportunity”, “project”, “forecast”, “confident”, “projections”, “schedule”, “designed”, “future”, “discussion”, “if” or the negative thereof or other variations thereof, are forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to the Company’s Condensed Consolidated Financial Statements” such as net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs, assumptions used to calculate future level of funding of employee benefit plans, the adequacy of insurance coverage and the impact of new accounting pronouncements and litigation. Forward-looking statements also include, without limitation, statements as to the Company’s expected future results of operations and growth, strategic alliances and their benefits, government regulation, potential increases in demand for the Company’s products, the Company’s ability to meet working capital requirements, the Company’s business strategy, the expected increases in operating efficiencies, anticipated trends in the Company’s markets, estimates of goodwill impairments and amortization expense of other intangible assets, the effects of litigation and the amount of insurance coverage, and statements as to trends or the Company’s or management’s beliefs, expectations and opinions.

 

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Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Quarterly Report on Form 10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including, without limitation, the following:

 

  our ability to successfully implement our business and growth strategy;
     
  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;
     
  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;
     
  our ability to identify, complete and integrate acquisitions;
     
  effects of legislation and regulation, including 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;

 

26 

 

 

  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, 2018, and other risks described elsewhere in this Quarterly Report on Form 10-Q, or in other filings the Company makes from time to time with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period.

 

Certain accounting estimates and assumptions are particularly sensitive because their significance to the consolidated condensed financial statements and the possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions include the Company’s revenue recognition, accounts receivable reserves, inventory valuation, goodwill, long-lived assets, deferred taxes policies, employee benefit obligations, lease assets and liabilities and investment securities. These and other significant accounting policies are described in and incorporated by reference from “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1 to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

Results of Operations

 

Revenue, net

 

Below is a summary of our revenue by main markets for the three and nine months ended September 30, 2019 and 2018:

 

           Change 
Three Months Ended September 30  2019   2018   Dollars   Percent 
 Medical Biotelemetry:                    
 Diabetes  $15,723   $16,662   $(939)   -5.6% 
 Other Medical   3,376    2,694    682    25.3% 
 Total  $19,099   $19,356   $(257)   -1.3% 
 Hearing Health:                    
 Value Based DTEC  $1,510   $1,490   $20    1.3% 
 Value Based ITEC   2,443    3,660    (1,217)   -33.3% 
 Legacy OEM   2,405    3,056    (651)   -21.3% 
 Total  $6,358   $8,206   $(1,848)   -22.5% 
 Professional Audio Communications  $1,436   $2,004   $(568)   -28.3% 
Total Net Revenue  $26,893   $29,566   $(2,673)   -9.0% 

 

           Change 
Nine Months Ended September 30  2019   2018   Dollars   Percent 
 Medical Biotelemetry:                    
 Diabetes  $50,837   $47,531   $3,306    7.0% 
 Other Medical   9,947    7,956    1,991    25.0% 
 Total  $60,784   $55,487   $5,297    9.5% 
 Hearing Health:                    
 Value Based DTEC  $4,876   $5,327   $(451)   -8.5% 
 Value Based ITEC   7,419    8,923    (1,504)   -16.9% 
 Legacy OEM   7,749    8,500    (751)   -8.8% 
 Total  $20,044   $22,750   $(2,706)   -11.9% 
 Professional Audio Communications  $4,972   $5,353   $(381)   -7.1% 
Total Net Revenue  $85,800   $83,590   $2,210    2.6% 

 

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For the three months ended September 30, 2019, we experienced a decrease of 5.6% in net revenue in the diabetes medical biotelemetry market compared to the same period in 2018 driven by the timing of certain international orders filtering through various local regulatory requirements. For the nine months ended September 30, 2019, we experienced an increase of 7.0% in net revenue in the diabetes medical biotelemetry market compared to the same period in 2018 driven by market share growth for legacy products and the introduction of new products. IntriCon currently serves this market by offering medical manufacturers the capabilities to design, develop and manufacture medical devices that are easier to use, are more miniature, use less power, and are lighter. IntriCon has a strong presence in the diabetes market with its Medtronic partnership. The Company believes there are growth opportunities in this market as well as other emerging biotelemetry and home care markets that could benefit from its capabilities to develop devices that are more technologically advanced, smaller and lightweight.

 

All other medical net revenue for the three and nine months ended September 30, 2019 increased 25.3% and 25.0%, respectively, compared to the same period in 2018. The increase was driven by the addition of a new customer in our medical coils business.

 

Net revenue in our hearing health value based direct-to-end-consumer (DTEC) business for the three and nine months ended September 30, 2019 increased 1.3% and decreased 8.5%, respectively, compared to the same period in 2018 due to timing of orders and sales mix.

 

Net revenue in our hearing health value based indirect-to-end-consumer (ITEC) business for the three and nine months ended September 30, 2019 decreased 33.3% and 16.9%, respectively, compared to the same period in 2018. The revenue decline during the third quarter was largely attributed to restructuring activities within a large insurance customer’s hearing health business, as they pivot towards a more traditional “brick-and-mortar” approach that no longer aligns with our partnership strategy to reach the end customer.

 

Net revenue in our hearing health legacy OEM business for the three and nine months ended September 30, 2019 decreased 21.3% and 8.8%, respectively, compared to the same period in 2018 due to sales mix.

 

Net revenue to the professional audio device sector decreased 28.3% and 7.1% for the three and nine months ended September 30, 2019, respectively, compared to the same period in 2018. IntriCon will continue to leverage its core technology in professional audio to support existing customers, as well as pursue related hearing health and medical product opportunities.

 

Gross profit

 

Gross profit, both in dollars and as a percent of revenue, for the three and nine months ended September 30, 2019 and 2018, was as follows:

 

   2019   2018   Change 
       Percent       Percent         
Three Months Ended September 30  Dollars   of Revenue   Dollars   of Revenue   Dollars   Percent 
Gross Profit  $6,773    25.2%   $9,330    31.6%   $(2,557)   -27.4% 
                               

 

   2019   2018   Change 
       Percent       Percent         
Nine Months Ended September 30  Dollars   of Revenue   Dollars   of Revenue   Dollars   Percent 
Gross Profit  $23,547    27.4%   $27,155    32.5%   $(3,608)   -13.3% 

 

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The 2019 gross profit decreased over the comparable prior year period primarily due to the ongoing validation and qualification expense as well as excess capacity related to the recent manufacturing expansion to meet the higher volume requirements of our existing and future customers.

 

Sales and Marketing, General and Administrative and Research and Development Expenses

 

Sales and marketing, general and administrative and research and development expenses for the three and nine months ended September 30, 2019 and 2018 were as follows:

 

   2019   2018   Change 
       Percent       Percent         
Three Months Ended September 30  Dollars   of Revenue   Dollars   of Revenue   Dollars   Percent 
Sales and Marketing  $2,609    9.7%   $2,784    9.4%   $(175)   -6.3% 
General and Administrative   3,715    13.8%    2,921    9.9%    794    27.2% 
Research and Development   840    3.1%    1,251    4.2%    (411)   -32.9% 

 

   2019   2018   Change 
       Percent       Percent         
Nine Months Ended September 30  Dollars   of Revenue   Dollars   of Revenue   Dollars   Percent 
Sales and Marketing  $9,071    10.6%   $8,023    9.6%   $1,048    13.1% 
General and Administrative   10,551    12.3%    8,429    10.1%    2,122    25.2% 
Research and Development   2,902    3.4%    3,693    4.4%    (791)   -21.4% 

 

Sales and marketing expense for the three months ended September 30, 2019 was $2,609 compared to $2,784 for the comparable period in 2018. The decrease was due to lower DTEC marketing, support costs and wages. Sales and marketing expense for the nine months ended September 30, 2019 was $9,071 compared to $8,023 for the comparable period in 2018. The increase was primarily due to additional support costs and wages. 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 decreased over the prior year periods due to a reduction in outside service and support costs.

 

Impairment loss

 

Impairment loss for the three and nine months ended September 30, 2019 was $0 and $3,765, respectively. There were no impairment losses identified for the comparable prior year periods. The impairment losses related to a write-off of goodwill and intangible assets due to negative cash flows within our Hearing Help Express reporting unit.

 

Interest income (expense), net

 

Interest income (expense), net for the three and nine months ended September 30, 2019 was $240 and $703 compared to ($48) and ($453) for the comparable three and nine month periods in 2018. This increase was due to the payoff of all of our credit facility debt in 2018 which reduced our interest expense along with interest income earned in the current year on our investment accounts.

 

Other expense, net

 

Other expense, net for the three and nine months ended September 30, 2019 was $52 and $458 compared to $221 and $650 for the same period in 2018.

 

Income tax expense (benefit)

 

Income tax expense (benefit) for the three and nine months ended September 30, 2019 was $87 and $334 compared to ($97) and $358 for the same period in 2018.

 

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Liquidity and Capital Resources

 

As of September 30, 2019, we had $8,688 of cash on hand. Sources of our cash for the nine months ended September 30, 2019 have been from our operating activities, as described below. The Company’s cash flows from operating, investing and financing activities, as reflected in the statement of cash flows, are summarized as follows:

 

   Nine Months Ended 
   September 30, 2019   September 30, 2018 
Cash provided by (used in) from continuing operations:          
Operating activities  $1,783   $(1,728)
Investing activities   (929)   (4,339)
Financing activities   (123)   52,300 
Effect of exchange rate changes on cash   (46)   (24)
Net increase in cash from continuing operations  $685   $46,209 

 

The most significant items that contributed to the $1,783 of cash provided by operating activities were non-cash add backs for impairment loss, depreciation and amortization and stock-based compensation expense, as well as a decrease in accounts receivable and inventory partially offset by decreases in accounts payable and accrued expenses as well as increases in contract assets.

 

Net cash used in investing activities of ($929) primarily consisted of purchases of machinery and equipment, investment securities and other assets along with our investments in partnerships partially offset by proceeds from sale and maturity of investment securities.

 

Net cash used in financing activities of ($123) 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 September 30, 2019, provides for a $7,000 revolving credit facility, with a $200 sub facility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Company’s eligible trade receivables and eligible inventory, and eligible equipment less a reserve. The credit facility matures on December 15, 2022.

 

On April 17, 2019, the Company entered into a Thirteenth Amendment to the Loan and Security Agreement with CIBC Bank USA which: reduced our borrowing capacity to its current $7,000 level; lessened restrictions surrounding acquisitions, business investments, distributions and disposition of assets; eliminated the mandatory prepayment requirement with respect to proceeds from asset sales and capital and debt financings; and eliminated the annual capital expenditure covenant.

 

We obtained a waiver for our failure to meet the fixed charge coverage ratio covenant in the credit facility as of September 30, 2019. After giving effect to the waiver, the Company was in compliance with all applicable covenants under the credit facility as of September 30, 2019.

 

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.

 

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Capital Adequacy

 

We believe that funds raised from our August 2018 public offering, funds expected to be generated from operations 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 September 30, 2019, and December 31, 2018, the Company had a total borrowing capacity of $10,572 and $13,884, respectively, with no borrowings outstanding at each reporting period.

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

ITEM 4. Controls and Procedures

 

The Company’s management, with the participation of its chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of September 30, 2019 (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 September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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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, 2018, which could materially affect the Company’s business, financial condition or future results. The risk factors in the Company’s Annual Report on Form 10-K have not materially changed. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

ITEM 3. Defaults upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. Other Information

 

None.

 

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ITEM 6. Exhibits

 

(a)Exhibits

 

10.1Master Supply Agreement effective as of May 14, 2019 between Medtronic, Inc. and the Company and related Business Unit Supply Agreement and Automation Agreement (Certain provisions of this exhibit have been omitted pursuant to Item 601 (b)(10)(iv) of Regulation S-K.)*

 

31.1*Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1*Certification of principal executive officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2*Certification of principal financial officer to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101*The following materials from IntriCon Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets (Unaudited) as of September 30, 2019 and December 31, 2018; (ii) Consolidated Condensed Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2019, and 2018; (iii) Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2019, and 2018; (iv) Consolidated Condensed Statements of Equity (Unaudited) for the Nine Months Ended September 30, 2019, and 2018; (v) Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019, and 2018; and (vi) Notes to Consolidated Condensed Financial Statements (Unaudited)*

 

 

*Filed herewith.

 

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SIGNATURES

 

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

 

    INTRICON CORPORATION
    (Registrant)
       
Date: November 8, 2019 By:  /s/ Mark S. Gorder  
  Mark S. Gorder  
  President and Chief Executive Officer
  (principal executive officer)
       
Date: November 8, 2019 By:  /s/ Scott Longval  
  Scott Longval  
  Executive Vice President, Chief Operating
Officer, Chief Financial Officer and Secretary
  (principal financial officer)  

  

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