ITEM 1.
Financial Statements
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|
|
|
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INTRICON
CORPORATION
|
Consolidated
Condensed Balance Sheets
|
(In
Thousands
,
Except Per Share Amounts
)
|
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
|
December
31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
380
|
|
|
$
|
667
|
|
Restricted cash
|
|
|
612
|
|
|
|
595
|
|
Accounts receivable, less allowance
for doubtful accounts of $167 at March 31, 2017 and $170 at December 31, 2016
|
|
|
8,129
|
|
|
|
7,289
|
|
Inventories
|
|
|
13,239
|
|
|
|
12,343
|
|
Other current assets
|
|
|
1,104
|
|
|
|
957
|
|
Current assets of discontinued operations
|
|
|
—
|
|
|
|
123
|
|
Total current assets
|
|
|
23,464
|
|
|
|
21,974
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
40,202
|
|
|
|
40,152
|
|
Less: Accumulated
depreciation
|
|
|
33,755
|
|
|
|
33,546
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|
Net machinery and
equipment
|
|
|
6,447
|
|
|
|
6,606
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
10,555
|
|
|
|
10,555
|
|
Intangible assets, net
|
|
|
2,856
|
|
|
|
2,920
|
|
Investment in partnerships
|
|
|
238
|
|
|
|
146
|
|
Other assets, net
|
|
|
1,447
|
|
|
|
1,557
|
|
Total assets (a)
|
|
$
|
45,007
|
|
|
$
|
43,758
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
2,368
|
|
|
|
2,346
|
|
Accounts
payable
|
|
|
8,403
|
|
|
|
6,722
|
|
Accrued salaries, wages and commissions
|
|
|
2,171
|
|
|
|
2,413
|
|
Other accrued liabilities
|
|
|
1,785
|
|
|
|
1,914
|
|
Liabilities of discontinued operations
|
|
|
—
|
|
|
|
123
|
|
Total current liabilities
|
|
|
14,727
|
|
|
|
13,518
|
|
|
|
|
|
|
|
|
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Long-term debt, less current maturities
|
|
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9,830
|
|
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|
9,284
|
|
Other postretirement benefit obligations
|
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|
490
|
|
|
|
501
|
|
Accrued pension liabilities
|
|
|
730
|
|
|
|
737
|
|
Other long-term liabilities
|
|
|
691
|
|
|
|
707
|
|
Total liabilities
(a)
|
|
|
26,468
|
|
|
|
24,747
|
|
Commitments and contingencies
|
|
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|
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Shareholders’ equity:
|
|
|
|
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Common stock, $1.00 par value per share; 20,000 shares authorized;
6,836 and 6,820 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
|
|
|
6,836
|
|
|
|
6,820
|
|
Additional paid-in capital
|
|
|
21,646
|
|
|
|
21,383
|
|
Accumulated deficit
|
|
|
(9,061
|
)
|
|
|
(8,633
|
)
|
Accumulated other comprehensive loss
|
|
|
(952
|
)
|
|
|
(1,014
|
)
|
Total shareholders’
equity
|
|
|
18,469
|
|
|
|
18,556
|
|
Non-controlling interest
|
|
|
70
|
|
|
|
455
|
|
Total equity
|
|
|
18,539
|
|
|
|
19,011
|
|
Total liabilities and equity
|
|
$
|
45,007
|
|
|
$
|
43,758
|
|
(a) Assets of Hearing Help Express (HHE), a consolidated variable interest entity, that can only be used to settle obligations of HHE were $5,040 at March 31, 2017 and $5,159 at December 31, 2016, respectively. Liabilities of HHE, for which creditors do not have recourse to the general credit of IntriCon, were $4,166 at March 31, 2017 and $3,833 at December 31, 2016, respectively.
(See accompanying notes to the consolidated condensed financial statements)
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INTRICON CORPORATION
|
Consolidated Condensed Statements of Operations
|
(In Thousands, Except Per Share Amounts)
|
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|
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Three Months Ended
|
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March 31,
|
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|
March 31,
|
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|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
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Sales, net
|
|
$
|
20,088
|
|
|
$
|
18,064
|
|
Cost of sales
|
|
|
14,412
|
|
|
|
12,966
|
|
Gross profit
|
|
|
5,676
|
|
|
|
5,098
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,311
|
|
|
|
1,156
|
|
General and administrative
|
|
|
2,558
|
|
|
|
2,266
|
|
Research and development
|
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|
1,153
|
|
|
|
1,165
|
|
Total operating expenses
|
|
|
6,022
|
|
|
|
4,587
|
|
Operating income (loss)
|
|
|
(346
|
)
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(182
|
)
|
|
|
(126
|
)
|
Other income (expense)
|
|
|
56
|
|
|
|
(70
|
)
|
Income (loss) from continuing operations before income taxes and discontinued operations
|
|
|
(472
|
)
|
|
|
315
|
|
Income tax expense
|
|
|
64
|
|
|
|
34
|
|
Income (loss) from continuing operations before discontinued operations
|
|
|
(536
|
)
|
|
|
281
|
|
Loss on sale of discontinued operations (Note 3)
|
|
|
(164
|
)
|
|
|
—
|
|
Loss from discontinued operations (Note 3)
|
|
|
(113
|
)
|
|
|
(300
|
)
|
Net loss
|
|
|
(813
|
)
|
|
|
(19
|
)
|
Less: Loss allocated to non-controlling interest
|
|
|
(385
|
)
|
|
|
(34
|
)
|
Net income (loss) attributable to IntriCon shareholders
|
|
$
|
(428
|
)
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share attributable to IntriCon shareholders:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Discontinued operations
|
|
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
Net income (loss) per share:
|
|
$
|
(0.06
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share attributable to IntriCon shareholders:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Discontinued operations
|
|
|
(0.04
|
)
|
|
|
(0.05
|
)
|
Net income (loss) per share:
|
|
$
|
(0.06
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,826
|
|
|
|
5,981
|
|
Diluted
|
|
|
6,826
|
|
|
|
6,228
|
|
|
|
|
|
|
|
|
|
|
(See accompanying notes to the consolidated condensed financial statements)
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|
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INTRICON CORPORATION
|
Consolidated Condensed Statements of Comprehensive Loss
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net loss
|
|
$
|
(813
|
)
|
|
$
|
(19
|
)
|
Interest rate swap, net of taxes of $0
|
|
|
12
|
|
|
|
(37
|
)
|
Pension and postretirement obligations, net of taxes of $0
|
|
|
5
|
|
|
|
5
|
|
Foreign currency translation adjustment, net of taxes of $0
|
|
|
45
|
|
|
|
30
|
|
Comprehensive loss
|
|
$
|
(751
|
)
|
|
$
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
(See accompanying notes to the consolidated condensed financial statements)
|
|
|
|
|
|
|
INTRICON CORPORATION
|
Consolidated Condensed Statements of Cash Flows
|
(In Thousands)
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(813
|
)
|
|
$
|
(19
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
562
|
|
|
|
494
|
|
Stock-based compensation
|
|
|
218
|
|
|
|
181
|
|
Change in deferred gain
|
|
|
—
|
|
|
|
(28
|
)
|
Loss on sale of discontinued operations
|
|
|
164
|
|
|
|
—
|
|
Change in allowance for doubtful accounts
|
|
|
(3
|
)
|
|
|
1
|
|
Equity in loss of partnerships
|
|
|
12
|
|
|
|
54
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(888
|
)
|
|
|
(629
|
)
|
Inventories
|
|
|
(905
|
)
|
|
|
(85
|
)
|
Other assets
|
|
|
(121
|
)
|
|
|
(454
|
)
|
Accounts payable
|
|
|
1,670
|
|
|
|
492
|
|
Accrued expenses
|
|
|
(531
|
)
|
|
|
(913
|
)
|
Other liabilities
|
|
|
51
|
|
|
|
(25
|
)
|
Net cash used in operating activities
|
|
|
(584
|
)
|
|
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(273
|
)
|
|
|
(624
|
)
|
Other
|
|
|
(94
|
)
|
|
|
(18
|
)
|
Net cash used in investing activities
|
|
|
(367
|
)
|
|
|
(642
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings
|
|
|
4,520
|
|
|
|
3,628
|
|
Repayments of long-term borrowings
|
|
|
(3,920
|
)
|
|
|
(1,951
|
)
|
Proceeds from employee stock purchases and exercise of stock options
|
|
|
60
|
|
|
|
24
|
|
Change in restricted cash
|
|
|
(21
|
)
|
|
|
(42
|
)
|
Net cash provided by financing activities
|
|
|
639
|
|
|
|
1,659
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
25
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(287
|
)
|
|
|
186
|
|
Cash, beginning of period
|
|
|
667
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
380
|
|
|
$
|
553
|
|
(See accompanying notes to the consolidated condensed financial statements)
INTRICON
CORPORATION
Notes
to Consolidated Condensed Financial Statements (Unaudited) (In Thousands, Except Per Share Data)
In
the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of
normal recurring adjustments) necessary to present fairly IntriCon Corporation’s (“IntriCon” or the “Company”)
consolidated financial position as of March 31, 2017 and December 31, 2016, and the consolidated results of its operations and
cash flows for the three months ended March 31, 2017 and 2016. 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.
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. For all periods presented, the
Company classified this business as discontinued operations, and, accordingly, has reclassified historical financial data presented
herein.
The
consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation. The Company evaluates its voting and variable interests in entities
on a qualitative and quantitative basis. The Company consolidates entities in which it concludes it has the power to direct the
activities that most significantly impact an entity’s economic success and has the obligation to absorb losses or the right
to receive benefits that could be significant to the entity.
On
January 19, 2017, the Company announced that it had exercised its option to acquire the remaining 80 percent stake in Hearing
Help Express. The transaction is expected to close in 2017. The results of Hearing Help Express are consolidated into the Company’s
financial statements as of October 31, 2016.
In
April 2017, we entered into an agreement to acquire a 49 percent stake in Soundperience. Soundperience has designed state of the
art self-fitting hearing aid technology. The company’s self-fitting hearing aid technology is being used in the German market
today, most notably though our Signison joint venture with Soundperience. Both Soundperience and Signison will be accounted in
the Company’s financial statements using the equity method.
The
Company notes Hearing Help Express’s pro forma financial statements were not included for 2016 as this company was in bankruptcy
and this year was not reflective of the normal operations of Hearing Help Express.
The
Company has evaluated subsequent events occurring after the date of the consolidated financial statements for events requiring
recording or disclosure in the financial statements.
|
2.
|
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
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB’s
Emerging Issues Task Force (the “Task Force”). The new standard requires that the statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. Entities will also be required to reconcile such total to amounts on the balance sheet and disclose the nature
of the restrictions. The Company does not anticipate that the adoption of this new standard will have a material impact on its
consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-9, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting, which simplifies several aspects of the accounting for shared-based payment transactions, including the income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
For public entities, this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. The adoption of the guidance does not have a material impact on our 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
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.
|
3.
|
Discontinued
Operations
|
The
following table shows the cardiac diagnostic monitoring business balance sheet as of December 31, 2016:
|
|
|
|
|
|
December
31,
|
|
|
|
2016
|
|
Accounts
receivable, net
|
|
$
|
123
|
|
Current
assets of discontinued operations
|
|
$
|
123
|
|
|
|
|
|
|
Accounts
payable
|
|
|
22
|
|
Accrued
compensation and other liabilities
|
|
|
101
|
|
Current
liabilities of discontinued operations
|
|
$
|
123
|
|
The
following table shows the results of the cardiac diagnostic monitoring discontinued operations:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
Sales,
net
|
|
$
|
140
|
|
|
$
|
194
|
|
Operating
costs and expenses
|
|
|
(253
|
)
|
|
|
(494
|
)
|
Net
loss from discontinued operations
|
|
|
(113
|
)
|
|
|
(300
|
)
|
The
Company sold the cardiac diagnostic monitoring business on February 17, 2017 to Datrix, LLC for a future revenue earn-out that
was valued by the Company at $0. The Company recorded a loss on the sale of $164. The net loss was computed as follows:
|
|
|
|
Accounts
receivable, net
|
|
$
|
179
|
|
Accrued
liabilities
|
|
|
(15
|
)
|
Net
assets sold
|
|
$
|
164
|
|
Fair value of consideration
received
|
|
|
—
|
|
Loss
on sale of discontinued operations, net of income taxes
|
|
$
|
164
|
|
The
Company currently operates in two reportable segments: body-worn devices and hearing health direct-to-consumer. The nature of
distribution and services has been deemed separately identifiable. Therefore, segment reporting has been applied.
Income
(loss) from operations is total net revenues less cost of sales and operating expenses. Identifiable assets by industry segment
include assets directly identifiable with those operations. The accounting policies applied to determine segment information are
the same as those described in the summary of significant accounting policies described in and incorporated by reference from
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 1 to the financial
statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company evaluates
the performance of each segment based on income and loss from continuing operations before income taxes. The following table summarizes
data by industry segment:
|
|
|
|
|
|
|
|
|
|
At
and for the Three Months Ended March 31, 2017
|
|
Body
Worn Devices
|
|
|
Hearing
Health Direct-to-Consumer
|
|
|
Total
|
|
Revenue,
net
|
|
$
|
18,672
|
|
|
$
|
1,416
|
|
|
$
|
20,088
|
|
Loss from continuing
operations
|
|
|
(83
|
)
|
|
|
(453
|
)
|
|
|
(536
|
)
|
Identifiable assets
(excluding goodwill)
|
|
|
30,416
|
|
|
|
4,036
|
|
|
|
34,452
|
|
Goodwill
|
|
|
9,551
|
|
|
|
1,004
|
|
|
|
10,555
|
|
Depreciation and amortization
|
|
|
495
|
|
|
|
67
|
|
|
|
562
|
|
Capital expenditures
|
|
|
213
|
|
|
|
60
|
|
|
|
273
|
|
|
5.
|
Geographic
Information
|
The
geographical distribution of long-lived assets to geographical areas consisted of the following at:
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
United
States
|
|
$
|
4,572
|
|
|
$
|
4,640
|
|
Singapore
|
|
|
1,339
|
|
|
|
1,413
|
|
Other
– primarily United Kingdom and Indonesia
|
|
|
536
|
|
|
|
553
|
|
Consolidated
|
|
$
|
6,447
|
|
|
$
|
6,606
|
|
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.
The
geographical distribution of net sales to geographical areas for the three months ended March 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Net
Sales to Geographical Areas
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
United
States
|
|
$
|
15,523
|
|
|
$
|
11,730
|
|
Europe
|
|
|
2,478
|
|
|
|
3,297
|
|
Asia
|
|
|
1,910
|
|
|
|
2,868
|
|
All
other countries
|
|
|
177
|
|
|
|
169
|
|
Consolidated
|
|
$
|
20,088
|
|
|
$
|
18,064
|
|
Geographic
net sales are allocated based on the location of the customer. All other countries include net sales primarily to various countries
in Europe and in the Asia Pacific region.
For
the three months ended March 31, 2017, one customer accounted for 46% of the Company’s consolidated net sales. For the three
months ended March 31, 2016, one customer accounted for 39% of the Company’s consolidated net sales.
At
March 31, 2017, two customers combined accounted for 31% of the Company’s consolidated accounts receivable. At December
31, 2016, two customers combined accounted for 31% of the Company’s consolidated accounts receivable.
Inventories
consisted of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
Work-in process
|
|
|
Finished products
and components
|
|
|
Total
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
$
|
6,212
|
|
|
$
|
1,401
|
|
|
$
|
2,955
|
|
|
$
|
10,568
|
|
Foreign
|
|
|
|
1,583
|
|
|
|
369
|
|
|
|
719
|
|
|
|
2,671
|
|
Total
|
|
|
$
|
7,795
|
|
|
$
|
1,770
|
|
|
$
|
3,674
|
|
|
$
|
13,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
7.
|
Short
and Long-Term Debt
|
Short
and long-term debt is summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Domestic asset-based revolving credit facility
|
|
$
|
4,078
|
|
|
$
|
3,218
|
|
Note payable
|
|
|
2,000
|
|
|
|
2,000
|
|
Foreign overdraft and letter of credit facility
|
|
|
1,247
|
|
|
|
1,243
|
|
Domestic term loan
|
|
|
5,000
|
|
|
|
5,250
|
|
Unamortized finance costs
|
|
|
(127
|
)
|
|
|
(81
|
)
|
Total debt
|
|
|
12,198
|
|
|
|
11,630
|
|
Less: current maturities
|
|
|
(2,368
|
)
|
|
|
(2,346
|
)
|
Total long-term debt
|
|
$
|
9,830
|
|
|
$
|
9,284
|
|
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 March 31, 2017, 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.
|
On
March 9, 2017, the Company and its domestic subsidiary, IntriCon, Inc., entered into a Tenth Amendment to the Loan and Security
Agreement and Waiver (the “Tenth Amendment”) with The PrivateBank and Trust Company. The Tenth Amendment, among other
things:
|
▪
|
amended
the minimum EBITDA (as defined in the Loan and Security Agreement), funded debt to EBITDA
ratio and fixed charge coverage ratio covenants; and
|
|
▪
|
waived
defaults in the funded debt to EBITDA ratio and fixed charge coverage ratio covenants
as of December 31, 2016.
|
All
of the borrowings under this agreement have been characterized as either a current or long-term liability on our balance sheet
in accordance with the repayment terms described more fully below.
Weighted
average interest on the revolving credit facility was 6.82% for the three months ended March 31, 2017 and 4.36% for the year ended
December 31, 2016. The outstanding balance of the revolving credit facility was $4,078 and $3,218 at March 31, 2017 and December
31, 2016, respectively. The total availability on the revolving credit facility was approximately $4,508 and $5,121 at March 31,
2017 and December 31, 2016, respectively.
The
outstanding principal balance of the term loan, as amended, is payable in quarterly installments of $250. Any remaining principal
and accrued interest is payable on February 28, 2019. IntriCon is also required to use 100% of the net cash proceeds of certain
asset sales (excluding inventory and certain other dispositions), sale of capital securities or issuance of debt to pay down the
term loan.
The
Company was in compliance with the financial covenants under the facility as of March 31, 2017.
Foreign
Credit Facility
In
addition to its domestic credit facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international
senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for an asset based line of credit.
Borrowings bear interest at a rate of .75% to 2.5% over the lender’s prevailing prime lending rate. Weighted average interest
on the international credit facilities was 3.87% and 3.50% for the three months ended March 31, 2017 and the year ended December
31, 2016, respectively. The outstanding balance was $1,247 and $1,243 at March 31, 2017 and December 31, 2016, respectively. The
total remaining availability on the international senior secured credit agreement was approximately $476 and $455 at March 31,
2017 and December 31, 2016, 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.
Income
tax expense for the three months ended March 31, 2017 was $64 compared to $34 for the same period in 2016. The expense for the
three months ended March 31, 2017 and 2016, was primarily due to foreign operations. The Company has net operating loss carryforwards
for U.S. federal income tax purposes and, consequently, minimal federal benefit or expense from the domestic operations was recognized
as the deferred tax asset has a full valuation allowance.
The
following was the income (loss) before income taxes for each jurisdiction in which the Company has operations for the three months
ended March 31, 2017 and 2016.
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
United States
|
|
$
|
(387
|
)
|
|
$
|
(32
|
)
|
Singapore
|
|
|
(93
|
)
|
|
|
204
|
|
Indonesia
|
|
|
16
|
|
|
|
18
|
|
United Kingdom
|
|
|
(125
|
)
|
|
|
55
|
|
Germany
|
|
|
117
|
|
|
|
70
|
|
Income (loss) before income taxes
|
|
$
|
(472
|
)
|
|
$
|
315
|
|
|
9.
|
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 Pan, the Company may grant stock options, stock awards, stock appreciation rights, restricted stock
units and other equity-based awards, although no such awards, other than stock options, had been granted as of March 31, 2017.
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.
The
Compensation Committee of the Board of Directors has established a non-employee directors’ stock fee election program, referred
to as the director’s program, and a non-employee director and executive officer stock purchase program, referred to as the
management purchase program, as an award under the 2015 Plan. There were no shares purchased under the director program or the
management purchase program during the three months ended March 31, 2017 and 2016.
Stock
option activity as of and during the three months ended March 31, 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
Aggregate
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
Outstanding at December 31, 2016
|
|
|
1,385
|
|
|
$
|
6.54
|
|
|
|
|
|
Options forfeited, cancelled or expired
|
|
|
(4
|
)
|
|
|
7.38
|
|
|
|
|
|
Options granted
|
|
|
145
|
|
|
|
6.90
|
|
|
|
|
|
Options exercised
|
|
|
(26
|
)
|
|
|
5.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
|
|
1,500
|
|
|
$
|
6.60
|
|
|
$
|
4,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2017
|
|
|
1,116
|
|
|
$
|
6.48
|
|
|
$
|
3,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at December 31, 2016
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at March 31, 2017
|
|
|
272
|
|
|
|
|
|
|
|
|
|
The
number of shares available for future grants at March 31, 2017 does not include a total of up to 1,124 shares subject to options
outstanding under the 2006 plan as of March 31, 2017, which will become available for grant under the 2015 Equity Incentive Plan
in the event of the expiration, cancellation or surrender of such options.
The
fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and
are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected
stock price volatility. The weighted average fair value of options granted was $3.98 for options granted during the three months
ended March 31, 2017. The weighted average fair value of options granted was $7.58 for options granted during the three months
ended March 31, 2016.
The
Company calculates expected volatility for stock options and awards using the Company’s historical volatility.
The
Company currently estimates a zero percent forfeiture rate for stock options.
The
risk-free rates for the expected terms of the stock options and awards are based on the U.S. Treasury yield curve in effect at
the time of grant.
The
weighted average remaining contractual life of options outstanding and exercisable was 4.36 years and 5.33 years as of March 31,
2017 and December 31, 2016, respectively.
The
Company recorded $218 of non-cash stock option expense for the three months ended March 31, 2017. The Company recorded $181 of
non-cash stock option expense for the three months ended March 31, 2016. As of March 31, 2017, there was $1,247 of total unrecognized
compensation costs related to non-vested awards that are expected to be recognized over a weighted-average period of 2.04 years.
The
Company also has an Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, as amended, through March
31, 2017, provides that a maximum of 300 shares may be sold under the Purchase Plan. There were a total of 4 shares purchased
under the plan for the three months ended March 31, 2017 and a total of 4 shares purchased for the three months ended March 31,
2016.
|
10.
|
Income
(loss) Per Share
|
The
following table presents a reconciliation between basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Numerator:
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and discontinued operations
|
|
$
|
(536
|
)
|
|
$
|
281
|
|
Loss on sale of discontinued operations
|
|
|
(164
|
)
|
|
|
|
|
Loss from discontinued operations, net of income taxes
|
|
|
(113
|
)
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(813
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Less: loss allocated to non-controlling interest
|
|
|
(385
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to shareholders
|
|
$
|
(428
|
)
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic – weighted shares outstanding
|
|
|
6,826
|
|
|
|
5,981
|
|
Weighted shares assumed upon exercise of stock options
|
|
|
—
|
|
|
|
247
|
|
Diluted – weighted shares outstanding
|
|
|
6,826
|
|
|
|
6,228
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share attributable to IntriCon shareholders:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Discontinued operations
|
|
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
Net income (loss) per share:
|
|
$
|
(0.06
|
)
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share attributable to IntriCon shareholders:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.02
|
)
|
|
$
|
0.05
|
|
Discontinued operations
|
|
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
Net income (loss) per share:
|
|
$
|
(0.06
|
)
|
|
$
|
0.00
|
|
The
dilutive impact summarized above relates to the periods when the average market price of Company stock exceeded the exercise price
of the potentially dilutive option securities granted. 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. Individual components of basic and
diluted income (loss) per share may not sum to the total income (loss) per share due to rounding.
Excluded
from the computation of diluted earnings per share for the three months ended March 31, 2017 were outstanding in the money options
to purchase approximately 294 common shares because the effect would have been anti-dilutive due to the Company’s net income
(loss) in the period.
The
Company is a defendant along with a number of other parties in lawsuits alleging that plaintiffs have or may have contracted asbestos-related
diseases as a result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. These
lawsuits relate to the discontinued heat technologies segment which was sold in March 2005. Due to the non-informative nature
of the complaints, the Company does not know whether any of the complaints state valid claims against the Company. Certain insurance
carriers have informed the Company that the primary policies for the period August 1, 1970-1978 have been exhausted and that the
carriers will no longer provide defense and insurance coverage under those policies. However, the Company has other primary and
excess insurance policies that the Company believes afford coverage for later years. Some of these other primary insurers have
accepted defense and insurance coverage for these suits, and some of them have either ignored the Company’s tender of defense
of these cases, or have denied coverage, or have accepted the tenders but asserted a reservation of rights and/or advised the
Company that they need to investigate further. Because settlement payments are applied to all years a litigant was deemed to have
been exposed to asbestos, the Company believes that it will have funds available for defense and insurance coverage under the
non-exhausted primary and excess insurance policies. However, unlike the older policies, the more recent policies have deductible
amounts for defense and settlements costs that the Company will be required to pay; accordingly, the Company expects that its
litigation costs will increase in the future. Further, many of the policies covering later years (approximately 1984 and thereafter)
have exclusions for any asbestos products or operations, and thus do not provide insurance coverage for asbestos-related lawsuits.
The Company does not believe that the asserted exhaustion of some of the primary insurance coverage for the 1970-1978 period will
have a material adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number
of insurance carriers involved in the defense of the suits, and the significant number of policy years and policy limits under
which these insurance carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company’s
consolidated financial position or results of operations.
The
Company’s former French subsidiary, Selas SAS, filed for insolvency in France. The Company may be subject to additional
litigation or liabilities as a result of the French insolvency proceeding, including liabilities under guarantees aggregating
approximately $450.
The
Company is also involved in other lawsuits arising in the normal course of business. While it is not possible to predict with
certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not
materially affect our consolidated financial position, liquidity or results of operations.
12.
Related-Party Transactions
On
March 10, 2017, the Company’s entered into a Fourth Extension Agreement to the Amended and Restated Office/Warehouse Lease
with Arden Partners I, L.L.P., the landlord of the Company’s facility in Arden Hills, Minnesota. Pursuant to the lease as
amended, the Company leases office and factory space from a partnership consisting of three present or former officers of the
Company, including Mark Gorder, a member of the Company’s Board of Directors and the President and Chief Executive Officer
of the Company. The Company is required to pay all real estate taxes and operating expenses. The total base rent expense, real
estate taxes and other charges incurred under the lease were approximately $124 for the three months ended March 31, 2017 and
approximately $121 for the three months ended March 31, 2016. The term of the lease runs to January 31, 2022.
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. For the three months ended March 31, 2017, the Company paid that firm approximately
$72 for legal services and costs. For the three months ended March 31, 2016, the Company paid that firm approximately $67
for legal services and costs. The Chairman of our Board of Directors is 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.
13. Revenue
by Market
The
following tables set forth, for the periods indicated, net revenue by market:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Medical
|
|
$
|
11,671
|
|
|
$
|
9,839
|
|
Hearing Health
|
|
|
5,619
|
|
|
|
6,468
|
|
Hearing Health Direct-to-Consumer
|
|
|
1,416
|
|
|
|
—
|
|
Professional Audio Communications
|
|
|
1,382
|
|
|
|
1,757
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
20,088
|
|
|
$
|
18,064
|
|
14.
Subsequent Events
On
May 3, 2017, IntriCon, Inc., a wholly owned subsidiary of the Company, entered into an Investment Agreement with Rheinton GmbH
and Soundperience GmbH, each of which is a German company with limited liability, pursuant to which IntriCon, Inc. ultimately
will acquire a 49% interest in Soundperience, a self-fitting hearing aid technology provider. Under the Investment Agreement,
IntriCon, Inc. acquired a 16.67% interest in Soundperience in settlement of a 400 € loan (approximately $440) made by IntriCon,
Inc. and will acquire a 32.33% interest in Soundperience for an additional investment of 800 € (approximately $880) upon
the satisfaction of certain milestones for the development of self-fitting hearing aid software, anticipated to be completed in
the 2017 fourth quarter. As part of the initial investment, IntriCon, Inc. entered into an irrevocable, worldwide license with
Soundperience for the self-fitting hearing aid software. The license is exclusive in the United States.
The
foregoing description of the Investment Agreement does not purport to be complete and is qualified in its entirety by reference
to the English translation of the Investment Agreement, a copy of which is filed as Exhibit 10.4 hereto and is incorporated herein
by reference.
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, the United Kingdom and Germany.
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. For all periods presented, the
Company classified this business as discontinued operations, and, accordingly, has reclassified historical financial data presented
herein.
The
consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation. The Company evaluates its voting and variable interests in entities
on a qualitative and quantitative basis. The Company consolidates entities in which it concludes it has the power to direct the
activities that most significantly impact an entity’s economic success and has the obligation to absorb losses or the right
to receive benefits that could be significant to the entity.
On
January 19, 2017, the Company announced that it had exercised its option to acquire the remaining 80 percent stake in Hearing
Help Express. The transaction is expected to close in 2017. The results of Hearing Help Express are consolidated into the Company’s
financial statements as of October 31, 2016.
In
April 2017, we entered into an agreement to acquire a 49 percent stake in Soundperience. Soundperience has designed state
of the art, self-fitting hearing aid technology. The company’s self-fitting hearing aid technology is being used in the
German market today, most notably though our Signison joint venture with Soundperience. Both Soundperience and Signison will be
accounted in the Company’s financial statements using the equity method.
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.
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 emerging value based
hearing healthcare market, the medical bio-telemetry market and the professional audio communication market. Revenue from the
medical bio-telemetry and value hearing health markets is reported on the respective medical and hearing health 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 13 “Revenue by Market” to the Company’s consolidated condensed financial statements
included herein.
Value
Based Hearing Healthcare Market
The
Company believes the value based hearing healthcare (VBHH) market offers significant growth opportunities. In the United States
alone, there are approximately 37.5 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.
The average cost of a hearing aid in the US market today is over $2,400 per device, more than double the cost from twelve 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.
W
e
believe a perfect vortex of factors has come together over the last few years to enable the emergence of a market disruptive,
high-quality, low cost distribution model, including,
continued consolidation of
retail (causing escalating hearing aid prices), consumer outcry, consumer education, advancements in technology (such as behind-the-ear
devices, advanced digital signal processing, low-power wireless, and self-fitting software) as well as regulatory actions and
pronouncements by the U.S. Food and Drug Administration, the President’s Council of Advisors on Science and Technology and
the National Academies of Science, Engineering and Medicine.
Today
in the US market, the conventional channel pushes all hearing impaired through the same bloated, costly channel. However, a very
large portion of the hearing-impaired market – mostly notably those with mild to moderate losses – could be properly
severed 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.
In
early January 2016, the U.S. Food and Drug Administration (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 has
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 gather stakeholder and public input on draft
guidance related to the agency’s premarket requirements for hearing aids and PSAPs. The FDA’s intent is to consider
ways in which regulation can support further device penetration into the hearing market. In December 2016, t
he
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 that could deliver new, innovative and lower-cost products to millions of consumers. Further
guidance is expected later in 2017.
The
Company is in the final stages of commercializing its PhysioLink™ 2 wireless technology, which will be incorporated into
product platforms serving the traditional and value based hearing healthcare markets. This technology is an integrated platform
that incorporates IntriCon’s Audion™ 8 amplifier and Bluetooth® low energy, enabling wireless connectivity from
any Bluetooth® enabled device over distances up to five meters.
We
are also currently developing our third generation PhysioLink™ technology, leveraging industry leading wireless IC technology
to enable concurrent audio streaming and data transmission over Bluetooth® low energy. This technology will be incorporated
into product platforms serving traditional and value based hearing healthcare markets, providing end users with an unprecedented
experience through breakthrough audio and wireless performance.
In
October of 2016, we purchased 20 percent of Hearing Help Express, Inc., a direct-to-consumer mail order hearing aid provider.
In January 2017, we exercised an option to acquire the remaining 80% equity interest. Hearing Help Express is a key next step
in our value based hearing healthcare strategy. Over the last decade, we have invested in the technology and low-cost manufacturing
to design and build superior devices and fitting solutions, to address what we estimate to be a $1 billion annually value based
hearing healthcare market. With this acquisition, 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. 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. Hearing Help Express provides an efficient, traditional direct-to-consumer channel to reach
consumers who likely do not have insurance that will cover hearing devices. This is a channel that we can build on and expand
via technology—and one that is complementary with many of our existing relationships.
In
April 2017, we entered into an agreement to acquire a 49 percent stake in Soundperience. Soundperience has designed state
of the art, self-fitting hearing aid technology. Soundperience software applications are the first psycho-acoustic way of analyzing
peripheral hearing and central hearing processing.
The
Company’s self-fitting hearing aid technology is being used in the German market today, most notably though our Signison
joint venture with Soundperience. Currently, the technology is PC based and is wired to the hearing aid during programing. However,
the system will be integrated with IntriCon’s wireless hearing aids over the next few months, and initially rolled out in
Germany through our Signison joint venture.
We
believe strongly that incorporating self-fitting technology is a critical step in creating our high-quality, low-cost hearing
healthcare ecosystem. Soundperience’s technology has the potential to drastically reduce the price of hearing aids, drive
greater access and increase customer satisfaction.
In
other VBHH channels, the Company entered into a manufacturing agreement with hi HealthInnovations, a UnitedHealth Group company,
to become their supplier of hearing aids. At the beginning of 2012, hi HealthInnovations launched a suite of high-tech, lower-cost
hearing devices for their Medicare and Part D participants and later in the year announced they were increasing this offering
to the over 26 million people enrolled in their employer-sponsored and individual health benefit plans. In 2012, they expanded
their offering to include a hearing aid discount program for health plans. This program is available nationwide to all health
insurers, including employer-sponsored, individual and Medicare plans. The insurance model has been successfully demonstrated
internationally, where several countries providing a full insurance program are serving 40 to 70 percent of the hearing-impaired
population. Further, research in the U.S. has shown a fully insured model will encourage an individual to seek treatment at an
earlier stage of hearing loss, greatly increasing the market size and penetration. The Company also has various international
VBHH initiatives. On November 3, 2015, the Company acquired the assets of PC Werth through its IntriCon UK subsidiary to gain
direct access to the NHS and to have greater control over its efforts to accelerate new market penetration into the United Kingdom.
IntriCon UK has been appointed as one of the main suppliers to the NHS Supply Chain’s National Framework. The NHS is widely
seen as the most efficient hearing aid delivery system in the world, supplying an estimated 1.4 million hearing aids annually.
We believe IntriCon is well positioned to serve their needs, and we are developing new technologies to further enhance delivery
efficiencies and product standards in the future.
We
also believe there are niches in the conventional hearing health channel that will embrace our VBHH proposition in the United
States and Europe. High costs of conventional devices and retail consolidation have constrained the growth potential of the independent
audiologist and dispenser. We believe our software and product offering can provide independent audiologists and dispensers the
ability to compete with larger retailers, such as Costco, and manufacturer owned retail distributors. In the third quarter of
2015, we announced a joint venture with The Academy of Doctors of Audiology (ADA) to provide hearing instruments and educational
resources to audiologists and their patients. The joint venture operates as a limited liability company under the name “earVenture
LLC”. EarVenture was officially launched in November 2015 at the ADA conference. To date, more than 400 of the 1,200 ADA
members have registered to join the earVenture program and we have delivered initial units. In 2016, earVenture began rolling-out
a comprehensive marketing and sales plan to convert those registered members to consistent customers, as well as solicit non-registered
ADA members to join the program. While we do not view earVenture, near term, as a meaningful contributor to sales, it continues
to provide valuable industry insights and has the potential for future value by connecting it to our emerging direct-to-consumer
channel.
Medical
Bio-Telemetry
In
the medical bio-telemetry market, the Company is focused on sales of bio-telemetry devices for life-critical diagnostic monitoring.
Using our nanoDSP and BodyNet™ technology platforms, the Company manufactures microelectronics, micro-mechanical assemblies,
high-precision injection-molded plastic components and complete bio-telemetry devices for emerging and leading medical device
manufacturers. The medical industry is faced with pressures to reduce the cost of healthcare. Driven by core technologies, such
as the IntriCon Physiolink™ that wirelessly connects patients and care givers in non-traditional ways, IntriCon helps shift
the point of care from expensive traditional settings, such as hospitals, to less expensive non-traditional settings like the
home. IntriCon currently serves this market by offering medical manufacturers the capabilities to design, develop, manufacture
and distribute medical devices that are easier to use, are more miniature, use less power, and are lighter. Increasingly, the
medical industry is looking for wireless, low-power capabilities in their devices.
IntriCon
currently has a strong presence in the diabetes and other bio-telemetry markets. For diabetes, IntriCon has partnered with Medtronic
to manufacture their wireless continuous glucose monitors (CGM), sensors, and accessories associated with Medtronic’s CGM
system, including the MiniMed Connect, which links the MiniMed pump and CGM to certain smart devices providing users with a discrete
and real-time view of their blood sugar information. Our Medtronic business posted record revenue in 2015, led by the MiniLink
REAL-Time Transmitter and related accessories sales, which are incorporated in Medtronic’s MiniMed 530G insulin pump and
CGM system. In August 2016, the FDA approved the MiniMed 630G system which will replace the 530G system. In addition to the MiniMed
630G system, IntriCon is also designed into the MiniMed 670G system which was approved by the FDA in September 2016, and is scheduled
to be launched in the spring of 2017. The MiniMed 670G is the world’s first hybrid closed loop insulin delivery system and
we are excited to be designed into and supporting such a revolutionary diabetes management system. 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.
IntriCon
manufactures bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system
as well as a family of safety needle products for an OEM customer that utilizes IntriCon’s insert and straight molding capabilities.
These products are assembled using full automation, including built-in quality checks within the production lines.
Lastly,
IntriCon is targeting other emerging biotelemetry and home care markets that could benefit from its capabilities to develop devices
that are more technologically advanced, smaller and lightweight. To do so, IntriCon is leveraging its resources in sales and marketing
and research and development to expand its reach to other large medical device and health care companies.
In
order to focus financial and operational resources on value hearing health and the growing DTC opportunity, IntriCon made the
strategic decision to divest its non-core CDM business in 2016. The Company sold the cardiac diagnostic monitoring business on
February 17, 2017 to Datrix, LLC.
Professional
Audio Communications
IntriCon
entered the high-quality audio communication device market in 2001, and now has a line of miniature, professional audio headset
products used by customers focusing on emergency response needs. The line includes several communication devices that are extremely
portable and perform well in noisy or hazardous environments. These products are well suited for applications in the fire, law
enforcement, safety, aviation and military markets. In addition, the Company has a line of miniature ear- and head-worn devices
used by performers and support staff in the music and stage performance markets. We believe performance in difficult listening
environments and wireless operations will continue to improve as these products increasingly include our proprietary nanoDSP,
wireless nanoLink and PhysioLink technologies.
Core
Technologies Overview
Our
core technologies expertise is focused on three main markets: medical bio-telemetry, value based hearing healthcare 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), Fitting Software, ULP Wireless, Microminiaturization,
and Miniature Transducers. These five core technologies serve as the foundation of current and future product platform development,
designed to meet the rising demand for smaller, portable, more advanced devices and the need for greater efficiencies in the delivery
models. The continued advancements in this area have allowed the Company to further enhance the mobility and effectiveness of
miniature body-worn devices.
ULP
DSP
DSP
converts real-world analog signals into a digital format. Through our nanoDSP™ technology, IntriCon offers an extensive
range of ULP DSP amplifiers for hearing, medical and professional audio applications. Our proprietary nanoDSP incorporates advanced
ultra-miniature hardware with sophisticated signal processing algorithms to produce devices that are smaller and more effective.
The Company further expanded its DSP portfolio including improvements to its Reliant CLEAR™ feedback canceller, offering
increased added stable gain and faster reaction time. Additionally, the DSP technologies are utilized in the Audion8™, our
eight-channel hearing aid amplifier, and the Audion16™, our wide dynamic range compression sixteen-channel hearing aid amplifier
announced in April 2016. The amplifiers are feature-rich and are designed to fit a wide array of applications. In addition to
multiple compression channels, the amplifiers have a complete set of proven adaptive features which greatly improve the user experience.
ULP
Wireless
Wireless
connectivity is fast becoming a required technology, and wireless capabilities are especially critical in new body-worn devices.
IntriCon’s BodyNet™ ULP technology, including the nanoLink™ and PhysioLink™ wireless systems, offers solutions
for transmitting the body’s activities to caregivers, and wireless audio links for professional communications and surveillance
products include diabetes monitoring, and audio streaming for hearing devices.
IntriCon
is in the final stages of commercializing its PhysioLink2 and Physiolink3 wireless technology, which will be incorporated into
product platforms serving the medical, hearing health 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 five meters. The Physiolink2 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 Physiolink3 technology builds on the Physiolink2 capabilities by adding wireless streaming at 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 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 individuals that cannot receive
care today, primarily due to high cost and low access. IntriCon will be introducing our advanced fitting solutions through our
various VBHH channels later in 2017.
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 with the increase of greater interventional care that our coil technology harbors significant value.
Forward-Looking
and Cautionary Statements
Certain
statements included in this Quarterly Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission,
which are not historical facts, or that include forward-looking terminology such as “may”, “will”, “believe”,
“anticipate”, “expect”, “should”, “optimistic” “continue”, “estimate”,
“intend”, “plan”, “would”, “could”, “guidance”, “potential”,
“opportunity”, “project”, “forecast”, “confident”, “projections”,
“schedule”, “designed”, “future”, “discussion”, “if” or the negative
thereof or other variations thereof, are forward-looking statements (as such term is defined in Section 21E of the Securities
Exchange Act of 1934 and Section 27A of the Securities Act of 1933, and the regulations thereunder), which are intended to be
covered by the safe harbors created thereby. These statements may include, but are not limited to statements in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to the Company’s Condensed
Consolidated Financial Statements” such as net operating loss carryforwards, the ability to meet cash requirements for operating
needs, the ability to meet liquidity needs, assumptions used to calculate future level of funding of employee benefit plans, the
adequacy of insurance coverage and the impact of new accounting pronouncements and litigation. Forward-looking statements also
include, without limitation, statements as to the Company’s expected future results of operations and growth, strategic alliances
and their benefits, government regulation, potential increases in demand for the Company’s products, the Company’s
ability to meet working capital requirements, the Company’s business strategy, the expected increases in operating efficiencies,
anticipated trends in the Company’s markets, estimates of goodwill impairments and amortization expense of other intangible assets,
the effects of changes in accounting pronouncements, the effects of litigation and the amount of insurance coverage, and statements
as to trends or the Company’s or management’s beliefs, expectations and opinions.
Forward-looking
statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ
materially from those in the forward-looking statements. In addition to the factors discussed in this Quarterly Report on Form
10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from
those expressed or implied by such forward-looking statements, including, without limitation, the following:
|
▪
|
our
ability to successfully implement our business and growth strategy;
|
|
▪
|
risks
arising in connection with the insolvency of our former subsidiary, Selas SAS, and potential
liabilities and actions arising in connection with the insolvency;
|
|
▪
|
the
volume and timing of orders received by the Company, particularly from Medtronic and
hi HealthInnovations;
|
|
▪
|
changes
in estimated future cash flows;
|
|
▪
|
our
ability to collect our accounts receivable;
|
|
▪
|
foreign
currency movements in markets that we serve;
|
|
▪
|
changes
in the global economy and financial markets;
|
|
▪
|
weakening
demand for our products due to general economic conditions;
|
|
▪
|
changes
in the mix of products sold;
|
|
▪
|
our
ability to meet demand;
|
|
▪
|
changes
in customer requirements;
|
|
▪
|
timing
and extent of research and development expenses;
|
|
▪
|
FDA
approval, timely release and acceptance of our products and 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;
|
|
▪
|
our
ability to comply with covenants in our debt agreements or to obtain waivers if we do
not comply;
|
|
▪
|
our
ability to repay debt when it comes due;
|
|
▪
|
our
ability to obtain extensions of our current credit facility or a new credit facility;
|
|
▪
|
the
loss of one or more of our major customers;
|
|
▪
|
our
ability to identify, complete and integrate acquisitions;
|
|
▪
|
effects
of legislation;
|
|
▪
|
effects
of foreign operations;
|
|
▪
|
our
ability to develop new products;
|
|
▪
|
our
ability to recruit and retain engineering and technical personnel;
|
|
▪
|
the
costs and risks associated with research and development investments;
|
|
▪
|
the
recent recessions in Europe and the debt crisis in certain countries in the European
Union;
|
|
▪
|
our
ability and the ability of our customers to protect intellectual property;
|
|
▪
|
loss
of members of our senior management team; and
|
|
▪
|
other
risk factors set forth in our most recent Annual Report on Form 10-K or any prior Quarterly
Report on Form 10-Q, which are incorporated by reference into this Report.
|
For
a description of these and other risks, see Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2016, 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 consolidated and variable interest entities, revenue recognition,
accounts receivable reserves, inventory valuation, goodwill, long-lived assets, deferred taxes policies and employee benefit obligations.
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 financial statements contained
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Results
of Operations
Sales,
net
Our
net sales are comprised of two segments: our body-worn device segment (consisting of three main markets: medical, hearing health,
and professional audio) and our hearing health direct-to-consumer segment. Below is a summary of our sales by main markets for
the three months ended March 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
Three Months Ended March 31
|
|
2017
|
|
|
2016
|
|
|
Dollars
|
|
|
Percent
|
|
Medical
|
|
$
|
11,671
|
|
|
$
|
9,839
|
|
|
$
|
1,832
|
|
|
|
18.6
|
%
|
Hearing Health
|
|
|
5,619
|
|
|
|
6,468
|
|
|
|
(849
|
)
|
|
|
-13.1
|
%
|
Hearing Health Direct-to-Consumer
|
|
|
1,416
|
|
|
|
—
|
|
|
|
1,416
|
|
|
|
—
|
|
Professional Audio Communications
|
|
|
1,382
|
|
|
|
1,757
|
|
|
|
(375
|
)
|
|
|
-21.3
|
%
|
Consolidated Net Sales
|
|
$
|
20,088
|
|
|
$
|
18,064
|
|
|
$
|
2,024
|
|
|
|
11.2
|
%
|
For
the three months ended March 31, 2017, we experienced an increase of 18.6% in net sales in the medical market compared to the
same period in 2016. Medtronic revenues were up year-over-year and we continue to anticipate Medtronic revenue growth throughout
2017 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 other emerging biotelemetry and home care
markets that could benefit from its capabilities to develop devices that are more technologically advanced, smaller and lightweight.
Net
sales in our hearing health business for the three months ended March 31, 2017 decreased 13.1% compared to the same period in
2016. The decrease for the three months ended March 31, 2017 was primarily due to decreases in the traditional hearing health
market. The Company remains very optimistic about the progress that has been made and the long-term prospects of the value based
hearing healthcare market. Market dynamics, such as low penetration rates, an aging population, and the need for reduced cost
and convenience, have resulted in the emergence of alternative care models, such the insurance channel and PSAP channel. IntriCon
believes it is very well positioned to serve these value based hearing healthcare market channels. The Company will be aggressively
pursuing larger customers who can benefit from our value proposition. Over the past several years, the Company has invested heavily
in core technologies, product platforms and its global manufacturing capabilities geared to provide high-tech, lower-cost hearing
devices.
Net
sales in our hearing health direct-to-consumer business for the three months ended March 31, 2017 increased due to the acquisition
of 20% equity interest and control of Hearing Help Express during the fourth quarter of 2016.
Net
sales to the professional audio device sector decreased 21.3% for the three months ended March 31, 2017 compared to the same period
in 2016. IntriCon will continue to leverage its core technology in professional audio to support existing customers, as well as
pursue related hearing health and medical product opportunities.
Gross profit
Gross profit, both in dollars and as a percent of sales, for
the three months ended March 31, 2017 and 2016, was as follows:
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
Percent
|
|
|
|
|
Percent
|
|
|
|
|
|
Three Months Ended March 31
|
|
Dollars
|
|
|
of Sales
|
|
|
Dollars
|
|
|
of Sales
|
|
|
Dollars
|
|
|
Percent
|
|
Gross Profit
|
|
$
|
5,676
|
|
|
|
28.3
|
%
|
|
$
|
5,098
|
|
|
|
28.2
|
%
|
|
$
|
578
|
|
|
|
11.3
|
%
|
The 2017 gross profit increase over the
comparable prior year period was primarily due to higher overall sales volumes.
Sales and Marketing, General and Administrative
and Research and Development Expenses
Sales and marketing, general and administrative and research
and development expenses for the three months ended March 31, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
Percent
|
|
|
|
|
Percent
|
|
|
|
|
|
Three Months Ended March 31
|
|
Dollars
|
|
|
of Sales
|
|
|
Dollars
|
|
|
of Sales
|
|
|
Dollars
|
|
|
Percent
|
|
Sales and Marketing
|
|
$
|
2,311
|
|
|
|
11.5
|
%
|
|
$
|
1,156
|
|
|
|
6.4
|
%
|
|
$
|
1,155
|
|
|
|
99.9
|
%
|
General and Administrative
|
|
|
2,558
|
|
|
|
12.7
|
%
|
|
|
2,266
|
|
|
|
12.5
|
%
|
|
|
292
|
|
|
|
12.9
|
%
|
Research and Development
|
|
|
1,153
|
|
|
|
5.7
|
%
|
|
|
1,165
|
|
|
|
6.4
|
%
|
|
|
(12
|
)
|
|
|
-1.0
|
%
|
Sales and marketing expenses increased
over the prior year due to the addition of Hearing Help Express during 2017. General and administrative expenses were greater than
the prior year period primarily due to increased support costs along with costs at Hearing Help Express. Research and development
remained steady with the prior year three month period.
Interest expense
Net interest expense for the three months
ended March 31, 2017 was $1
82
compared to $126 for the comparable three month period in 2016.
The increase in interest expense was primarily due to higher interest expense charges along with interest expenses generated from
Hearing Help Express that were not incurred in the prior year period.
Other income (expense)
Other income (expense) for the three months
ended March 31, 2017 was $56 compared to other income (expense) of $(70) for the same period in 2016. The change in other income
(expense) primarily related to changes in the currency exchange rates.
Income tax expense
Income tax expense for
the three months ended March 31, 2017 was $64 compared to $34 for the same period in 2016. The expense increase for the three months
ended March 31, 2017 was primarily due to taxable income generated by foreign operations and a minimum domestic state tax payment
made in the current year.
Liquidity and Capital Resources
As of March 31, 2017, we had $380 of cash
on hand. Sources of our cash for the three months ended March 31, 2017 have been from our financing activities, as described below.
The Company’s cash flows from operating, investing and financing activities, as reflected in the statement of cash flows,
are summarized as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(584
|
)
|
|
$
|
(931
|
)
|
Investing activities
|
|
|
(367
|
)
|
|
|
(642
|
)
|
Financing activities
|
|
|
639
|
|
|
|
1,659
|
|
Effect of exchange rate changes on cash
|
|
|
25
|
|
|
|
100
|
|
Increase (decrease) in cash
|
|
$
|
(287
|
)
|
|
$
|
186
|
|
The most significant items that
contributed to the $(584) of cash used in operating activities was a net loss, increases in accounts receivable and inventory and
a decrease in accrued expenses partially offset by an increase in accounts payable and add backs for non-cash depreciation and
amortization and stock compensation.
Net cash used in investing activities
of $(367) consisted primarily of purchases of property, plant and equipment.
Net cash provided by financing
activities of $639 was comprised primarily of proceeds from long-term borrowings partially offset by repayments of borrowings under
our credit facilities.
The Company had the following bank arrangements:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Total borrowing capacity under existing facilities
|
|
$
|
15,308
|
|
|
$
|
15,287
|
|
|
|
|
|
|
|
|
|
|
Facility Borrowings:
|
|
|
|
|
|
|
|
|
Domestic revolving credit facility
|
|
|
4,078
|
|
|
|
3,218
|
|
Domestic term loan
|
|
|
5,000
|
|
|
|
5,250
|
|
Foreign overdraft and letter of credit facility
|
|
|
1,247
|
|
|
|
1,243
|
|
Total borrowings and commitments
|
|
|
10,325
|
|
|
|
9,711
|
|
Remaining availability under existing facilities
|
|
$
|
4,983
|
|
|
$
|
5,576
|
|
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 March
31, 2017, 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.
|
On March 9, 2017, the Company
and its domestic subsidiary, IntriCon, Inc., entered into a Tenth Amendment to the Loan and Security Agreement and Waiver (the
“Tenth Amendment”) with The PrivateBank and Trust Company. The Tenth Amendment, among other things:
|
▪
|
amended the minimum EBITDA (as defined
in the Loan and Security Agreement), funded debt to EBITDA ratio and fixed charge coverage ratio covenants; and
|
|
▪
|
waived defaults in the funded debt to
EBITDA ratio and fixed charge coverage ratio covenants as of December 31, 2016.
|
Weighted average interest on
the revolving credit facility was 6.82% for the three months ended March 31, 2017 and 4.36% for the year ended December 31, 2016.
The outstanding balance of the revolving credit facility was $4,078 and $3,218 at March 31, 2017 and December 31, 2016, respectively.
The total availability on the revolving credit facility was approximately $4,508 and $5,121 at March 31, 2017 and December 31,
2016, respectively.
The outstanding principal balance
of the term loan, as amended, is payable in quarterly installments of $250. Any remaining principal and accrued interest is payable
on February 28, 2019. IntriCon is also required to use 100% of the net cash proceeds of certain asset sales (excluding inventory
and certain other dispositions), sale of capital securities or issuance of debt to pay down the term loan.
The Company was in compliance
with the financial covenants under the facility as of March 31, 2017.
Foreign Credit Facility
In addition to its domestic credit
facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international senior secured credit
agreement with Oversea-Chinese Banking Corporation Ltd. that provides for an asset based line of credit. Borrowings bear interest
at a rate of .75% to 2.5% over the lender’s prevailing prime lending rate. Weighted average interest on the international
credit facilities was 3.87% and 3.50% for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively.
The outstanding balance was $1,246 and $1,243 at March 31, 2017 and December 31, 2016, respectively. The total remaining availability
on the international senior secured credit agreement was approximately $476 and $455 at March 31, 2017 and December 31, 2016, respectively.
Capital Adequacy
We believe that funds expected
to be generated from operations, the available borrowing capacity through our revolving credit loan facilities and the control
of capital spending will be sufficient to meet our anticipated cash requirements for operating needs and for repayment of maturing
debt for at least the next 12 months. If, however, we do not generate sufficient cash from operations, or if we incur additional
unanticipated liabilities, we may be required to seek additional financing or sell equity or debt on terms which may not be as
favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of
equity or debt will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital
is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. Furthermore,
if we fail to meet our financial and other covenants under our loan agreements, absent waiver, we will be in default of the loan
agreements and our lenders could take action that would adversely affect our business. There can be no assurance that our lenders
will provide a waiver of any default in our loan covenants. While management believes that we will be able to meet our liquidity
needs for at least the next 14 months, no assurance can be given that we will be able to do so.