Management of IntriCon Corporation and
its subsidiaries (“the Company”) is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness
of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed
the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016, using criteria set
forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework). Based on this assessment, the Company’s management believes that, as of December 31, 2016, the Company’s
internal control over financial reporting was effective based on those criteria.
This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to a
provision of the Dodd Frank Act, which eliminated such requirement for “smaller reporting companies,” as defined in
SEC regulations, such as IntriCon.
There were no changes in our internal control
over financial reporting during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
Notes to Consolidated Financial Statements
(In Thousands, Except Per Share Data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Headquartered in Arden Hills, Minnesota,
IntriCon Corporation (together with its subsidiaries, referred to as the Company, we, us or our) is an international company engaged
in designing, developing, engineering, manufacturing and distributing body-worn devices. The Company designs, develops, engineers,
manufactures and distributes micro-miniature products, microelectronics, micro-mechanical assemblies, complete assemblies and software
solutions, primarily for the emerging value based hearing healthcare market, the medical bio-telemetry market and the professional
audio communication market. In addition to its operations in the state of Minnesota, the Company has facilities in the state of
Illinois, Singapore, Indonesia, the United Kingdom and Germany.
Basis of Presentation
– In
December 2016, the Company’s board of directors approved plans to discontinue its cardiac diagnostic monitoring business.
The Company sold the cardiac diagnostic monitoring business on February 17, 2017 to Datrix LLC. On June 13, 2013, the Company announced
a global restructuring plan to accelerate future growth and reduce costs. As part of the restructuring, the Company disposed of
the assets relating to its security and certain microphone and receiver operations. For all periods presented, the Company classified
these businesses as discontinued operations, and, accordingly, has reclassified historical financial data presented herein. See
further information in Notes 2 and 3.
Consolidation
– 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.
Principles of 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.
Discontinued Operations
–
The Company records discontinued operations when the disposal of separately identified business unit constitutes a significant
strategic shift in the Company’s operations.
Non-Controlling Interests
–
The Company owns 50 percent of earVenture and 20 percent of Hearing Help Express. The Company has consolidated the results of earVenture
for all periods presented and Hearing Help Express from November 1, 2016 to December 31, 2016 based on the Company’s ability
to control the operations of the entities and the likelihood that the Company bears the largest risk and reward of their financial
results. The remaining ownership is accounted for as a non-controlling interest and reported as part of equity in the consolidated
financial statements. The Company allocates gains and losses to the non-controlling interest even when such allocation might result
in a deficit balance, reducing the losses attributed to the controlling interest. Changes in ownership interests are treated as
equity transactions if the Company maintains control.
Segment Disclosures
– A business
segment is a distinguishable component of an enterprise that is engaged in providing an individual product or service or a group
of related products or services and that is subject to risks and returns that are different from those of other business segments.
The Company has determined that the Company operates in two reportable segments, our body-worn device segment and our direct to
consumer hearing health segment, as further described in Note 5.
Use of Estimates
– The Company
makes estimates and assumptions relating to the reporting of assets and liabilities, the recording of reported amounts of revenues
and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements. Actual
results could differ from those estimates. Considerable management judgment is necessary in estimating future cash flows and other
factors affecting the valuation of goodwill, intangible assets, and employee benefit obligations including the operating and macroeconomic
factors that may affect them. The Company uses historical financial information, internal plans and projections and industry information
in making such estimates.
Revenue Recognition
–For its
body-worn device segment, the Company recognizes revenue when the customer takes ownership, primarily upon product shipment, and
assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales
price is fixed or determinable. For its direct to consumer segment, the Company recognizes revenue after the customer trial period
has ended (generally 60 days from shipment).
Body-worn device segment customers have
30 days to notify the Company if the product is damaged or defective. Beyond that, there are no significant obligations that remain
after shipment other than warranty obligations. Contracts with customers do not include product return rights; however, the Company
may elect in certain circumstances to accept returns of products. The Company records revenue for product sales net of returns.
Sales and use tax are reported on a net basis. The Company defers recognition of revenue on discounts to customers if discounts
are considered significant.
In general, the Company warrants its products
to be free from defects in material and workmanship and will fully conform to and perform to specifications for a period of one
year. The Company develops a warranty reserve based on historical experience.
Shipping and Handling Costs
–The
Company includes shipping and handling revenues in sales and shipping and handling costs in cost of sales.
Fair Value of Financial Instruments
– The carrying value of cash, accounts receivable, notes payable, and trade accounts payables approximate fair value because
of the short maturity of those instruments. The fair values of the Company’s long-term debt obligations, pension and post-retirement
obligations approximate their carrying values based upon current market rates of interest.
Concentration of Cash
– The
Company deposits its cash in what management believes are high credit quality financial institutions. The balance, at times, may
exceed federally insured limits.
Restricted Cash –
Restricted
cash consists of deposits required to secure a credit facility at our Singapore location and deposits required to fund retirement
related benefits for certain employees.
Accounts Receivable
– The
Company reviews customers’ credit history before extending unsecured credit and establishes an allowance for uncollectible
accounts based upon factors surrounding the credit risk of specific customers and other information. Invoices are generally due
30 days after presentation. Accounts receivable over 30 days are considered past due. The Company does not accrue interest on past
due accounts receivables. Receivables are written off once all collection attempts have failed and are based on individual credit
evaluation and specific circumstances of the customer. The allowance for doubtful accounts balance was $170 and $135 as of December
31, 2016 and 2015, respectively.
Inventories
– Inventories
are stated at the lower of cost or market. The cost of the inventories is determined by the first-in, first-out method.
Property, Plant and Equipment
–
Property, plant and equipment are carried at cost. Depreciation is computed on a straight-line basis using estimated useful lives
of 5 to 40 years for buildings and improvements and 3 to 12 years for machinery and equipment. Leasehold improvements are amortized
using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Improvements are capitalized
and expenditures for maintenance, repairs and minor renewals are charged to expense when incurred. At the time assets are retired
or sold, the costs and accumulated depreciation are eliminated and the resulting gain or loss, if any, is reflected in the consolidated
statement of operations. Depreciation expense was $1,870, $1,524 and $1,955 for the years ended December 31, 2016, 2015, and 2014,
respectively.
Intangible Assets –
Definite-lived
intangible assets consist of various acquired Hearing Help Express trademarks and customer relationships which are amortized over
eighteen to twenty years.
Impairment
of Long-lived Assets and Long-lived Assets to be Disposed of
– The Company reviews its long-lived assets, certain identifiable
intangibles, and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
group to future net undiscounted cash flows expected to be generated by the asset group. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. As of December
31, 2016, the Company has determined that no impairment of long-lived assets from continuing operations exists.
Goodwill is reviewed
for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The
Company utilizes the two-step impairment analysis and elected not to use the qualitative assessment or “step zero”
approach. In the two-step impairment analysis, in step one, the fair value of each reporting unit is compared to its carrying value,
including goodwill. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds
the fair value, the goodwill of the reporting unit is potentially impaired and the Company completes step two in order to measure
the impairment loss. In step two, the Company calculates the implied fair value of goodwill by deducting the fair value of all
tangible and intangible net assets (including unrecognized intangible assets) of the reporting unit from the fair value of the
reporting unit. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment
loss, in the period identified, equal to the difference. The Company has concluded that no impairment of goodwill or intangible
assets occurred during the year ended December 31, 2016.
Other assets, net
– The principal
amounts included in other assets, net are technology fees. Amortization expense was $159, $231 and $227 for the years ended December
31, 2016, 2015, and 2014, respectively.
Investments in Partnerships
–
Certain of the Company’s investments in equity securities are long-term, strategic investments in companies. In certain circumstances,
the Company accounts for these investments under the equity method of accounting. Under the equity method the Company records the
investment at the amount the Company paid and adjusts for the Company’s share of the investee’s income or loss and
dividends paid. The investments are reviewed quarterly for changes in circumstances or the occurrence of events that suggest the
Company’s investment may not be recoverable. To date there have been no impairment losses recognized.
Income Taxes
– Income taxes
are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases, operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Valuation allowances are established to the extent the future benefit from the deferred tax assets realization is more likely than
not unable to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The Company recognizes accrued interest and penalties related to uncertain tax positions
in income tax expense. At December 31, 2016 the Company had no accrual for the payment of tax related interest and there was no
tax interest or penalties recognized in the consolidated statements of operations. The Company’s federal and state tax returns
are potentially open to examinations for fiscal years 2003-2005 and 2009-2016.
Employee Benefit Obligations
–
The Company provides pension and health care insurance for certain domestic retirees and employees of its operations discontinued
in 2005. These obligations have been included in continuing operations as the Company retained these obligations. The Company also
provides retirement related benefits for certain foreign employees. The Company measures the costs of its obligation based on actuarial
determinations. The net periodic costs are recognized as employees render the services necessary to earn the post-retirement benefit
and the obligation is recorded on the consolidated balance sheet as accrued pension liabilities.
Assumptions about the discount rate, the
expected rate of return on plan assets and the future rate of compensation increases are determined by the Company. The Company
believes the assumptions are within accepted guidelines and ranges. However, these actuarial assumptions could vary materially
from actual results due to economic events and different rates of retirement, mortality and withdrawal.
Stock Option and Equity Plans
–
Under the Company stock-based compensation plans, executives, employees and outside directors receive awards of options to purchase
common stock. Under all awards, the terms are fixed at the grant date. Generally, the exercise price equals the market price of
the Company’s stock on the date of the grant. Options under the plans generally vest over three years, and have a maximum
term of 10 years. The plans also permits the granting of stock awards, stock appreciation rights, restricted stock units and other
equity based awards. The Company expenses grant-date fair values of stock options and awards ratably over the vesting period of
the related share-based award.
Product Warranty
– The Company
offers a warranty on various products and services. The Company estimates the costs that may be incurred under its warranties and
records a liability in the amount of such costs at the time the product is sold. Factors that affect the Company’s warranty
liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company
periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The amount of the
reserve recorded is equal to the costs to repair or otherwise satisfy the claim.
Patent Costs –
Costs associated
with the submission of a patent application are expensed as incurred given the uncertainty of the patents providing future economic
benefit to the Company.
Advertising Costs
– Advertising
costs are charged to expense as incurred.
Research and Development Costs
–
Research and development costs, net of customer funding, amounted to $4,688, $4,279, and $4,291 in 2016, 2015 and 2014, respectively,
and are charged to expense when incurred, net of customer funding. The Company accrues proceeds received under governmental grants
when earned and estimable as a reduction to research and development expense.
Customer Funded Tooling Costs –
The Company designs and develops molds and tools for reimbursement on behalf of several customers. Costs associated with the
design and development of the molds and tools are charged to expense, net of the customer reimbursement amount. Net customer funded
tooling resulted in income of $102, $121 and $140 for the years ended December 31, 2016, 2015 and 2014, respectively, and is included
in cost of goods sold in the consolidated statements of operations.
Income (Loss) Per Share
–
Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock
outstanding during the year. Diluted income (loss) per common share reflects the potential dilution of securities that could share
in the earnings. The Company uses the treasury stock method for calculating the dilutive effect of stock options.
Comprehensive Income (Loss)
–
Comprehensive income (loss) consists of net income (loss), change in fair value of derivative instruments, pension and post-retirement
obligations and foreign currency translation adjustments and is presented in the consolidated statements of comprehensive income
(loss).
Foreign Currency Translation
–
The Company’s German subsidiary accounts for its transactions in its functional currency, the euro. The Company’s United
Kingdom subsidiary accounts for its transactions in its functional currency, the British pound. Foreign assets and liabilities
are translated into United States dollars using the year-end exchange rates. Equity is translated at average historical exchange
rates. Results of operations are translated using the average exchange rates throughout the year. Translation gains or losses are
accumulated as a separate component of equity.
Derivative Financial Instruments
— When deemed appropriate, the Company enters into derivative instruments. The Company does not use derivative financial
instruments for speculative or trading purposes. All derivative transactions are linked to an existing balance sheet item or firm
commitment, and the notional amount does not exceed the value of the exposure being hedged.
We recognize all derivative financial instruments
in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Generally,
changes in fair values of derivatives accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded
in other comprehensive income (loss), net of tax or, if ineffective, on the consolidated statements of operations.
New Accounting Pronouncements
In January 2017, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-04 “Intangibles — Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment.” This new standard simplifies the accounting for goodwill impairments
by eliminating step 2 from the goodwill impairment test. The amendments in this update are effective for annual impairment tests
in fiscal years beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed on or after
January 1, 2017. The Company does not anticipate that the adoption of this new standard will have a material impact on its consolidated
financial statements.
In February 2016, the FASB issued its final
standard on accounting for leases. This standard, issued as ASU 2016-02, requires that an entity that is a lessee recognize lease
assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. This
update is effective for financial statement periods beginning after December 15, 2018, with earlier application permitted. The
Company has not yet determined the impact of this pronouncement on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No.
2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method
of Accounting.” Among other things, the amendments in ASU 2016-07 eliminate the requirement that when an investment qualifies
for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor
must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity
method had been in effect during all previous periods that the investment had been held. The amendments require that the equity
method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s
previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method
accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required.
The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method
of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date
the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively
upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of
the equity method. Early adoption is permitted. The Company has determined the impact of this pronouncement on its consolidated
financial statements and related disclosures to be immaterial.
In March 2016, the FASB issued its final
standard on simplifying the accounting for share-based payment awards. This standard, issued as ASU 2016-09, simplifies several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification on the statement
of cash flows, and accounting for forfeitures. This update is effective for financial statement periods beginning after December
15, 2016, with early adoption permitted. The Company has determined the impact of this pronouncement on its consolidated financial
statements and related disclosures to be immaterial.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740) Related to the Balance Sheet Classification of Deferred Taxes which will require entities to present deferred
tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified balance sheet. The ASU simplifies the current
guidance (ASC 740-10-45-4), which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified
balance sheet. The ASU is effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within
those annual periods. The Company has determined the impact of this pronouncement on its consolidated financial statements and
related disclosures to be immaterial.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330) Related to Simplifying the Measurement of Inventory which applies to all inventory except inventory that
is measured using last-in, first-out (“LIFO”) or the retail inventory method. Inventory measured using first-in, first-out
(“FIFO”) or average cost is covered by the new amendments. Inventory within the scope of the new guidance should be
measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged
for inventory measured using LIFO or the retail inventory method. The amendments will take effect for public business entities
for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance should
be applied prospectively, and earlier application is permitted as of the beginning of an interim or annual reporting period. The
Company has determined the impact of this pronouncement on its consolidated financial statements and related disclosures to be
immaterial.
In April 2015, the FASB issued ASU No.
2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 amends existing guidance to require the presentation
of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a
deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted.
The Company implemented this ASU in 2016 which had an immaterial effect.
In 2015, the FASB issued ASU No. 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud
Computing Arrangement. The amendments in ASU 2015-05 provide guidance to customers about whether a cloud computing arrangement
includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for
the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing
arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments
do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software
licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The Company
has determined the impact of this pronouncement on its consolidated financial statements and related disclosures to be immaterial.
In May 2014, the FASB issued new accounting
guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate
all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue
is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods
or services. This guidance will be effective for the Company beginning January 1, 2018 and can be applied either retrospectively
to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company has established a timeline
related to the implementation of the standard and believes the timeline is sufficient to implement the new standard. We are currently
assessing the impact on the Company’s consolidated financial statements.
In 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15, ‘Presentation
of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern, intended to define management’s responsibility to evaluate whether there is substantial doubt about
an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective
for the Company in the year ended December 31, 2016, and interim periods beginning March 31, 2017, with early application permitted.
The Company has determined the impact of this pronouncement on its consolidated financial statements and related disclosures to
be immaterial.
2. DISCONTINUED OPERATIONS
On June 13, 2013, the Company announced a global strategic restructuring plan designed to accelerate the
Company’s future growth and reduce costs. As part of the global strategic restructuring plan, the Company decided to exit
the security and certain microphone and receiver operations. On January 27, 2014, the Company completed the sale of the security
business and certain microphone and receiver operations of IntriCon Tibbetts Corporation, IntriCon’s wholly owned subsidiary
based in Camden, Maine, to Sierra Peaks Corporation, pursuant to an Asset Purchase Agreement entered into on January 27, 2014 between
Sierra Peaks Corporation, as the buyer, and IntriCon Tibbetts Corporation as the seller. Sierra Peaks Corporation paid $500 cash
at closing for the assets and assumed certain operating liabilities of the businesses.
The Company recorded a loss on the sale
of $120. The net loss was computed as follows:
|
|
|
Accounts receivable, net
|
|
$
|
384
|
|
Inventory, net
|
|
|
128
|
|
Property, plant and equipment, net
|
|
|
127
|
|
Other assets
|
|
|
1
|
|
Accounts payable
|
|
|
(69
|
)
|
Net assets sold
|
|
$
|
571
|
|
Cash proceeds received from Sierra Peaks
|
|
|
500
|
|
Net assets sold
|
|
|
(571
|
)
|
Transaction costs
|
|
|
(49
|
)
|
Loss on sale of discontinued operations, net of income taxes
|
|
$
|
(120
|
)
|
The following table shows the results
of microphone and receiver discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
207
|
|
Operating costs and expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(357
|
)
|
Loss on impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(150
|
)
|
Other income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(150
|
)
|
In December 2016, the Company’s board
of directors approved plans to discontinue its cardiac diagnostic monitoring business. The Company sold the cardiac diagnostic
monitoring business on February 17, 2017 to Datrix, LLC.
The following table shows the cardiac
diagnostic monitoring business balance sheets as of December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable, net
|
|
$
|
123
|
|
|
$
|
243
|
|
Inventory
|
|
|
—
|
|
|
|
837
|
|
Other current assets
|
|
|
—
|
|
|
|
6
|
|
Current assets of discontinued operations
|
|
$
|
123
|
|
|
$
|
1,086
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
—
|
|
|
|
33
|
|
Other assets of discontinued operations
|
|
$
|
—
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
22
|
|
|
|
22
|
|
Accrued compensation and other liabilities
|
|
|
101
|
|
|
|
94
|
|
Current liabilities of discontinued operations
|
|
$
|
123
|
|
|
$
|
116
|
|
The following table shows the results
of the cardiac diagnostic monitoring discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
1,161
|
|
|
$
|
1,212
|
|
|
$
|
1,209
|
|
Operating costs and expenses
|
|
|
(2,135
|
)
|
|
|
(2,177
|
)
|
|
|
(2,080
|
)
|
Loss on impairment
|
|
|
(796
|
)
|
|
|
—
|
|
|
|
—
|
|
Net loss from discontinued operations
|
|
|
(1,770
|
)
|
|
|
(965
|
)
|
|
|
(871
|
)
|
In 2016, the Company evaluated the cardiac diagnostic monitoring
business for impairment and recorded non-cash impairment charges of $796.
In determining the nonrecurring fair value measurements of the impairment of other
short and long-term assets, the Company utilized the market value approach. Based on the market value assessment, the Company
determined fair values for the identified assets and incurred impairment charges for the remaining book value of the assets during
the year ended December 31, 2016 as set forth in the table below. These charges were reflected in the Company’s discontinued
operations in 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as
of
measurement
date
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
|
Impairment
Charge
|
|
Accounts Receivable
|
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
175
|
|
|
$
|
52
|
|
Inventory
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
726
|
|
|
|
726
|
|
Other Assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
|
|
|
18
|
|
3. RESTRUCTURING CHARGES
On June 13, 2013, the Company announced
a global strategic restructuring plan designed to accelerate the Company’s future growth by focusing resources on the highest
potential growth areas and reduce costs. The plan was approved by the Company’s Board of Directors on June 12, 2013. As part
of this plan, the Company: reduced investment in certain non-core professional audio communications product lines; transferred
specific product lines from Singapore to the Company’s lower-cost manufacturing facility in Batam, Indonesia; reduced global
administrative and support workforce; transferred the medical coil operations from the Company’s Maine facility to Minnesota
to better leverage existing manufacturing capacity; sold its remaining security, microphone and receiver operations; added experienced
professionals in value based hearing healthcare; and focused more resources in medical biotelemetry. During 2016, 2015 and 2014,
the Company incurred restructuring charges of $0, $0 and $83, respectively, primarily related to employee termination benefits,
from the restructuring of its continuing operations. The Company does not expect to incur any additional cash charges related to
this restructuring.
During 2016, the Company incurred
restructuring charges of $132, related to IntriCon UK Limited facility moving costs. The Company does not expect to incur any
additional cash charges related to this restructuring.
|
4. ACQUISTIONS
Acquisition of Hearing Help Express
In October 2016, the Company purchased
20 percent of Hearing Help Express (HHE). The Company paid a total of $693. Based on the facts and circumstances surrounding the
management of the business and the funding of working capital needs, the Company determined the guidance in ASC 810 applied based
on the Company’s ability to control the operations of Hearing Help Express and the likelihood that the Company bears the
largest risk and reward of its financial results. The Company has consolidated Hearing Help Express in the Company’s consolidated
financial statements.
The Company accounted for the transaction as a business combination
in the fourth quarter of 2016. The transaction allows the Company entry into the sale of products directly to consumers in the
United States. In accordance with ASC 805, the purchase price is being allocated based on estimates of the fair value of assets
acquired and liabilities assumed.
The purchase price was allocated as follows:
|
|
|
|
Cash
|
|
$
|
157
|
|
Inventory
|
|
|
341
|
|
Accounts Receivable
|
|
|
333
|
|
Property, Plant and Equipment
|
|
|
9
|
|
Intangible Assets
|
|
|
2,920
|
|
Goodwill
|
|
|
1,004
|
|
Other Assets
|
|
|
500
|
|
Note Payable
|
|
|
(2,000
|
)
|
Deferred Revenue
|
|
|
(717
|
)
|
IRS Note
|
|
|
(461
|
)
|
Non-Controlling Interest
|
|
|
(650
|
)
|
Other Payables
|
|
|
(743
|
)
|
|
|
$
|
693
|
|
Additionally, the Company had an option to purchase the remaining
80% of the business for $650 plus an earn-out that has been valued at $185 and exercised the option on January 17, 2017. The transaction
is expected to close in the first half of 2017, subject to customary closing conditions.
Goodwill represents the excess of the purchase
price over the fair value of the net tangible and intangible assets acquired. The establishment of goodwill was primarily due to
the expected revenue growth that is attributable to increased market penetration from future customers.
The Company has recognized additional revenue
of $1,025 and losses of approximately $3 relating to the sales of the hearing devices and accessories from October 19, 2016 through
December 31, 2016.
Acquisition costs of $216 were incurred
and recorded during the year ended December 31, 2016 and are included in other expenses, net in the consolidated statements of
operations. We consider the majority of the acquisition costs to be of the non-operating, miscellaneous nature, as they were incurred
as part of a non-operating activity, a business acquisition
Acquisition of Assets of PC Werth
On November 3, 2015, the Company acquired the assets of PC Werth
Ltd, a leading supplier of hearing healthcare products and equipment to the United Kingdom’s National Health Service (NHS),
through its IntriCon UK subsidiary. Under the terms of the agreement, the Company paid PC Werth Ltd a total of $197 in cash and
assumed payables of $393.
The Company accounted for the transaction as a business combination
in the fourth quarter of 2015. In accordance with ASC 805, the purchase price is being allocated based on estimates of the fair
value of assets acquired and liabilities assumed.
The purchase price was allocated as follows:
|
|
|
|
Inventory
|
|
$
|
155
|
|
Property, Plant and Equipment
|
|
|
39
|
|
Intellectual Property
|
|
|
39
|
|
Goodwill
|
|
|
357
|
|
Payables
|
|
|
(393
|
)
|
|
|
$
|
197
|
|
Goodwill represents the excess of the purchase price for the
PC Werth acquisition over the fair value of the net tangible and intangible assets acquired. The establishment of goodwill was
primarily due to the expected revenue growth that is attributable to increased market penetration from future customers.
The Company has recognized additional revenue of $414 and net
losses of approximately $265 relating to the sales of the hearing devices and accessories from November 2015 through December 31,
2015.
Acquisition costs of $143 were primarily
incurred and recorded during the year ended December 31, 2015 and are included in other expenses, net in the consolidated statements
of operations. We consider the majority of the acquisition costs to be of the non-operating, miscellaneous nature, as they were
incurred as part of a non-operating activity, a business acquisition.
Unaudited Supplemental Pro Forma Financial
Information
The following unaudited
supplemental pro forma information combines the Company’s results with those of PC Werth Ltd (predecessor to IntriCon
UK) and Hearing Help Express as if the acquisitions had occurred at the beginning of each of the periods presented. The
Company notes Hearing Help Express’s earnings were not included within the pro forma table below for 2015 and 2014 as
this company was in bankruptcy and these years were not reflective of the normal operations of Hearing Help Express. This
unaudited pro forma information is not intended to represent or be indicative of the Company’s consolidated results of
operations or financial condition that would have been reported for the periods presented had the acquisitions been completed
at the beginning on each of the periods presented, and should not be taken as indicative of the Company’s future
consolidated results of operations or financial condition.
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31
|
|
Unaudited
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenue
|
|
$
|
73,828
|
|
|
$
|
80,698
|
|
|
$
|
79,951
|
|
Net
earnings attributable to IntriCon Shareholders
|
|
|
(4,749
|
)
|
|
|
955
|
|
|
|
1,563
|
|
Net earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.73
|
)
|
|
$
|
0.16
|
|
|
$
|
0.27
|
|
Diluted
|
|
$
|
(0.73
|
)
|
|
$
|
0.15
|
|
|
$
|
0.26
|
|
The Company believes the above historical
pro forma results are not indicative of what future results of IntriCon
UK and Hearing Help Express could be due to both companies
being purchased out of bankruptcy and due to the many usual and infrequent charges that occurred for both of these companies during
the periods noted above.
5. SEGMENT REPORTING
The Company currently operates in two reportable segments: body-worn
devices and hearing health direct to consumer. The nature of distribution and services has been deemed separately identifiable.
Therefore, segment reporting has been applied.
Income (loss) from operations is total revenues less cost of
sales and operating expenses. Identifiable assets by industry segment include assets directly identifiable with those operations.
The accounting policies applied to determine segment information are the same as those described in the summary of significant
accounting policies. The Company evaluates the performance of each segment based on income and loss from operations before income
taxes. The following table summarizes data by industry segment:
|
|
|
|
|
|
|
|
|
|
At and for the Year Ended December
31, 2016
|
|
Body
Worn Devices
|
|
|
Hearing
Health Direct-
to-Consumer
|
|
|
Total
|
|
Revenue, net
|
|
$
|
66,984
|
|
|
$
|
1,025
|
|
|
$
|
68,009
|
|
Income (loss) from operations
|
|
|
(2,957
|
)
|
|
|
(17
|
)
|
|
|
(2,974
|
)
|
Identifiable assets (excluding goodwill)
|
|
|
29,048
|
|
|
|
4,155
|
|
|
|
33,203
|
|
Goodwill
|
|
|
9,551
|
|
|
|
1,004
|
|
|
|
10,555
|
|
Depreciation and amortization
|
|
|
2,041
|
|
|
|
—
|
|
|
|
2,041
|
|
Capital expenditures
|
|
|
1,766
|
|
|
|
—
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
At and for the Year Ended December
31, 2015
|
|
Body
Worn Devices
|
|
|
Hearing Health Direct-
to-Consumer
|
|
|
Total
|
|
Revenue, net
|
|
$
|
68,527
|
|
|
$
|
—
|
|
|
$
|
68,527
|
|
Income (loss) from operations
|
|
|
3,082
|
|
|
|
—
|
|
|
|
3,082
|
|
Identifiable assets (excluding goodwill)
|
|
|
32,335
|
|
|
|
—
|
|
|
|
32,335
|
|
Goodwill
|
|
|
9,551
|
|
|
|
—
|
|
|
|
9,551
|
|
Depreciation and amortization
|
|
|
1,755
|
|
|
|
—
|
|
|
|
1,755
|
|
Capital expenditures
|
|
|
3,982
|
|
|
|
—
|
|
|
|
3,982
|
|
6. GEOGRAPHIC INFORMATION
The geographical distribution of long-lived
assets, consisting of property, plant and equipment and net sales to geographical areas as of and for the years ended December
31, 2016 and 2015 is set forth below:
Long-lived Assets, Net
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
4,640
|
|
|
$
|
5,125
|
|
Singapore
|
|
|
1,413
|
|
|
|
1,272
|
|
Other – primarily United Kingdom and Indonesia
|
|
|
553
|
|
|
|
312
|
|
Consolidated
|
|
$
|
6,606
|
|
|
$
|
6,709
|
|
Long-lived assets consist of property and
equipment. Excluded from long-lived assets are investments in partnerships, patents, license agreements, intangible assets and
goodwill. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These assets are periodically
reviewed to assure the net realizable value from the estimated future production based on forecasted cash flows exceeds the carrying
value of the assets.
Net Sales to Geographical Areas
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
Net Sales to Geographical Areas
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
47,460
|
|
|
$
|
49,687
|
|
|
$
|
48,769
|
|
Europe
|
|
|
11,019
|
|
|
|
6,634
|
|
|
|
6,834
|
|
Asia
|
|
|
8,187
|
|
|
|
10,901
|
|
|
|
9,641
|
|
All other countries
|
|
|
1,343
|
|
|
|
1,305
|
|
|
|
1,850
|
|
Consolidated
|
|
$
|
68,009
|
|
|
$
|
68,527
|
|
|
$
|
67,094
|
|
Geographic net sales are allocated based
on the location of the customer.
One customer accounted for 40 percent,
43 percent and 37 percent of the Company’s consolidated net sales in 2016, 2015 and 2014, respectively. During 2016, 2015
and 2014, the top five customers accounted for approximately 59 percent, 61 percent and 58 percent of the Company’s consolidated
net sales, respectively.
At December 31, 2016, two customers accounted
for a combined 31 percent of the Company’s consolidated accounts receivable. Two customers accounted for a combined 27 percent
of the Company’s consolidated accounts receivable at December 31, 2015.
7. GOODWILL
The Company performed its annual goodwill
impairment test as of November 30
th
for each of the years ended December 31, 2016, 2015 and 2014. The Company completed
an analysis to assess the fair value of its reporting units to determine whether goodwill was impaired and the extent of such impairment,
if any for the years ended December 31, 2016, 2015 and 2014. Based upon this analysis, the Company has concluded that no impairment
of goodwill or intangible assets occurred during the years ended December 31, 2016, 2015 and 2014.
The changes in the carrying amount of
goodwill for the years presented are as follows:
|
|
|
|
Carrying amount at December 31, 2013
|
|
|
9,194
|
|
Changes to the carrying amount
|
|
|
—
|
|
Carrying amount at December 31, 2014
|
|
|
9,194
|
|
Acquisition of assets of PC Werth (Note 4)
|
|
|
357
|
|
Carrying amount at December 31, 2015
|
|
|
9,551
|
|
Acquisition of equity interest of Hearing Help Express (Note 4)
|
|
|
1,004
|
|
Carrying amount at December 31, 2016
|
|
$
|
10,555
|
|
8. INTANGIBLE ASSETS
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
Trademark
|
|
$
|
1,370
|
|
|
$
|
—
|
|
Customer List
|
|
|
1,550
|
|
|
|
—
|
|
Total, net of accumulated amortization
|
|
$
|
2,920
|
|
|
$
|
—
|
|
The definite-lived intangible assets consist
of various acquired Hearing Help Express trademarks and customer relationships. The asset life of trademarks is 20 years and the
life of the customer list is 18 years. The annual amortization expense for the trademark and customer list will be $155.
9. INVENTORIES
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
|
Work-in
process
|
|
|
Finished
products and
components
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
5,731
|
|
|
$
|
1,324
|
|
|
$
|
2,609
|
|
|
$
|
9,664
|
|
Foreign
|
|
|
1,751
|
|
|
|
284
|
|
|
|
644
|
|
|
|
2,679
|
|
Total
|
|
$
|
7,482
|
|
|
$
|
1,608
|
|
|
$
|
3,253
|
|
|
$
|
12,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
6,201
|
|
|
$
|
1,636
|
|
|
$
|
2,347
|
|
|
$
|
10,184
|
|
Foreign
|
|
|
2,472
|
|
|
|
636
|
|
|
|
343
|
|
|
|
3,451
|
|
Total
|
|
$
|
8,986
|
|
|
$
|
2,342
|
|
|
$
|
2,690
|
|
|
$
|
13,635
|
|
10. SHORT AND LONG-TERM DEBT
Short and long-term debt at December 31, 2016 and 2015 was
as follows:
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
December
31, 2015
|
|
Domestic asset-based revolving credit facility
|
|
$
|
3,218
|
|
|
$
|
4,674
|
|
Note payable
|
|
|
2,000
|
|
|
|
—
|
|
Foreign overdraft and letter of credit facility
|
|
|
1,243
|
|
|
|
913
|
|
Domestic term loan
|
|
|
5,250
|
|
|
|
4,250
|
|
Unamortized finance costs
|
|
|
(81
|
)
|
|
|
—
|
|
Total debt
|
|
|
11,630
|
|
|
|
9,837
|
|
Less: Current maturities
|
|
|
(2,346
|
)
|
|
|
(1,908
|
)
|
Total long-term debt
|
|
$
|
9,284
|
|
|
$
|
7,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
Due by Year
|
|
|
|
|
2017
|
|
|
|
2018
|
|
|
|
2019
|
|
|
|
2020
|
|
|
|
Thereafter
|
|
|
|
Total
|
|
Domestic credit facility
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,218
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,218
|
|
Domestic term loan
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
3,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,250
|
|
Note payable
|
|
|
333
|
|
|
|
667
|
|
|
|
667
|
|
|
|
333
|
|
|
|
—
|
|
|
|
2,000
|
|
Foreign overdraft and letter of credit facility
|
|
|
1,013
|
|
|
|
230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,243
|
|
Total debt
|
|
$
|
2,346
|
|
|
$
|
1,897
|
|
|
$
|
3,917
|
|
|
$
|
333
|
|
|
$
|
—
|
|
|
$
|
11,711
|
|
Domestic Credit Facilities
The Company and its domestic subsidiaries
are parties to a credit facility with The PrivateBank and Trust Company. The credit facility, as amended through December 31, 2016,
provides for:
|
■
|
a $9,000 revolving credit facility, with
a $200 sub facility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing
base composed of stated percentages of the Company’s eligible trade receivables and eligible inventory, and eligible equipment
less a reserve; and
|
|
■
|
a term loan in the original amount of
$6,000.
|
In August 2016, the Company and its domestic
subsidiaries entered into an Ninth Amendment to the Loan and Security Agreement and Waiver with The PrivateBank and Trust Company.
The amendment, among other things:
|
■
|
amended the definition of EBITDA to permit
the add back of certain transactions expenses and expense reductions;
|
|
■
|
amended the funded debt to EBITDA and
fixed charge coverage covenants; and
|
|
■
|
waived a default in the funded debt to
EBITDA covenant as of June 30, 2016.
|
All of the borrowings under this agreement
have been characterized as either a current or long-term liability on our balance sheet in accordance with the repayment terms
described more fully below.
Loans under the credit facility are secured
by a security interest in substantially all of the assets of the Company and its domestic subsidiaries including a pledge of the
stock of its domestic subsidiaries. Loans under the credit facility bear interest at varying rates based on the Company’s
leverage ratio of funded debt / EBITDA, at the option of the Company, at:
|
■
|
the London InterBank Offered Rate (“LIBOR”)
plus 2.50% to 4.00%, or
|
|
■
|
the base rate, which is the higher of
(a) the rate publicly announced from time to time by the lender as its “prime rate” and (b) the Federal Funds Rate
plus 0.5%, plus 0.00% to 1.25% ; in each case, depending on the Company’s leverage ratio.
|
Interest
is payable monthly in arrears, except that interest on LIBOR based loans is payable at the end of the one, two or three month
interest periods applicable to LIBOR based loans. IntriCon is also required to pay a non-use fee equal to 0.25% per year of the
unused portion of the revolving line of credit facility, payable quarterly in arrears.
Weighted
average interest on our domestic credit facilities was 4.36%, 3.68%, and 4.51% for 2016, 2015, and 2014, respectively.
The
outstanding balance of the revolving credit facility was $3,218 and $4,674 at December 31, 2016 and 2015, respectively. The total
remaining availability on the revolving credit facility was approximately $5,121 and $3,326 at December 31, 2016 and 2015, respectively.
The
outstanding principal balance of the term loan, as amended, is payable in quarterly installments of $250. Any remaining principal
and accrued interest is payable on February 28, 2019. IntriCon is also required to use 100% of the net cash proceeds of certain
asset sales (excluding inventory and certain other dispositions), sale of capital securities or issuance of debt to pay down the
term loan.
The
borrowers are subject to various covenants under the credit facility, including a maximum funded debt to EBITDA, a minimum fixed
charge coverage ratio and maximum capital expenditure financial covenants. Under the credit facility, except as otherwise permitted,
the borrowers may not, among other things: incur or permit to exist any indebtedness; grant or permit to exist any liens or security
interests on their assets or pledge the stock of any subsidiary; make investments; be a party to any merger or consolidation,
or purchase of all or substantially all of the assets or equity of any other entity; sell, transfer, convey or lease all or any
substantial part of its assets or capital securities; sell or assign, with or without recourse, any receivables; issue any capital
securities; make any distribution or dividend (other than stock dividends), whether in cash or otherwise, to any of its equity
holders; purchase or redeem any of its equity interests or any warrants, options or other rights to equity; enter into any transaction
with any of its affiliates or with any director, officer or employee of any borrower; be a party to any unconditional purchase
obligations; cancel any claim or debt owing to it; make payment on or changes to any subordinated debt; enter into any agreement
inconsistent with the provisions of the credit facility or other agreements and documents entered into in connection with the
credit facility; engage in any line of business other than the businesses engaged in on the date of the credit facility and businesses
reasonably related thereto; or permit its charter, bylaws or other organizational documents to be amended or modified in any way
which could reasonably be expected to materially adversely affect the interests of the lender. On March 9, 2017, the Company entered
into an amendment with The PrivateBank to waive certain covenant violations at December 31, 2016 and reset certain financial covenant
thresholds set forth in the credit facility. After giving effect to the waiver, the Company was in compliance with all applicable
covenants under the credit facility as of December 31, 2016.
During
2014, the Company entered into interest rate swaps with The PrivateBank which are accounted for as effective cash flow hedges.
The interest rate swaps had a combined initial notional amount of $3,750, with a portion of the swap amortizing on a basis consistent
with the $250 quarterly installments required under the term loan. The interest rate swaps fix the Company’s one month LIBOR
interest rate on the notional amounts at rates ranging from 0.80% - 1.45%. We hold a right to cancel the interest rate swaps starting
August 31, 2016. Interest rate swaps, which are considered derivative instruments, of $19 and $41 are reported in the consolidated
balance sheets at fair value in other current liabilities at December 31, 2016 and 2015.
The
debt issuance costs are being amortized over the related term utilizing the effective interest method and are included in interest
expense and long-term debt and are being amortized over their estimated useful life on a straight-line basis. Debt issuance cost
included in interest expense was $57, $72 and $56 for the years ended December 31, 2016, 2015, and 2014, respectively
Foreign
Credit Facility
In
addition to its domestic credit facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international
senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for an asset based line of credit.
Borrowings bear interest at a rate of .75% to 2.5% over the lender’s prevailing prime lending rate. Weighted average interest
on the international credit facilities was 3.50%, 3.37% and 4.50% for the years ended December 31, 2016, 2015 and 2014. The outstanding
balance was $1,243 and $913 at December 31, 2016 and 2015, respectively. The loans are collateralized by IntriCon, PTE’s
restricted cash and receivables. The total remaining availability on the international senior secured credit agreement was approximately
$455 and $817 at December 31, 2016 and 2015, respectively.
Note
Payable
Hearing
Help Express has a $2,000 note payable to a party holding 80% of its equity interest. The note is secured by substantially all
of the assets of Hearing Help Express. The note is payable over 48 months in quarterly installments with interest at 5% per year,
except that interest only will be paid in the first twelve months, with the deferred payments to be made at maturity.
11.
OTHER ACCRUED LIABILITIES
Other
accrued liabilities at December 31:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Accrued
professional fees
|
|
$
|
63
|
|
|
$
|
173
|
|
Pension
|
|
|
93
|
|
|
|
93
|
|
Postretirement benefit
obligation
|
|
|
103
|
|
|
|
103
|
|
Deferred revenue -
direct to consumer
|
|
|
614
|
|
|
|
—
|
|
Other
|
|
|
1,041
|
|
|
|
910
|
|
|
|
$
|
1,914
|
|
|
$
|
1,279
|
|
12.
DOMESTIC AND FOREIGN INCOME TAXES
Domestic
and foreign income taxes (benefits) were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
178
|
|
|
|
27
|
|
|
|
428
|
|
Total
Current
|
|
$
|
253
|
|
|
$
|
27
|
|
|
$
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
—
|
|
Income
Tax Expense
|
|
$
|
217
|
|
|
$
|
19
|
|
|
$
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before income taxes and discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
661
|
|
|
|
1,792
|
|
|
|
2,402
|
|
Domestic
|
|
|
(3,418
|
)
|
|
|
1,309
|
|
|
|
1,415
|
|
|
|
$
|
(2,757
|
)
|
|
$
|
3,101
|
|
|
$
|
3,817
|
|
The
following is a reconciliation of the statutory federal income tax rate to the effective tax rate based on income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Tax
provision at statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
Change
in valuation allowance
|
|
|
(46.42
|
)
|
|
|
(20.08
|
)
|
|
|
(10.74
|
)
|
Impact
of permanent items, including stock based compensation expense
|
|
|
(7.93
|
)
|
|
|
(21.33
|
)
|
|
|
15.58
|
|
Effect
of foreign tax rates
|
|
|
2.49
|
|
|
|
7.82
|
|
|
|
(17.14
|
)
|
State
taxes net of federal benefit
|
|
|
5.05
|
|
|
|
1.92
|
|
|
|
(3.67
|
)
|
Effect
of dividend of foreign subsidiary in prior year
|
|
|
(3.85
|
)
|
|
|
5.18
|
|
|
|
3.74
|
|
Prior
year provision to return true-up
|
|
|
10.60
|
|
|
|
(6.70
|
)
|
|
|
(9.75
|
)
|
Non-controlling
interest
|
|
|
(1.77
|
)
|
|
|
1.22
|
|
|
|
—
|
|
Other
|
|
|
(0.03
|
)
|
|
|
(1.40
|
)
|
|
|
(6.08
|
)
|
Domestic
and foreign income tax rate
|
|
|
(7.86
|
)%
|
|
|
0.63
|
%
|
|
|
5.94
|
%
|
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2016, and 2015 are presented below:
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards and credits
|
|
$
|
12,043
|
|
|
$
|
7,931
|
|
Inventory
|
|
|
650
|
|
|
|
563
|
|
Compensation
accruals
|
|
|
1,447
|
|
|
|
1,273
|
|
Accruals
and reserves
|
|
|
89
|
|
|
|
113
|
|
Credits
|
|
|
251
|
|
|
|
236
|
|
Other
|
|
|
459
|
|
|
|
212
|
|
Total
Deferred tax assets
|
|
|
14,939
|
|
|
|
10,328
|
|
|
|
|
|
|
|
|
|
|
Less:
valuation allowance
|
|
|
(13,253
|
)
|
|
|
(9,810
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets net of valuation allowance
|
|
$
|
1,686
|
|
|
$
|
518
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(1,424
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
Undistributed
earnings of foreign subsidiary
|
|
|
(194
|
)
|
|
|
(319
|
)
|
Total
deferred tax liabilities
|
|
|
(1,618
|
)
|
|
|
(475
|
)
|
Net
deferred tax
|
|
$
|
68
|
|
|
$
|
43
|
|
The
valuation allowance is maintained against deferred tax assets which the Company has determined are more likely than not to be
unrealized. The change in valuation allowance was $(3,443), $(291), and $59 for the years ended December 31, 2016, 2015 and 2014,
respectively. For tax reporting purposes, the Company has actual federal and state net operating loss carryforwards of $32,019
and $15,759, respectively. These net operating loss carryforwards begin to expire in 2022 for federal tax purposes and 2017 for
state tax purposes. Subsequently recognized tax benefits, if any, related to the valuation allowance for deferred tax assets or
realization of net operating loss carryforwards will be reported in the consolidated statements of operations. If substantial
changes in the Company’s ownership occur, there could be an annual limitation on the amount of the carryforwards that are
available to be utilized.
Excluded
from the Company’s net operating loss carryforwards is $438 resulting from the exercise of non-qualified stock options.
Because the Company is currently in an NOL position, the windfall is not recorded through additional paid-in capital until the
tax benefit is recognized through a reduction in actual tax payments.
During
2013, the Company changed its indefinite reinvestment assertion and recognized a deferred tax liability relating to cumulative
undistributed earnings of controlled foreign subsidiaries in Germany. The Company has not recognized a deferred tax liability
relating to cumulative undistributed earnings of controlled foreign subsidiaries in Singapore and Indonesia that are essentially
permanent in duration. If some or all of the undistributed earnings of the controlled foreign subsidiaries are remitted to the
Company in the future, income taxes, if any, after the application of foreign tax credits will be accrued at that time. Determination
of the amount of unrecognized tax liability related to undistributed earnings in foreign subsidiaries is not currently practical.
In
assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The Company regularly assesses the likelihood that the deferred tax assets
will be recovered from future taxable income. The Company considers projected future taxable income and ongoing tax planning strategies,
then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than
not able to be realized. Based upon the Company’s assessment of all available evidence, including the previous three years
of United States based taxable income and loss after permanent items, estimates of future profitability, and the Company’s
overall prospects of future business, the Company determined that it is more likely than not that the Company will not be able
to realize a portion of the deferred tax assets in the future. The Company will continue to assess the potential realization of
deferred tax assets on an annual basis, or an interim basis if circumstances warrant. If the Company’s actual results and
updated projections vary significantly from the projections used as a basis for this determination, the Company may need to change
the valuation allowance against the gross deferred tax assets.
The
Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would
more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized
upon ultimate settlement with the relevant taxing authority. The Company has analyzed all tax positions for which the statute
of limitations remains open. As a result of the assessment, the Company has not recorded any liabilities for unrecognized income
tax benefits or retained earnings. The Company does not have any unrecognized tax benefits as of December 31, 2016, 2015 and 2014.
The
Company recognizes penalties and interest accrued related to liability on unrecognized tax benefits in income tax expense for
all periods presented. As of December 31, 2016 and 2015 the Company has no amounts accrued for the payment of interest and penalties.
13.
EMPLOYEE BENEFIT PLANS
The
Company has a defined contribution plan for most of its domestic employees. Under these plans, eligible employees may contribute
amounts through payroll deductions supplemented by employer contributions for investment in various investments specified in the
plans. The Company contributions to these plans were $212, $341 and $271 for the years ended December 31, 2016, 2015 and 2014.
The
Company provides post-retirement medical benefits to certain former domestic employees who met minimum age and service requirements.
In 1999, a plan amendment was instituted which limits the liability for post-retirement benefits beginning January 1, 2000 for
certain employees who retire after that date. This plan amendment resulted in a $1,100 unrecognized prior service cost reduction
which is recognized as employees render the services necessary to earn the post-retirement benefit. The Company’s policy
is to pay the cost of these post-retirement benefits when required on a cash basis. The Company also has provided certain foreign
employees with retirement related benefits.
The
following table presents the amounts recognized in the Company’s consolidated balance sheets at December 31, 2016 and 2015
for post-retirement medical benefits:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Change
in Projected Benefit Obligation:
|
|
|
|
|
|
|
|
|
Projected
benefit obligation at January 1
|
|
$
|
645
|
|
|
$
|
588
|
|
Interest
cost
|
|
|
27
|
|
|
|
25
|
|
Actuarial
loss
|
|
|
24
|
|
|
|
134
|
|
Participant
contributions
|
|
|
23
|
|
|
|
25
|
|
Benefits
paid
|
|
|
(115
|
)
|
|
|
(127
|
)
|
Projected
benefit obligation at December 31
|
|
|
604
|
|
|
|
645
|
|
Change
in fair value of plan assets:
|
|
|
|
|
|
|
|
|
Employer
contributions
|
|
|
92
|
|
|
|
102
|
|
Participant
contributions
|
|
|
23
|
|
|
|
25
|
|
Benefits
paid
|
|
|
(115
|
)
|
|
|
(127
|
)
|
Funded
status
|
|
|
(604
|
)
|
|
|
(645
|
)
|
Current
liabilities
|
|
|
103
|
|
|
|
103
|
|
Noncurrent
liabilities
|
|
|
501
|
|
|
|
542
|
|
Net
amount recognized
|
|
|
604
|
|
|
|
645
|
|
Amount
recognized in other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
Unrecognized
net actuarial gain
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued
post-retirement medical benefit costs are classified as other post-retirement benefit obligations as of December 31, 2016 and
2015.
Net
periodic post-retirement medical benefit costs for 2016, 2015, and 2014 included the following components:
For
measurement purposes, a 5.9% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend
rate) was assumed for 2016; the rate was assumed to decrease gradually to 4.6% by the year 2066 and remain at that level thereafter.
The difference in the health care cost trend rate assumption may have a significant effect on the amounts reported.
The
assumptions used for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Annual
increase in cost of benefits
|
|
|
5.9
|
%
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
Discount
rate used to determine year-end obligations
|
|
|
3.3
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Discount
rate used to determine year-end expense
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
In
addition to the post-retirement medical benefits, the Company provides retirement related benefits to certain former executive
employees and to certain employees of foreign subsidiaries. The liabilities established for these benefits at December 31, 2016
and 2015 are illustrated below.
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Current
portion
|
|
$
|
93
|
|
|
$
|
93
|
|
Long-term
portion
|
|
|
737
|
|
|
|
805
|
|
Total
liability at December 31
|
|
$
|
830
|
|
|
$
|
898
|
|
The
Company calculated the fair values of the pension plans above utilizing a discounted cash flow, using standard life expectancy
tables, annual pension payments, and a discount rate of 4.5%.
Employer
benefit payments (medical and pension), which reflect expected future service, are expected to be paid in the following years:
|
|
|
|
|
2017
|
|
$
|
196
|
|
2018
|
|
|
182
|
|
2019
|
|
|
170
|
|
2020
|
|
|
159
|
|
2021
|
|
|
148
|
|
Years 2022-2028
|
|
|
579
|
|
14.
CURRENCY TRANSLATION AND TRANSACTION ADJUSTMENTS
All
assets and liabilities of foreign operations in which the functional currency is not the U.S. dollar are translated into U.S.
dollars at prevailing rates of exchange in effect at the balance sheet date. Revenues and expenses are translated using average
rates of exchange for the year. Adjustments resulting from the process of translating the financial statements of foreign subsidiaries
into U.S. dollars are reported as a separate component of equity, net of tax, where appropriate.
Foreign
currency transaction amounts included in the consolidated statements of operations include a loss of $128, $40 and $51 in 2016,
2015 and 2014, respectively.
15.
COMMON STOCK AND STOCK OPTIONS
The
Company has a 2006 Equity Incentive Plan and a 2015 Equity Incentive Plan. The 2015 Equity Incentive Plan, which was approved
by the shareholders on April 24, 2015, replaced the 2006 Equity Incentive Plan. New grants may not be made under the 2006 plan;
however certain option grants under these plans remain exercisable as of December 31, 2016. The aggregate number of shares of
common stock for which awards could be granted under the 2015 Equity Incentive Plan as of the date of adoption was 500 shares.
Additionally, as outstanding options under the 2006 plan expire, the shares of the Company’s common stock subject to the
expired options will become available for issuance under the 2015 Equity Incentive Plan.
Under
the plans, executives, employees and outside directors receive awards of options to purchase common stock. The Company may also
grant stock awards, stock appreciation rights, restricted stock units and other equity-based awards, although no such awards,
other than awards under the director program and management purchase program described below, had been granted as of December
31, 2016. Under all awards, the terms are fixed on the grant date. Generally, the exercise price of stock options equals the market
price of the Company’s stock on the date of the grant. Options under the plans generally vest over three years, and have
a maximum term of 10 years.
Additionally,
the board has established the non-employee directors’ stock fee election program, referred to as the director program, as
an award under the 2015 equity incentive plan. The director program gives each non-employee director the right under the 2015
equity incentive plan to elect to have some or all of his quarterly director fees paid in common shares rather than cash. No shares
were issued under the director program for any of the years ended December 31, 2016, 2015 and 2014.
On
July 23, 2008, the Compensation Committee of the Board of Directors approved the non-employee director and executive officer stock
purchase program, referred to as the management purchase program, as an award under the 2015 Plan. The purpose of the management
purchase program is to permit the Company’s non-employee directors and executive officers to purchase shares of the Company’s
Common Stock directly from the Company. Pursuant to the management purchase program, as amended, participants may elect to purchase
shares of Common Stock from the Company not exceeding an aggregate of $100 during any fiscal year. Participants may make such
election one time during each twenty business day period following the public release of the Company’s earnings announcement,
referred to as a window period, and only if such participant is not in possession of material, non-public information concerning
the Company and subject to the discretion of the Board to prohibit any transactions in Common Stock by directors and executive
officers during a window period. There was 1 share purchased under the management purchase program during the year ended December
31, 2014 and no shares purchased under the program during the years ended December 31, 2016 and 2015.
Stock
option activity during the periods indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
Aggregate
|
|
|
|
Number
of Shares
|
|
|
Exercise
Price
|
|
|
Intrinsic
Value
|
|
Outstanding
at December 31, 2013
|
|
|
1,407
|
|
|
$
|
5.75
|
|
|
|
|
|
Options
forfeited or cancelled
|
|
|
(63
|
)
|
|
|
7.87
|
|
|
|
|
|
Options
granted
|
|
|
174
|
|
|
|
4.99
|
|
|
|
|
|
Options
exercised
|
|
|
(205
|
)
|
|
|
3.74
|
|
|
|
|
|
Outstanding
at December 31, 2014
|
|
|
1,313
|
|
|
|
5.86
|
|
|
|
|
|
Options
granted
|
|
|
170
|
|
|
|
7.14
|
|
|
|
|
|
Options
exercised
|
|
|
(159
|
)
|
|
|
3.12
|
|
|
|
|
|
Outstanding
at December 31, 2015
|
|
|
1,324
|
|
|
|
6.36
|
|
|
|
|
|
Options
forfeited or cancelled
|
|
|
(70
|
)
|
|
|
5.75
|
|
|
|
|
|
Options
granted
|
|
|
192
|
|
|
|
7.11
|
|
|
|
|
|
Options
exercised
|
|
|
(61
|
)
|
|
|
5.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2016
|
|
|
1,385
|
|
|
$
|
6.54
|
|
|
$
|
1,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2015
|
|
|
989
|
|
|
$
|
6.50
|
|
|
$
|
2,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2016
|
|
|
1,025
|
|
|
$
|
6.45
|
|
|
$
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for future grant at December 31, 2016
|
|
|
404
|
|
|
|
|
|
|
|
|
|
The
number of shares available for future grant at December 31, 2016, does not include a total of up to 1,151 shares subject to options
outstanding under the 2006 plan which will become available for grant under the 2015 Equity Incentive Plan in the event of the
expiration of such options.
The
weighted-average remaining contractual term of options exercisable and outstanding at December 31, 2016 was 5.33 and 4.21 years.
The total intrinsic value of options exercised during fiscal 2016, 2015 and 2014, was $76, $630 and $635, respectively.
The
weighted-average per share grant date fair value of options granted was $4.17, $4.50 and $3.28, in 2016, 2015 and 2014, respectively,
using the Black-Scholes option-pricing model.
For
disclosure purposes, the fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected
volatility
|
|
|
61.66
- 66.45
|
%
|
|
|
65.15
- 72.81
|
%
|
|
|
75.03
- 75.59
|
%
|
Risk-free
interest rate
|
|
|
1.36-2.00
|
%
|
|
|
1.42-1.88
|
%
|
|
|
2.00-2.07
|
%
|
Expected
life (years)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected
stock price volatility. Because the Company’s options have characteristics different from those of traded options, in the
opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options.
The
Company calculates expected volatility for stock options and awards using the Company’s historical volatility.
The
expected term for stock options and awards is calculated based on the Company’s estimate of future exercise at the time
of grant.
The
Company currently estimates a zero percent forfeiture rate for stock options and regularly reviews this estimate.
The
risk-free rates for the expected terms of the stock options and awards and the employee stock purchase plan is based on the U.S.
Treasury yield curve in effect at the time of grant.
The
Company recorded $685, $579, and $457 of non-cash stock option expense for the years ended December 31, 2016, 2015 and 2014, respectively.
There were 55 stock options that were exercised using a cashless method of exercise for the year ended December 31, 2016. As of
December 31, 2016, there was $880 of total non-cash stock option expense related to non-vested awards that is expected to be recognized
over a weighted-average period of 1.71 years.
The
Company also has an Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, as amended, provides that
a maximum of 300 shares may be sold under the Purchase Plan. There were 18, 14, and 16 shares purchased under the Purchase Plan
during the years ended December 31, 2016, 2015 and 2014, respectively.
On
May 18, 2016, the Company completed a public offering and sale of 805 shares of common stock. The net proceeds from this offering,
after deducting underwriting discounts and offering expenses, totaled approximately $3,678 and were used for working capital and
general corporate purposes
16.
INCOME (LOSS) PER SHARE
The
following table sets forth the computation of basic and diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations before discontinued operations
|
|
$
|
(2,974
|
)
|
|
$
|
3,082
|
|
|
$
|
3,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of income taxes
|
|
|
(1,770
|
)
|
|
|
(965
|
)
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(4,744
|
)
|
|
|
2,117
|
|
|
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Loss allocated to non-controlling interest
|
|
|
(157
|
)
|
|
|
(111
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (loss) attributable to shareholders
|
|
$
|
(4,587
|
)
|
|
$
|
2,228
|
|
|
$
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
– weighted shares outstanding
|
|
|
6,497
|
|
|
|
5,907
|
|
|
|
5,791
|
|
Weighted
shares assumed upon exercise of stock options
|
|
|
—
|
|
|
|
334
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
– weighted shares outstanding
|
|
|
6,497
|
|
|
|
6,241
|
|
|
|
6,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share attributable to shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.43
|
)
|
|
$
|
0.54
|
|
|
$
|
0.59
|
|
Discontinued
operations
|
|
|
(0.27
|
)
|
|
|
(0.16
|
)
|
|
|
(0.20
|
)
|
Net
income (loss) per share:
|
|
$
|
(0.71
|
)
|
|
$
|
0.38
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income (loss) per share attributable to shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.43
|
)
|
|
$
|
0.51
|
|
|
$
|
0.56
|
|
Discontinued
operations
|
|
|
(0.27
|
)
|
|
|
(0.15
|
)
|
|
|
(0.19
|
)
|
Net
income (loss) per share:
|
|
$
|
(0.71
|
)
|
|
$
|
0.36
|
|
|
$
|
0.37
|
|
The
Company excluded all stock options, including 37 in the money options, in 2016 from the computation of the diluted income per
share because their effect would have been anti-dilutive due to the Company’s net loss in the period. The Company excluded
in the money stock options of 71 and 21 in 2015 and 2014, respectively, from the computation of the diluted income per share because
their effect would be anti-dilutive. For additional disclosures regarding the stock options, see Note 15.
17.
CONTINGENCIES AND COMMITMENTS
The
Company is a defendant along with a number of other parties in lawsuits alleging that plaintiffs have or may have contracted asbestos-related
diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. These
lawsuits relate to the discontinued heat technologies segment which was sold in March 2005. Due to the non-informative nature
of the complaints, the Company does not know whether any of the complaints state valid claims against the Company. Certain insurance
carriers have informed the Company that the primary policies for the period August 1, 1970-1978 have been exhausted and that the
carriers will no longer provide defense and insurance coverage under those policies. However, the Company has other primary and
excess insurance policies that the Company believes afford coverage for later years. Some of these other primary insurers have
accepted defense and insurance coverage for these suits, and some of them have either ignored the Company’s tender of defense
of these cases, or have denied coverage, or have accepted the tenders but asserted a reservation of rights and/or advised the
Company that they need to investigate further. Because settlement payments are applied to all years a litigant was deemed to have
been exposed to asbestos, the Company believes that it will have funds available for defense and insurance coverage under the
non-exhausted primary and excess insurance policies. However, unlike the older policies, the more recent policies have deductible
amounts for defense and settlements costs that the Company will be required to pay; accordingly, the Company expects that its
litigation costs will increase in the future. Further, many of the policies covering later years (approximately 1984 and thereafter)
have exclusions for any asbestos products or operations, and thus do not provide insurance coverage for asbestos-related lawsuits.
The Company does not believe that the asserted exhaustion of some of the primary insurance coverage for the 1970-1978 period will
have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number
of insurance carriers involved in the defense of the suits, and the significant number of policy years and policy limits under
which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company’s
consolidated financial position or results of operations.
The
Company’s former wholly owned French subsidiary, Selas SAS, filed for insolvency in France. The Company may be subject to
additional litigation or liabilities as a result of the completion of the French insolvency proceeding, including liabilities
under guarantees aggregating approximately $410.
The
Company is also involved from time to time 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.
Total
expense for 2016, 2015 and 2014 under leases pertaining primarily to engineering, manufacturing, sales and administrative facilities,
with an initial term of one year or more, aggregated $1,498, $1,265, and $1,036, respectively. Remaining payments under such leases
are as follows: 2017- $1,676; 2018- $1,288; 2019 - $1,340; 2020 - $1,247; 2021 - $901, which includes two leased facility in Minnesota,
one that expires in 2017 and another that expires in 2022, one leased facility in Illinois that expires in 2022, one leased facility
in Singapore that expires in 2020, one leased facility in Indonesia that expires in 2021, one leased facility in the United Kingdom
that expires in 2021, and one leased facility in Germany that expires in 2022. Certain leases contain renewal options as provided
in the lease agreements.
On
October 5, 2007, the Company entered into employment agreements with its executive officers. The agreements call for payments
ranging from eleven months to two years base salary and unpaid bonus, if any, to the executives should there be a change of control
as defined in the agreement and the executives are not retained for a period of at least one year following such change of control.
Under the agreements, all stock options granted to the executives would vest immediately and be exercisable in accordance with
the terms of such stock options. The Company also agreed that if it enters into an agreement to sell substantially all of its
assets, it will obligate the buyer to fulfill its obligations pursuant to the agreements. The agreements terminate, except to
the extent that any obligation remains unpaid, upon the earlier of termination of the executive’s employment prior to a
change of control or asset sale for any reason or the termination of the executive after a change of control for any reason other
than by involuntary termination as defined in the agreements.
18.
RELATED-PARTY TRANSACTIONS
One
of the Company’s subsidiaries leases office and factory space from a partnership consisting of three present or former officers
of the subsidiary, including Mark Gorder, a member of the Company’s Board of Directors and the President and Chief Executive
Officer of the Company. The subsidiary is required to pay all real estate taxes and operating expenses. The total base rent expense,
real estate taxes and other charges incurred under the lease was approximately $484, $487 and $486 for the years ended December
31, 2016, 2015 and 2014, respectively.
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 our
Board of Directors. The Company paid approximately $406, $203, and $156 to Blank Rome LLP for legal services and costs in 2016,
2015 and 2014, respectively. The Chairman of our Board of Directors is considered independent under applicable NASDAQ and SEC
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.
19.
STATEMENTS OF CASH FLOWS
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Interest
received
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest
paid
|
|
|
568
|
|
|
|
437
|
|
|
|
432
|
|
Income
taxes paid
|
|
|
196
|
|
|
|
263
|
|
|
|
132
|
|
Shares
issued for director services in lieu of fees
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
20.
REVENUE BY MARKET
The
following table sets forth, for the periods indicated, net revenue by market:
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
$
|
37,602
|
|
|
$
|
39,609
|
|
|
$
|
33,900
|
|
Hearing
Health
|
|
|
21,882
|
|
|
|
21,089
|
|
|
|
22,959
|
|
Hearing
Health Direct-to-Consumer
|
|
|
1,025
|
|
|
|
—
|
|
|
|
—
|
|
Professional
Audio Communications
|
|
|
7,500
|
|
|
|
7,829
|
|
|
|
10,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Sales
|
|
$
|
68,009
|
|
|
$
|
68,527
|
|
|
$
|
67,094
|
|
21.
SUBSEQUENT EVENTS
Other
than the previously disclosed events, the Company has reviewed events subsequent to the date these consolidated financial statements
were issued and noted no other matters requiring adjustment to or disclosure in these consolidated financial statements.