ITEM 1.
Financial Statements
INTRICON CORPORATION
Consolidated Condensed Balance Sheets
(In Thousands
,
Except Per Share Amounts
)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
13,190
|
|
|
$
|
8,047
|
|
Short-term investments
|
|
|
16,008
|
|
|
|
38,093
|
|
Accounts receivable, less allowance for doubtful accounts of $368 at March 31, 2019 and $807 at December 31, 2018
|
|
|
10,493
|
|
|
|
11,479
|
|
Inventories
|
|
|
19,134
|
|
|
|
18,981
|
|
Contract assets
|
|
|
6,320
|
|
|
|
5,624
|
|
Other current assets
|
|
|
1,541
|
|
|
|
2,320
|
|
Total current assets
|
|
|
66,686
|
|
|
|
84,544
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
|
38,202
|
|
|
|
37,161
|
|
Less: Accumulated depreciation
|
|
|
25,941
|
|
|
|
25,429
|
|
Net machinery and equipment
|
|
|
12,261
|
|
|
|
11,732
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
10,808
|
|
|
|
10,808
|
|
Intangible assets, net
|
|
|
2,546
|
|
|
|
2,585
|
|
Operating lease right of use asset
|
|
|
5,518
|
|
|
|
—
|
|
Investment in partnerships
|
|
|
1,324
|
|
|
|
2,091
|
|
Long-term investments
|
|
|
15,228
|
|
|
|
—
|
|
Other assets, net
|
|
|
6,525
|
|
|
|
3,488
|
|
Total assets
|
|
$
|
120,896
|
|
|
$
|
115,248
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current financing leases
|
|
$
|
104
|
|
|
$
|
—
|
|
Current operating leases
|
|
|
1,700
|
|
|
|
—
|
|
Accounts payable
|
|
|
12,237
|
|
|
|
13,191
|
|
Accrued salaries, wages and commissions
|
|
|
2,572
|
|
|
|
4,409
|
|
Other accrued liabilities
|
|
|
4,692
|
|
|
|
4,047
|
|
Total current liabilities
|
|
|
21,305
|
|
|
|
21,647
|
|
|
|
|
|
|
|
|
|
|
Noncurrent financing leases
|
|
|
95
|
|
|
|
—
|
|
Noncurrent operating leases
|
|
|
4,030
|
|
|
|
—
|
|
Other postretirement benefit obligations
|
|
|
366
|
|
|
|
377
|
|
Accrued pension liabilities
|
|
|
733
|
|
|
|
706
|
|
Other long-term liabilities
|
|
|
1,306
|
|
|
|
544
|
|
Total liabilities
|
|
|
27,835
|
|
|
|
23,274
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $1.00 par value per share; 20,000 shares authorized; 8,714 and 8,664 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
|
|
|
8,714
|
|
|
|
8,664
|
|
Additional paid-in capital
|
|
|
85,131
|
|
|
|
84,999
|
|
Retained earnings (accumulated deficit)
|
|
|
266
|
|
|
|
(509
|
)
|
Accumulated other comprehensive loss
|
|
|
(797
|
)
|
|
|
(927
|
)
|
Total shareholders’ equity
|
|
|
93,314
|
|
|
|
92,227
|
|
Non-controlling interest
|
|
|
(253
|
)
|
|
|
(253
|
)
|
Total equity
|
|
|
93,061
|
|
|
|
91,974
|
|
Total liabilities and equity
|
|
$
|
120,896
|
|
|
$
|
115,248
|
|
(See accompanying notes to the consolidated condensed financial statements)
INTRICON CORPORATION
Consolidated Condensed Statements of Operations
(In Thousands, Except Per Share Amounts)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
30,109
|
|
|
$
|
25,363
|
|
Cost of goods sold
|
|
|
21,358
|
|
|
|
16,951
|
|
Gross profit
|
|
|
8,751
|
|
|
|
8,412
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
3,536
|
|
|
|
2,840
|
|
General and administrative
|
|
|
3,425
|
|
|
|
3,061
|
|
Research and development
|
|
|
965
|
|
|
|
1,159
|
|
Total operating expenses
|
|
|
7,926
|
|
|
|
7,060
|
|
Operating income
|
|
|
825
|
|
|
|
1,352
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
215
|
|
|
|
(188
|
)
|
Other expense, net
|
|
|
(134
|
)
|
|
|
(208
|
)
|
Income before income taxes
|
|
|
906
|
|
|
|
956
|
|
Income tax expense
|
|
|
131
|
|
|
|
187
|
|
Net income
|
|
$
|
775
|
|
|
$
|
769
|
|
|
|
|
|
|
|
|
|
|
Income per share of common stock:
|
|
|
|
|
|
|
|
|
Net income per share, Basic:
|
|
$
|
0.09
|
|
|
$
|
0.11
|
|
Net income per share, Diluted:
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,705
|
|
|
|
6,929
|
|
Diluted
|
|
|
9,382
|
|
|
|
7,843
|
|
(See accompanying notes to the consolidated condensed financial statements)
INTRICON CORPORATION
Consolidated Condensed Statements of Comprehensive Income
(In Thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Net income
|
|
$
|
775
|
|
|
$
|
769
|
|
Interest rate swap, net of taxes of $0
|
|
|
—
|
|
|
|
4
|
|
Investment in partnerships, net of taxes of $0
|
|
|
118
|
|
|
|
—
|
|
Pension and postretirement obligations, net of taxes of $0
|
|
|
5
|
|
|
|
5
|
|
Foreign currency translation adjustment, net of taxes of $0
|
|
|
7
|
|
|
|
77
|
|
Comprehensive income
|
|
$
|
905
|
|
|
$
|
855
|
|
(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,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
775
|
|
|
$
|
769
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
810
|
|
|
|
654
|
|
Equity in loss of partnerships
|
|
|
65
|
|
|
|
116
|
|
Stock-based compensation
|
|
|
329
|
|
|
|
333
|
|
Change in allowance for doubtful accounts
|
|
|
(439
|
)
|
|
|
151
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,301
|
|
|
|
(2,407
|
)
|
Inventories
|
|
|
(171
|
)
|
|
|
(1,183
|
)
|
Contract assets
|
|
|
(696
|
)
|
|
|
(1,787
|
)
|
Other assets
|
|
|
971
|
|
|
|
139
|
|
Accounts payable
|
|
|
(1,108
|
)
|
|
|
2,262
|
|
Accrued expenses
|
|
|
(1,431
|
)
|
|
|
(316
|
)
|
Other liabilities
|
|
|
29
|
|
|
|
14
|
|
Net cash provided by (used in) operating activities
|
|
|
435
|
|
|
|
(1,255
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of machinery and equipment
|
|
|
(954
|
)
|
|
|
(485
|
)
|
Payments for acquisition of other assets
|
|
|
(586
|
)
|
|
|
—
|
|
Purchase of investment securities
|
|
|
(34,516
|
)
|
|
|
—
|
|
Proceeds from sale of investment securities
|
|
|
38,015
|
|
|
|
—
|
|
Proceeds from maturities of investment securities
|
|
|
3,464
|
|
|
|
—
|
|
Investment in partnerships
|
|
|
(568
|
)
|
|
|
(164
|
)
|
Net cash provided by (used in) investing activities
|
|
|
4,855
|
|
|
|
(649
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
—
|
|
|
|
6,106
|
|
Repayments of long-term debt
|
|
|
—
|
|
|
|
(4,550
|
)
|
Payment of financing leases
|
|
|
(32
|
)
|
|
|
—
|
|
Exercise of stock options and employee stock purchase plan shares
|
|
|
88
|
|
|
|
267
|
|
Withholding of common stock upon vesting of restricted stock units
|
|
|
(235
|
)
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
|
(179
|
)
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
32
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
5,143
|
|
|
|
39
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
|
|
8,047
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
|
$
|
13,190
|
|
|
$
|
1,056
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing:
|
|
|
|
|
|
|
|
|
Acquisition of machinery and equipment in accounts payable
|
|
|
160
|
|
|
|
305
|
|
Investment in partnership through liability incurred
|
|
|
—
|
|
|
|
308
|
|
Fitting software other asset through liabilities incurred and exchange of investment in partnership
|
|
|
3,093
|
|
|
|
—
|
|
(See accompanying notes to the consolidated condensed financial statements)
INTRICON CORPORATION
Consolidated Condensed Statements of Equity
(In Thousands)
|
|
Shareholders’
Equity, Three Months Ended March 31, 2019 (Unaudited)
|
|
|
|
|
|
|
|
|
|
Common
Stock Number of Shares
|
|
|
Common
Stock Amount
|
|
|
Additional
Paid-in Capital
|
|
|
Retained Earnings (Accumulated
Deficit)
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Non-Controlling
Interest
|
|
|
Total
Equity
|
|
Balance December 31, 2018
|
|
|
8,664
|
|
|
$
|
8,664
|
|
|
$
|
84,999
|
|
|
$
|
(509
|
)
|
|
$
|
(927
|
)
|
|
$
|
(253
|
)
|
|
$
|
91,974
|
|
Exercise of stock options, net
|
|
|
27
|
|
|
|
27
|
|
|
|
(9
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
|
Withholding of common stock upon vesting of restricted stock units
|
|
|
20
|
|
|
|
20
|
|
|
|
(255
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(235
|
)
|
Shares issued under the employee stock purchase plan
|
|
|
3
|
|
|
|
3
|
|
|
|
67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
329
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
329
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
775
|
|
|
|
—
|
|
|
|
—
|
|
|
|
775
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
130
|
|
|
|
—
|
|
|
|
130
|
|
Balance March 31, 2019
|
|
|
8,714
|
|
|
$
|
8,714
|
|
|
$
|
85,131
|
|
|
$
|
266
|
|
|
$
|
(797
|
)
|
|
$
|
(253
|
)
|
|
$
|
93,061
|
|
|
|
Shareholders’
Equity, Three Months Ended March 31, 2018 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Number of Shares
|
|
|
Common Stock Amount
|
|
|
Additional Paid-in Capital
|
|
|
Accumulated Deficit
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
Non-Controlling Interest
|
|
|
Total Equity
|
|
Balance December 31, 2017
|
|
|
6,900
|
|
|
$
|
6,900
|
|
|
$
|
21,581
|
|
|
$
|
(6,056
|
)
|
|
$
|
(733
|
)
|
|
$
|
(253
|
)
|
|
$
|
21,439
|
|
Exercise of stock options, net
|
|
|
41
|
|
|
|
41
|
|
|
|
167
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
208
|
|
Shares issued under the employee stock purchase plan
|
|
|
3
|
|
|
|
3
|
|
|
|
57
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
333
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
333
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
769
|
|
|
|
—
|
|
|
|
—
|
|
|
|
769
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
86
|
|
|
|
—
|
|
|
|
86
|
|
Balance March 31, 2018
|
|
|
6,944
|
|
|
$
|
6,944
|
|
|
$
|
22,138
|
|
|
$
|
(5,287
|
)
|
|
$
|
(647
|
)
|
|
$
|
(253
|
)
|
|
$
|
22,895
|
|
(See accompanying notes to the consolidated financial statements)
INTRICON CORPORATION
Notes to Consolidated Condensed Financial Statements
(Unaudited) (In Thousands, Except Per Share Data)
In the opinion of management,
the accompanying consolidated condensed financial statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly IntriCon Corporation's (“IntriCon” or the “Company”) consolidated financial
position as of March 31, 2019 and December 31, 2018, and the consolidated results of its operations, equity and cash flows for
the three months ended March 31, 2019 and 2018. Results of operations for the interim periods are not necessarily indicative of
the results of operations expected for the full year or any other interim period. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2018 Annual Report
on Form 10-K filed with the SEC.
The consolidated financial statements
include the accounts of the Company and its consolidated subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation. The Company evaluates its voting and variable interests in entities on a qualitative and quantitative
basis. The Company consolidates entities in which it concludes it has the power to direct the activities that most significantly
impact an entity’s economic success and has the obligation to absorb losses or the right to receive benefits that could be
significant to the entity.
The Company has evaluated subsequent
events occurring after the date of the consolidated financial statements for events requiring recording or disclosure in the consolidated
financial statements.
|
2.
|
Changes in Accounting Policies
|
The Company’s significant
accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018. In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic
842). Topic 842 supersedes the lease accounting guidance previously set forth in the Accounting Standards Codification (ASC) Topic
840 “Leases,” and requires lessees to recognize a lease liability and a right-of-use asset (ROU) for all leases that
extend beyond one year. The Company adopted Topic 842 with a date of initial application of January 1, 2019, which resulted
in a ROU asset and lease liability of approximately $6.0M.
The Company did not apply Topic
842 retrospectively using the transition option in ASU 2018-11, “
Targeted Improvements”
to ASC 842, to not restate
comparative periods in transition and instead to use the effective date of ASC 842, “Leases”, as the date of initial
application of transition. In addition, we elected the package of practical expedients permitted under the transition guidance
within the new standard which allowed us to carry forward the historical lease classification.
Changes to the Company’s
accounting policies as a result of adopting Topic 842 are discussed below:
Short-term lease recognition
exemption.
The Company adopted the short-term lease recognition exemption as an accounting policy. Accordingly, the Company
will not recognize a lease liability and ROU asset for short-term leases in transition and, post-effective date, will continue
to recognize short-term leases as expense on a straight-line basis over the lease term. Renewal and purchase options for a lease
will be reassessed upon the occurrence of certain discrete reassessment events: (1) the lease term is extended more than 12 months
beyond the end of the previously determined lease term or (2) the lessee now concludes that the lessee’s exercise of a purchase
option is reasonably certain. When a lease no longer qualifies for the short-term lease exemption, the Company will apply ASC 842
guidance on initial recognition and measurement; the commencement date of the lease for this purpose is the date of the change
in circumstances.
Accounting for certain
leases at a portfolio level
. The Company accounts for leases at a portfolio level when the criteria described below are
met and it reasonably expects that the application of the lease model to the portfolio will not differ materially from the application
to the individual leases in that portfolio. If the applicable criteria are met, the start of the lease term is expected to be the
first of the month. The criteria are:
|
1.
|
Leases are similar in nature (e.g. similar underlying asset such as vehicles);
|
|
2.
|
Leases have identical or nearly identical contract provisions, including same lessor; and
|
|
3.
|
Leases with effective dates that fall within a narrow window of time (month or quarter) and have
the same lease term
|
For purposes of arriving at the
transition adjustment on the effective date, a total of seven vehicle leases were combined into three portfolios.
Combining lease and non-lease
components into a single component.
The Company elected to adopt this practical expedient for all asset classes. As a result
of this election, the consideration included in the lease payments for these asset classes will be greater, resulting in a larger
lease liability and ROU asset.
The Company currently operates
in two reportable segments: body-worn devices and hearing health direct-to-end-consumer (DTEC). The nature of distribution and
services has been deemed separately identifiable. Therefore, segment reporting has been applied. The following table summarizes
data by industry segment:
At and for the Three Months Ended March 31, 2019
|
|
Body
Worn Devices
|
|
|
Hearing
Health DTEC
|
|
|
Total
|
|
Revenue, net
|
|
$
|
28,479
|
|
|
$
|
1,630
|
|
|
$
|
30,109
|
|
Income (loss) before income taxes
|
|
|
2,388
|
|
|
|
(1,482
|
)
|
|
|
906
|
|
Identifiable assets (excluding goodwill)
|
|
|
105,182
|
|
|
|
4,906
|
|
|
|
110,088
|
|
Goodwill
|
|
|
9,551
|
|
|
|
1,257
|
|
|
|
10,808
|
|
Depreciation and amortization
|
|
|
749
|
|
|
|
61
|
|
|
|
810
|
|
Capital expenditures
|
|
|
934
|
|
|
|
20
|
|
|
|
954
|
|
At and for the Three Months Ended March 31, 2018
|
|
Body
Worn Devices
|
|
|
Hearing
Health DTEC
|
|
|
Total
|
|
Revenue, net
|
|
$
|
23,572
|
|
|
$
|
1,791
|
|
|
$
|
25,363
|
|
Income (loss)
|
|
|
1,222
|
|
|
|
(453
|
)
|
|
|
769
|
|
Identifiable assets (excluding goodwill)
|
|
|
42,121
|
|
|
|
6,640
|
|
|
|
48,761
|
|
Goodwill
|
|
|
9,551
|
|
|
|
1,257
|
|
|
|
10,808
|
|
Depreciation and amortization
|
|
|
604
|
|
|
|
50
|
|
|
|
654
|
|
Capital expenditures
|
|
|
475
|
|
|
|
10
|
|
|
|
485
|
|
|
4.
|
Geographic Information
|
The geographical distribution
of long-lived assets to geographical areas consisted of the following at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
United States
|
|
$
|
10,639
|
|
|
$
|
10,065
|
|
Singapore
|
|
|
1,200
|
|
|
|
1,240
|
|
Other
|
|
|
422
|
|
|
|
427
|
|
Consolidated
|
|
$
|
12,261
|
|
|
$
|
11,732
|
|
Long-lived assets consist of
property and equipment. Excluded from long-lived assets are investments in partnerships, patents, goodwill, operating lease ROU
assets and certain other assets. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These
assets are periodically reviewed to ensure the net realizable value from the estimated future production based on forecasted cash
flows exceeds the carrying value of the assets.
The geographical distribution
of net revenue to geographical areas for the three months ended March 31, 2019 and 2018 were as follows:
|
|
Three Months Ended
|
|
Net Revenue to Geographical Areas
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
United States
|
|
$
|
24,215
|
|
|
$
|
20,459
|
|
Europe
|
|
|
2,203
|
|
|
|
2,278
|
|
Asia
|
|
|
3,509
|
|
|
|
2,468
|
|
All other countries
|
|
|
182
|
|
|
|
158
|
|
Consolidated
|
|
$
|
30,109
|
|
|
$
|
25,363
|
|
Geographic net revenue is allocated
based on the location of the customer.
For the three months ended March
31, 2019, one customer accounted for 57% of the Company’s consolidated net revenue. For the three months ended March 31,
2018, one customer accounted for 54% of the Company’s consolidated net revenue.
Two customers combined accounted
for 49% and 52% of the Company’s consolidated accounts receivable at March 31, 2019 and December 31, 2018, respectively.
One customer accounted for 67%
and 78% of the Company’s consolidated contract assets at March 31, 2019 and December 31, 2018, respectively.
|
5.
|
Investment in Partnerships
|
Investment in partnerships consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Investment in Signison
|
|
$
|
1,138
|
|
|
$
|
865
|
|
Investment in and cash advance for Soundperience
|
|
|
—
|
|
|
|
1,022
|
|
Other
|
|
|
186
|
|
|
|
204
|
|
Total
|
|
$
|
1,324
|
|
|
$
|
2,091
|
|
The Company has a 50% ownership interest in Signison
as of March 31, 2019. Signison is accounted for in the Company’s financial statements using the equity method.
As of December 31, 2018, the Company held a 49% ownership
interest in Soundperience, which was accounted for using the equity method. In January 2019, the Company purchased the source code
for the Sentibo Smart Brain self-fitting software from Soundperience in exchange for 1,750 Euros, our 49% ownership and the related
license agreement. See Note 8.
The Company currently invests in commercial paper,
corporate notes and bonds with original maturities of not more than two years. The Company classifies these investments as held
to maturity based on our intent and ability to hold these investments until maturity. As a result, these investments are recorded
at amortized cost, which approximates fair value as of March 31, 2019. As of December 31, 2018, the Company invested in certain
liquid investment securities which were classified as available for sale investments and measured at fair value based on Level
1 inputs.
The maturity dates of our investments as of March 31, 2019 are as follows:
|
|
Less than one year
|
|
|
1-5 years
|
|
|
Total
|
|
Commercial Paper Original Maturities of 91 Days or More
|
|
$
|
6,602
|
|
|
$
|
—
|
|
|
$
|
6,602
|
|
Corporate Notes and Bonds
|
|
|
9,406
|
|
|
|
15,228
|
|
|
|
24,634
|
|
Total Investments
|
|
$
|
16,008
|
|
|
$
|
15,228
|
|
|
$
|
31,236
|
|
Inventories consisted of the following at:
|
|
|
Raw
materials
|
|
|
Work-in
process
|
|
|
Finished
products
and components
|
|
|
Total
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
$
|
10,926
|
|
|
$
|
2,403
|
|
|
$
|
1,284
|
|
|
$
|
14,613
|
|
|
Foreign
|
|
|
|
2,726
|
|
|
|
867
|
|
|
|
928
|
|
|
|
4,521
|
|
|
Total
|
|
|
$
|
13,652
|
|
|
$
|
3,270
|
|
|
$
|
2,212
|
|
|
$
|
19,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
$
|
10,657
|
|
|
$
|
2,484
|
|
|
$
|
1,583
|
|
|
$
|
14,724
|
|
|
Foreign
|
|
|
|
2,671
|
|
|
|
653
|
|
|
|
933
|
|
|
|
4,257
|
|
|
Total
|
|
|
$
|
13,328
|
|
|
$
|
3,137
|
|
|
$
|
2,516
|
|
|
$
|
18,981
|
|
Other assets, net consisted
of the following at:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Fitting Software
|
|
$
|
3,679
|
|
|
$
|
—
|
|
NXP Tech
|
|
|
2,161
|
|
|
|
2,259
|
|
Other
|
|
|
685
|
|
|
|
1,229
|
|
Total
|
|
$
|
6,525
|
|
|
$
|
3,488
|
|
In January 2019, the Company purchased the source
code for self-fitting software from Soundperience for 1,750 Euros and also transferred our 49% ownership interest in Soundperience
to the majority owner, positioning the Company to capitalize on the upcoming over-the-counter (OTC) hearing aid regulations. The
Company has capitalized the self-fitting software within other assets, net based on the cost of the consideration transferred and
will begin amortizing the asset when it is placed into service. Included in the capitalized cost of the self-fitting software is
$586 of cash paid at closing as well as noncash amounts of $869 that are due in future quarterly installments over the next four
years, $533 due in January 2023 and $1,691 for the value of the partnership and license agreement transferred. The future payments
are due in Euros and the related liabilities will be revalued based on exchange rates as of each reporting period.
The Company leases pertain primarily to engineering,
manufacturing, sales and administrative facilities, with an initial term of one year or more. The Company has three leased facilities
in Minnesota, two that expire in 2022 and one that expires in 2023, one leased facility in Illinois that expires in 2021 and, one
leased facility in Singapore that expires in 2020, one leased facility in Indonesia that expires in 2021, one leased facility in
the United Kingdom that expires in 2021, and one leased facility in Germany that expires in 2022.
Certain foreign leases allow for variable lease payments
that depend on an index or a market rate adjustment for the respective country and are adjusted on an annual basis. The adjustment
is recognized as incurred in profit and loss. The facility leases include options to extend for terms ranging from one to five
years. Lease options that the Company is reasonably certain to execute, will be included in the determination of the ROU asset
and lease liability. The Company also leases various computer equipment that include bargain purchase options at termination. These
leases have been classified as finance leases.
For the three months ended March 31, 2019, the Company
has a weighted-average lease term of 1.9 years for its finance leases, and 3.2 years for its operating leases. For the three months
ended March 31, 2019, the Company has a weighted-average discount rate of 5.56% for its finance leases, and 5.50% for its operating
leases. Operating cash flows for the three months ended March 31, 2019 from financing leases and operating leases were $27 and
$510, respectively. Financing lease assets are classified as machinery and equipment within the balance sheet.
The following tables summarizes
lease costs by type:
|
|
March
31, 2019
|
|
Lease cost
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
25
|
|
Interest on lease liabilities
|
|
|
3
|
|
|
|
|
|
|
Operating lease cost
|
|
|
502
|
|
Variable lease cost*
|
|
|
144
|
|
Total lease cost
|
|
$
|
674
|
|
*Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our domestic and foreign building leases.
Maturities of lease liabilities
are as follows:
|
|
|
Operating
Leases
|
|
|
Financing
Leases
|
|
|
Total
|
|
2019
|
|
|
$
|
1,490
|
|
|
$
|
80
|
|
|
$
|
1,570
|
|
2020
|
|
|
|
1,825
|
|
|
|
98
|
|
|
|
1,923
|
|
2021
|
|
|
|
1,490
|
|
|
|
24
|
|
|
|
1,514
|
|
2022
|
|
|
|
924
|
|
|
|
—
|
|
|
|
924
|
|
2023
|
|
|
|
353
|
|
|
|
—
|
|
|
|
353
|
|
2024 and thereafter
|
|
|
|
281
|
|
|
|
8
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
|
|
6,363
|
|
|
|
210
|
|
|
|
6,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Interest
|
|
|
|
(633
|
)
|
|
|
(11
|
)
|
|
|
(644
|
)
|
Present value of lease liabilities
|
|
|
$
|
5,730
|
|
|
$
|
199
|
|
|
$
|
5,929
|
|
As previously disclosed in Note 20 of the Notes to
the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, prior to the adoption of ASU 2016-02,
Leases (Topic
842)
, the future minimum payments required under lease agreements as of December 31, 2018 were 2019 - $2,417; 2020 - $2,255;
2021 - $1,689; 2022 - $950; 2023 - $188.
Income tax
expense for the three months ended March 31, 2019 was $131 compared to $187 for the same period in 2018. The expense for the three
months ended March 31, 2019 and 2018, was due to both domestic and foreign operations. The Company has net operating loss carryforwards
for U.S. federal income tax purposes, however, due to the new tax legislation, there are limitations on the use of certain of the
carryforwards and therefore the Company has recorded a full valuation allowance against the deferred tax asset.
The following
was the income before income taxes for each jurisdiction in which the Company has operations for the three months ended March 31,
2019 and 2018.
|
|
Three Months Ended
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
United States
|
|
$
|
884
|
|
|
$
|
852
|
|
Singapore
|
|
|
117
|
|
|
|
248
|
|
Indonesia
|
|
|
21
|
|
|
|
21
|
|
United Kingdom
|
|
|
(192
|
)
|
|
|
(236
|
)
|
Germany
|
|
|
76
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
906
|
|
|
$
|
956
|
|
|
11.
|
Shareholders’ Equity and Stock-based Compensation
|
The Company
has a 2006 Equity Incentive Plan and a 2015 Equity Incentive Plan. The 2015 Equity Incentive Plan replaced the 2006 Equity Incentive
Plan and new grants may not be made under the 2006 Plan.
Under the
2015 Equity Incentive Plan, the Company may grant stock options, stock awards, stock appreciation rights, restricted stock units
(“RSUs”) and other equity-based awards. Under all awards, the terms are fixed on the grant date.
The Company granted 23 RSUs
in the first quarter of 2019. The closing price of the Company’s common stock on the date of grant was $26.61. The RSUs vest
in equal, annual installments over a three year period beginning on the first anniversary of the date of grant at which time common
stock is issued with respect to vested units.
The Company
has also granted stock options under the plans. Options granted under the plans generally vest in equal, annual installments over
a three year period beginning on the first anniversary of the date of grant and have a maximum term of 10 years.
Stock award activity as of and
during the three months ended March 31, 2019 was as follows:
|
|
Outstanding
Awards
|
|
|
Stock
Option Weighted-
Average
|
|
|
Aggregate
|
|
|
|
Stock
Options
|
|
|
RSUs
|
|
|
Total
|
|
|
Exercise
Price
(a)
|
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
830
|
|
|
|
98
|
|
|
|
928
|
|
|
$
|
5.59
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
4.00
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
23
|
|
|
|
23
|
|
|
|
—
|
|
|
|
|
|
Exercised or vested
|
|
|
(31
|
)
|
|
|
(29
|
)
|
|
|
(60
|
)
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
798
|
|
|
|
92
|
|
|
|
890
|
|
|
$
|
5.68
|
|
|
$
|
17,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2019
|
|
|
638
|
|
|
|
—
|
|
|
|
638
|
|
|
$
|
6.10
|
|
|
$
|
12,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for future grant at March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
231
|
|
|
|
|
|
|
|
|
|
(a) The weighted average exercise price calculation does not include outstanding RSUs
The number of shares available
for future grants at March 31, 2019 does not include a total of up to 400 shares subject to options outstanding under the 2006
Equity Incentive Plan, which will become available for grant under the 2015 Equity Incentive Plan as outstanding options under
the 2006 Equity Incentive Plan expire, terminate, are cancelled or forfeited or are withheld in a net exercise of such options.
The Company recorded $329 and
$333 of non-cash stock compensation expense for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019,
there was $2,176 of total unrecognized compensation costs related to non-vested stock option and RSU awards that are expected to
be recognized over a weighted-average period of 1.91 years. The total intrinsic value of options exercised during the three months
ended March 31, 2019 was $1,480.
The Company also has an Employee
Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, as amended, through March 31, 2019, provides that a maximum
of 300 shares may be sold under the Purchase Plan. There were 3 and 1 shares purchased under the plan for the three months ended
March 31, 2019 and 2018, respectively.
The following table presents
a reconciliation between basic and diluted earnings per share:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
775
|
|
|
$
|
769
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic – weighted shares outstanding
|
|
|
8,705
|
|
|
|
6,929
|
|
Weighted shares assumed upon exercise of stock options
|
|
|
677
|
|
|
|
914
|
|
Diluted – weighted shares outstanding
|
|
|
9,382
|
|
|
|
7,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share:
|
|
$
|
0.09
|
|
|
$
|
0.11
|
|
Diluted net income per share:
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
The dilutive impact summarized
above relates to the periods when the average market price of Company stock exceeded the exercise price of the potentially dilutive
options. Earnings per common share was based on the weighted average number of common shares outstanding during the periods when
computing the basic earnings per share. When dilutive, stock options are included as equivalents using the treasury stock method
when computing the diluted earnings per share. Shares represented by RSUs are also included in the dilution calculation. Individual
components of basic and diluted income per share may not sum to the total income per share due to rounding.
No options or RSUs were excluded
from the dilutive calculation for the three months ended March 31, 2019 and March 31, 2018.
The Company is a defendant along
with a number of other parties in lawsuits alleging that plaintiffs have or may have contracted asbestos-related diseases as a
result of exposure to asbestos products or equipment containing asbestos sold by one or more named defendants. These lawsuits relate
to the discontinued heat technologies segment which was sold in March 2005. Due to the non-informative nature of the complaints,
the Company does not know whether any of the complaints state valid claims against the Company. Certain insurance carriers have
informed the Company that the primary policies for the period August 1, 1970-1978 have been exhausted and that the carriers will
no longer provide defense and insurance coverage under those policies. However, the Company has other primary and excess insurance
policies that the Company believes afford coverage for later years. Some of these other primary insurers have accepted defense
and insurance coverage for these suits, and some of them have either ignored the Company’s tender of defense of these cases,
or have denied coverage, or have accepted the tenders but asserted a reservation of rights and/or advised the Company that they
need to investigate further. Because settlement payments are applied to all years a litigant was deemed to have been exposed to
asbestos, the Company believes that it will have funds available for defense and insurance coverage under the non-exhausted primary
and excess insurance policies. However, unlike the older policies, the more recent policies have deductible amounts for defense
and settlements costs that the Company will be required to pay; accordingly, the Company expects that its litigation costs will
increase in the future. Further, many of the policies covering later years (approximately 1984 and thereafter) have exclusions
for any asbestos products or operations, and thus do not provide insurance coverage for asbestos-related lawsuits. The Company
does not believe that the asserted exhaustion of some of the primary insurance coverage for the 1970-1978 period will have a material
adverse effect on its financial condition, liquidity, or results of operations. Management believes that the number of insurance
carriers involved in the defense of the suits, and the significant number of policy years and policy limits under which these insurance
carriers are insuring the Company, make the ultimate disposition of these lawsuits not material to the Company's consolidated financial
position or results of operations.
The Company is also involved
in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these
matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect our consolidated
financial position, liquidity or results of operations.
|
14.
|
Related-Party Transactions
|
The Company uses the law firm
of Blank Rome LLP for legal services. A partner of that firm is the son-in-law of the Chairman of the Company’s Board
of Directors. For the three months ended March 31, 2019, the Company paid that firm approximately $71 for legal services and
costs. For the three months ended March 31, 2018, the Company paid that firm approximately $103 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. On May 1, 2019, the Chairman
retired from the Company’s Board of Directors.
In January 2019, the Company
purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience, an entity in which we owned 49%,
for 1,750 Euros and the transfer back of our full ownership interest in Soundperience. See Note 8.
The following tables set forth, for the periods indicated,
net revenue by market:
Timing of revenue recognition for the three months ended March 31, 2019:
|
|
Products and services
transferred at point in time
|
|
|
Products
and services transferred over time
|
|
|
Total
|
|
Medical Biotelemetry:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diabetes
|
|
$
|
—
|
|
|
$
|
17,164
|
|
|
$
|
17,164
|
|
Other Medical
|
|
|
—
|
|
|
|
3,629
|
|
|
|
3,629
|
|
Hearing Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Value Based DTEC
|
|
|
1,630
|
|
|
|
—
|
|
|
|
1,630
|
|
Value Based ITEC
|
|
|
2,577
|
|
|
|
—
|
|
|
|
2,577
|
|
Legacy OEM
|
|
|
3,342
|
|
|
|
—
|
|
|
|
3,342
|
|
Professional Audio Communications:
|
|
|
1,767
|
|
|
|
—
|
|
|
|
1,767
|
|
Total Net Revenue
|
|
$
|
9,316
|
|
|
$
|
20,793
|
|
|
$
|
30,109
|
|
Timing of revenue recognition for the three months ended March 31, 2018:
|
|
Products
and services transferred at point in time
|
|
|
Products
and services transferred over time
|
|
|
Total
|
|
Medical Biotelemetry:
|
|
|
|
|
|
|
|
|
|
|
|
|
Diabetes
|
|
$
|
—
|
|
|
$
|
13,562
|
|
|
$
|
13,562
|
|
Other Medical
|
|
|
—
|
|
|
|
2,371
|
|
|
|
2,371
|
|
Hearing Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Value Based DTEC
|
|
|
1,791
|
|
|
|
—
|
|
|
|
1,791
|
|
Value Based ITEC
|
|
|
2,629
|
|
|
|
—
|
|
|
|
2,629
|
|
Legacy OEM
|
|
|
3,181
|
|
|
|
—
|
|
|
|
3,181
|
|
Professional Audio Communications:
|
|
|
1,829
|
|
|
|
—
|
|
|
|
1,829
|
|
Total Net Revenue
|
|
$
|
9,430
|
|
|
$
|
15,933
|
|
|
$
|
25,363
|
|
On April 17, 2019, the Company entered into a Thirteenth
Amendment to the Loan and Security Agreement with CIBC Bank USA to reduce our borrowing capacity to $7,000; lessen restrictions
surrounding acquisitions, business investments, distributions and disposition of assets; eliminate the mandatory prepayment requirement
with respect to proceeds from asset sales and capital and debt financings; and eliminate the annual capital expenditure covenant.
ITEM 2.
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
Business Overview
Headquartered in Arden Hills,
Minnesota, IntriCon Corporation (together with its subsidiaries referred to as the “Company”, “IntriCon,”
“we”, “us” or “our”) is an international company engaged in designing, developing, engineering,
manufacturing and distributing body-worn devices. In addition to its operations in Minnesota, the Company has facilities in Illinois,
Singapore, Indonesia, Germany and the United Kingdom.
The consolidated financial statements
include the accounts of the Company and its consolidated subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation. The Company evaluates its voting and variable interests in entities on a qualitative and quantitative
basis. The Company consolidates entities in which it concludes it has the power to direct the activities that most significantly
impact an entity’s economic success and has the obligation to absorb losses or the right to receive benefits that could be
significant to the entity.
The Company’s significant
accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018. In February 2016, the FASB issued ASU 2016-02 “Leases” (Topic
842). Topic 842 supersedes the lease accounting guidance previously set forth in the Accounting Standards Codification (ASC) Topic
840 “Leases,” and requires lessees to recognize a lease liability and a right-of-use asset for all leases that extend
beyond one year. The Company adopted Topic 842 with a date of initial application of January 1, 2019.
Information contained in this
section of this Quarterly Report on Form 10-Q and expressed in U.S. dollars is presented in thousands (000s), except for per share
data and as otherwise noted.
Market Overview
IntriCon serves the body-worn
device market by designing, developing, engineering, manufacturing and distributing micro-miniature products, microelectronics,
micro-mechanical assemblies, complete assemblies and software solutions, primarily for the medical biotelemetry market, the emerging
value based hearing healthcare market, the hearing health direct-to-end-consumer market and the professional audio communication
market. Revenue from markets is reported on the respective medical biotelemetry, hearing health, hearing health direct-to-end-consumer
and professional audio lines in the discussion of our results of operations in “Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and Note 15 “Revenue by Market” to the Company’s
consolidated condensed financial statements included herein.
Hearing Healthcare Market
In the United States alone, there
are approximately 40 million adults that report some degree of hearing loss. In adults, the most common cause of hearing loss is
aging and noise. In fact, by the age of 65, one out of three people have hearing loss. The hearing-impaired population is expected
to grow significantly over the next decade due to an aging population and more frequent exposure to loud sounds that can cause
noise-induced hearing loss. It is estimated that hearing aids can help more than 90 percent of people with hearing loss, however
the current market penetration into the U.S. hearing impaired population is approximately 20 percent, a percentage that has remained
essentially unchanged for the last four decades. The primary deterrents to greater penetration are cost and access. Along with
this, the legacy hearing aid distribution channel is an oligopoly of six large hearing aid manufacturers who utilize bricks and
mortar and licensed audiologists to sell devices while controlling the channel dynamics. As a result, the average cost of a hearing
aid sold in the US market today is over $2,400 per device, more than double the cost from fifteen years ago. Approximately 70 percent
of the hearing impaired have hearing loss in both ears (referred to as a binaural loss), driving the total cost to almost $5,000
on average for a set of hearing aids.
Today in the US market, the legacy
channel pushes all hearing impaired through the same inefficient, costly channel. However, a very large portion of the hearing-impaired
market – mostly notably those with mild to moderate losses – could be better served with the proper combination of
high quality, outcome-based devices, advanced fitting software and consumer services/care best practices – all at much lower
cost. We believe fundamental change is needed and are excited about the opportunity that we created through thoughtful hard work
and planning: a chance to deliver superior outcomes-based affordable hearing healthcare, by combining state-of-the-art devices
and software technology, along with best practices customer service and at a much lower cost directly to consumers across the country,
many of whom have not been able to afford care previously.
We believe a perfect vortex of
factors has come together over the last few years to enable the emergence of a market disruptive, high-quality, low cost distribution
model. These factors include the continued consolidation of retail (causing escalating hearing aid prices), consumer outcry, consumer
education, advancements in technology (such as behind-the-ear devices, advanced digital signal processing, low-power wireless,
and self-fitting software) as well as regulatory actions and pronouncements by the U.S. Food and Drug Administration (FDA), the
President’s Council of Advisors on Science and Technology and the National Academies of Science, Engineering and Medicine.
In early January 2016, the FDA
weighed in on low hearing aid penetration rates with an announcement that highlighted statistics from the National Institute on
Deafness and Other Communication Disorders. They found that 37.5 million U.S. adults aged 18 and older report some form of hearing
loss. However, only 30 percent of adults over 70, and 16 percent of those aged 20 to 69, who could benefit from wearing hearing
aids, have ever used them. Based on these statistics, the FDA reopened the public comment period on draft guidance related to the
agency’s premarket requirements for hearing aids and personal sound amplifiers (PSAPs). In April 2016, the FDA hosted a public
workshop to, among other things, gather stakeholder and public input on draft guidance related to the agency’s premarket
requirements for hearing aids and PSAPs. The FDA’s intent was to consider ways in which it can most effectively regulate
hearing aids to promote accessibility and affordability while encouraging innovation. In December 2016, the FDA announced important
steps to better support consumer access to hearing aids. The agency issued a guidance document explaining that it does not intend
to enforce the requirement that individuals age 18 and older receive a medical evaluation or sign a waiver prior to purchasing
most hearing aids, effective immediately. It also announced its commitment to consider creating a category of over-the-counter
(OTC) hearing aids.
Furthermore, there were significant
public policy developments during 2017. On August 18, 2017, President Donald Trump signed into law H.R. 2430, the FDA Reauthorization
Act of 2017, which included a section concerning the regulation of OTC hearing aids. The law is designed to enable adults with
mild to moderate hearing loss to access OTC hearing aids without being seen by a hearing care professional. The law requires the
FDA to create and regulate a category of OTC hearing aids to ensure they meet the same high standards for safety, consumer labeling,
and manufacturing protection that all other medical devices must meet. Additionally, the law mandates that the FDA establish an
OTC hearing aid category for adults with “perceived” mild to moderate hearing loss within three years of passage of
the legislation. The FDA also must finalize a rule within 180 days after the close of the comment period, detailing what level
of safety, labeling and consumer protections will be included. We believe this law has the potential to remove the significant
barriers existing today that prevent innovative hearing health solutions. We believe that this law will invigorate competition,
spur innovation and facilitate the development of an ecosystem of hearing health care that provides affordable and accessible solutions
to millions of unserved or underserved Americans. Today, IntriCon serves both the value-based hearing healthcare channel and the
legacy hearing health channel.
Value-Based Hearing Healthcare
The Company believes the value-based
hearing healthcare (VBHH) market offers significant growth opportunities. In contrast to the legacy channel dynamics, the VBHH
market channel is flexible and able to serve the end consumer through a variety of modalities which may include self-fitting, remote
programing and adjustments, customer support call centers and bricks and mortar stores. The average price of a hearing aid sold
through this channel is less than twenty-five percent of the average $2,400 device price typically sold through the legacy channel.
The Company recently commissioned an ethnographic research study, which identified a $3+ billion annual VBHH market opportunity,
fueled by an immediate addressable market of 6.8 million dissatisfied hearing aid users and 6.6 million current non-hearing aid
users. In addition, this study assisted us in identifying our customer, various customer segmentations and personas. To best approach
this market opportunity, we have focused our efforts to serve both the value-based Direct-to-End-Consumer (DTEC) and value-based
Indirect-to-End-Consumer (ITEC) channels. Over the past decade we have invested in the manufacturing footprint, product technology
and fitting software to provide individuals access to affordable, quality outcomes-based hearing healthcare.
Our DTEC represents a channel
that sells products and services directly to the end consumer, which today consists of our HHE business. In December of 2017, we
purchased the remaining 80% of HHE, a direct-to-end-consumer mail order hearing aid provider. However, the Company had been preparing
to address this market long before the acquisition of HHE and has spent the last decade investing in the technology and low-cost
manufacturing to design and build superior devices and fitting solutions. With this acquisition, we believe we now have the channel
infrastructure to directly reach consumers and—importantly for millions—the ability to offer high-quality hearing healthcare
at a fraction of the cost. The Company’s devices and technologies coupled with HHE’s high-touch care, outcomes based,
and hassle free telemedicine model has created a complete eco-system of hearing healthcare in which the Company intends to serve
the $3+ billion market. Through our other VBHH initiatives and tests, we have formed alliances with other key partners, which have
given us experience and vital insight as we move aggressively into a more consumer-facing role. HHE provides an efficient, direct-to-end-consumer
channel to reach consumers who likely do not have insurance covering hearing devices. This is a channel that we can build on and
expand via technology—and one that is complementary with many of our existing relationships.
The Company is also focused on
serving its value-based ITEC customers, who also sell products and services directly to the end consumer. We have established ourselves
as a leader in supplying this portion of the market with advanced, outcome-based products and accessories. The Company has formed
strong relationships with various customers in the channel, including insurance providers, and geriatric product retailers and
other indirect-to-end-consumer hearing aid providers.
In January 2019, the Company
purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience, positioning the Company to capitalize
on the upcoming OTC hearing aid regulations. Sentibo Smart Brain self-fitting software is designed to improve both channel productivity
and the quality of first-time fittings, resulting in lower prices, greater access and increased customer satisfaction.
We strongly believe that incorporating
self-fitting technology is a critical step in creating our high-quality, low-cost hearing healthcare ecosystem. The Sentibo Smart
Brain self-fitting software technology has the potential to drastically reduce the price of hearing aids, drive greater access
and increase customer satisfaction.
Legacy Hearing Health Channel
We also believe there are niches
in the legacy hearing health channel that will embrace our outcomes-based products and technologies in the United States and Europe.
High costs of legacy devices and retail consolidation have constrained the growth potential of the independent audiologist and
dispenser. We believe our software and product offering can provide independent audiologists and dispensers the ability to compete
with larger retailers, such as Costco, and manufacturer owned retail distributors.
Medical Biotelemetry
In the medical biotelemetry market,
the Company is focused on sales of biotelemetry devices for life-critical diagnostic monitoring. The Company manufactures microelectronics,
micro-mechanical assemblies, high-precision injection-molded plastic components and complete biotelemetry devices for leading and
emerging medical device manufacturers. The medical industry is faced with pressures to reduce the cost of healthcare. Driven by
its core technologies, IntriCon helps shift the point of care from expensive traditional settings, such as hospitals, to less expensive
non-traditional settings like the home. IntriCon currently serves this market by offering medical manufacturers the capabilities
to design, develop, manufacture and distribute medical devices that are easier to use, are more miniature, use less power, and
are lighter. Increasingly, the medical industry is looking for wireless, low-power capabilities in their devices.
IntriCon currently has a presence
in the diabetes, cardiac and catheter positioning markets. For diabetes, IntriCon works with Medtronic to manufacture their wireless
continuous glucose monitors (CGM), sensor assemblies, and accessories associated with Medtronic’s insulin pump and CGM system.
In August 2016, the FDA approved the MiniMed 630G system which is intended to replace Medtronic’s MiniMed 530G system. In
September 2016, the FDA approved the next generation MiniMed 670G insulin pump system, into which IntriCon components are also
designed. The MiniMed 670G is the world’s first hybrid closed loop insulin delivery system and we are excited that our components
are designed into and support such a revolutionary diabetes management system. In June 2017, the 670G was launched in the U.S.
and Medtronic began fulfilling orders from patients enrolled in their Priority Access Program. In parallel, Medtronic began taking
new orders from interested customers who want to be next in line to receive the system after the Priority Access orders are filled.
In March 2018, the FDA approved the Guardian Connect, Medtronic’s standalone CGM system that allows patients to stay ahead
of high and low glucose events. Looking ahead, we believe there are opportunities to expand our diabetes product offering with
Medtronic, as well as move into new markets outside of the diabetes market.
IntriCon has a suite of medical
coils and micro coils that it offers to various original equipment manufacturing (OEM) customers. These products are currently
used in pacemaker programming and interventional catheter positioning applications. We recently secured a new large medical customer
for our proprietary medical coils to be used for pacemaker programming in their devices.
IntriCon manufactures bubble
sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system as well as a family of
safety needle products for an OEM customer that utilizes IntriCon’s insert and straight molding capabilities. These products
are assembled using full automation, including built-in quality checks within the production lines.
Throughout 2018, we expanded
our infrastructure to support anticipated growth from current medical biotelemetry customers and future growth from increased business
development. Expansion efforts in 2018 included a newly leased 37,000-square-foot medical biotelemetry manufacturing and clean
room facility in Minnesota, an additional 10,000-square-foot medical assembly space in Singapore, 13 new molding presses and a
high-speed printed circuit board assembly line. In addition to these investments, our current customers invested several million
dollars in tooling and automation within our facilities. While we have begun limited production on certain products in our new
facilities, we are still working with current medical biotelemetry customers to complete required validation and qualification
of several key production lines. We anticipate having all validation and qualification of our equipment and production lines related
to the recent expansion complete by the end of 2019.
The Company is committed to increasing
investments to support its medical biotelemetry business development efforts. In early 2019, the Company hired a vice president
of medical business development, to leverage our core competencies and diversify our medical revenue base. The Company believes
it has a significant opportunities to serve the emerging biotelemetry and home care markets through its already developed core
competencies and capabilities to develop devices that are more technologically advanced, smaller and lightweight.
Professional Audio Communications
IntriCon entered the high-quality
audio communication device market in 2001, and now has a line of miniature, professional audio headset products used by customers
focusing on emergency response needs. The line includes several communication devices that are extremely portable and perform well
in noisy or hazardous environments. These products are well suited for applications in the fire, law enforcement, safety, aviation
and military markets. In addition, the Company has a line of miniature ear- and head-worn devices used by performers and support
staff in the music and stage performance markets.
Core Technologies Overview:
Our core technologies expertise
is focused on four main markets: medical biotelemetry, hearing health, hearing health direct-to-end-consumer and professional audio
communications. Over the past several years, the Company has increased investments in the continued development of five critical
core technologies: Ultra-Low-Power (ULP) Digital Signal Processing (DSP), ULP Wireless, Fitting Software, Microminiaturization,
and Miniature Transducers. These five core technologies serve as the foundation of current and future product platform development,
designed to meet the rising demand for smaller, portable, more advanced devices and the need for greater efficiencies in the delivery
models. The continued advancements in this area have allowed the Company to further enhance the mobility and effectiveness of miniature
body-worn devices.
ULP DSP
DSP converts real-world analog
signals into a digital format. Through our nanoDSP™ technology, IntriCon offers an extensive range of ULP DSP amplifiers
for hearing, medical and professional audio applications. Our proprietary nanoDSP incorporates advanced ultra-miniature hardware
with sophisticated signal processing algorithms to produce devices that are smaller and more effective. The Company further expanded
its DSP portfolio including improvements to its Reliant CLEAR™ feedback canceller, offering increased added stable gain and
faster reaction time. Additionally, the DSP technologies are utilized in the Audion8™, our eight-channel hearing aid amplifier,
and the Audion16™, our wide dynamic range compression sixteen-channel hearing aid amplifier. The amplifiers are feature-rich
and are designed to fit a wide array of applications. In addition to multiple compression channels, the amplifiers have a complete
set of proven adaptive features which greatly improve the user experience.
ULP Wireless
Wireless connectivity is fast
becoming a required technology, and wireless capabilities are especially critical in new body-worn devices. IntriCon’s platform
of wireless technology offers solutions for transmitting the body’s activities to caregivers and wireless audio links for
professional communications and surveillance products, including diabetes monitoring and audio streaming for hearing devices.
IntriCon has completed the commercialization of the
third generation of Physiolink (Physiolink 3) wireless technology, which will be incorporated into product platforms serving the
medical biotelemetry, hearing health, hearing health direct-to-end-consumer and professional audio communication markets. This
system is based on 2.4GHz proprietary digital radio protocol in the industrial-scientific-medical (ISM) frequency band and enables
audio and data streaming and command and control to ear-worn and body-worn applications over distances of up to ten meters. The
Physiolink 3 technology can be used to increase productivity in the emerging VBHH channels through in office wireless programming,
remote cloud based fitting and consumer directed self-fitting of hearing aids. This will provide both greater access and lower
costs for patients. In addition, remote control functions will improve the patient experience while using the device especially
for those with diminished dexterity. The Physiolink 3 technology builds on the Physiolink 2 capabilities by adding wireless streaming
at, what we believe, are much lower power levels than any technology currently on the market. This will allow for accessories to
enhance the user experience in noisy environments by allowing audio streaming directly to the hearing aid.
Fitting Software
The ability to efficiently and
effectively fit hearing aids is critical to building a value based eco-system of hearing healthcare. By developing more advanced
fitting software systems, individuals can benefit from fittings that conform to their specific loss, while eliminating the need
for an in-person appointment. In addition to the traditional fitting software, IntriFit, used in the conventional channel, IntriCon
has made significant investments in various advanced fitting software solutions, including its purchase of the source code for
the Sentibo Smart Brain self-fitting software, that can enable remote and self-fitting solutions. IntriCon believes these advanced
fitting solutions, along with the other components of the eco-system, will drive access, affordability and superior customer satisfaction
to the millions of individuals that cannot receive care today, primarily due to high cost and low access.
In January 2019, the Company
purchased the source code for the Sentibo Smart Brain self-fitting software from Soundperience. The Sentibo Smart Brain System
is the first psycho-acoustic way of analyzing peripheral hearing and central hearing processing. It was developed by an international
research team based on the latest scientific findings from the fields of audiology and brain research. We believe this software
technology is a critical component to our domestic value-based hearing healthcare model. Sentibo, as well as our other proprietary
fitting systems, are designed to improve both channel productivity and the quality of first-time fittings, resulting in lower prices,
greater access and increased customer satisfaction. IntriCon expects to introduce our advanced fitting solutions through our various
VBHH channels in 2019.
Microminiaturization
IntriCon excels at miniaturizing
body-worn devices. We began honing our microminiaturization skills over 30 years ago, supplying components to the hearing health
industry. Our core miniaturization technology allows us to make devices for our markets that are one cubic inch and smaller. We
also are specialists in devices that run on very low power, as evidenced by our ULP wireless and DSP. Less power means a smaller
battery, which enables us to reduce size even further, and develop devices that fit into the palm of one’s hand.
Miniature Transducers
IntriCon’s advanced transducer
technology has been pushing the limits of size and performance for over a decade. Included in our transducer line are our miniature
medical coils and micro coils used in pacemaker programming and interventional catheter positioning applications. We believe that
with the increase of greater interventional care, our coil technology harbors significant value.
Forward-Looking and Cautionary Statements
Certain statements included in this Quarterly
Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission, which are not historical facts,
or that include forward-looking terminology such as “may”, “will”, “believe”, “anticipate”,
“expect”, “should”, “optimistic” “continue”, “estimate”, “intend”,
“plan”, “would”, “could”, “guidance”, “potential”, “opportunity”,
“project”, “forecast”, “confident”, “projections”, “schedule”, “designed”,
“future”, “discussion”, “if” or the negative thereof or other variations thereof, are forward-looking
statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act
of 1933, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements
may include, but are not limited to statements in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Notes to the Company’s Condensed Consolidated Financial Statements” such as
net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs,
assumptions used to calculate future level of funding of employee benefit plans, the adequacy of insurance coverage and the impact
of new accounting pronouncements and litigation. Forward-looking statements also include, without limitation, statements as to
the Company’s expected future results of operations and growth, strategic alliances and their benefits, government regulation,
potential increases in demand for the Company’s products, the Company’s ability to meet working capital requirements,
the Company’s business strategy, the expected increases in operating efficiencies, anticipated trends in the Company’s markets,
estimates of goodwill impairments and amortization expense of other intangible assets, the effects of changes in accounting pronouncements,
the effects of litigation and the amount of insurance coverage, and statements as to trends or the Company’s or management’s beliefs,
expectations and opinions.
Forward-looking statements are subject
to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those
in the forward-looking statements. In addition to the factors discussed in this Quarterly Report on Form 10-Q, certain risks, uncertainties
and other factors can cause actual results and developments to be materially different from those expressed or implied by such
forward-looking statements, including, without limitation, the following:
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our ability to successfully implement our business and growth strategy;
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risks arising in connection with the insolvency of our former subsidiary, Selas SAS, and potential liabilities and actions arising in connection with the insolvency;
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the volume and timing of orders received by the Company, particularly from Medtronic and hi Health;
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changes in estimated future cash flows;
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our ability to collect our accounts receivable;
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foreign currency movements in markets that we serve;
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changes in the global economy and financial markets;
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weakening demand for our products due to general economic conditions;
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changes in the mix of products sold;
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our ability to meet demand;
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changes in customer requirements;
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FDA approval, timely release and acceptance of our products and the products of our customers;
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competitive pricing pressures;
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pending and potential future litigation;
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cost and availability of electronic components and commodities for our products;
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our ability to create and market products in a timely manner and develop products that are inexpensive to manufacture;
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the loss of one or more of our major customers;
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our ability to identify, complete and integrate acquisitions;
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effects of legislation;
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effects of foreign operations;
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our ability to develop new products;
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our ability to recruit and retain engineering and technical personnel;
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the costs and risks associated with research and development investments;
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our ability and the ability of our customers to protect intellectual property;
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loss of members of our senior management team; and
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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.
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For a description of these and other risks,
see Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31,
2018, and other risks described elsewhere in this Quarterly Report on Form 10-Q, or in other filings the Company makes from time
to time with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that
may be made from time to time by or on behalf of the Company.
Critical Accounting Policies
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expense during the reporting period.
Certain accounting estimates and assumptions
are particularly sensitive because their significance to the consolidated condensed financial statements and the possibility that
future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions
include the Company’s revenue recognition, accounts receivable reserves, inventory valuation, goodwill, long-lived assets,
deferred taxes policies, employee benefit obligations, lease assets and liabilities and investment securities. These and other
significant accounting policies are described in and incorporated by reference from “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and Note 1 to the consolidated financial statements contained in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2018.
Results of Operations
Revenue, net
Below is a summary of our revenue by main
markets for the three months ended March 31, 2019 and 2018:
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Change
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Three Months Ended March 31
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2019
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|
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2018
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Dollars
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Percent
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|
Medical Biotelemetry:
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|
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|
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Diabetes
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$
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17,164
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$
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13,562
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$
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3,602
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26.6
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%
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Other Medical
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3,629
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|
|
|
2,371
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|
|
|
1,258
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|
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53.1
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%
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Total
|
|
$
|
20,793
|
|
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$
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15,933
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$
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4,860
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30.5
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%
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Hearing Health:
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Value Based DTEC
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$
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1,630
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$
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1,791
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$
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(161
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)
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-9.0
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%
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Value Based ITEC
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2,577
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2,629
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(52
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)
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-2.0
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%
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Legacy OEM
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3,342
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|
|
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3,181
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|
|
|
161
|
|
|
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5.1
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%
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Total
|
|
$
|
7,549
|
|
|
$
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7,601
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|
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$
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(52
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)
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-0.7
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%
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Professional Audio Communications
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$
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1,767
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|
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$
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1,829
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|
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$
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(62
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)
|
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-3.4
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%
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Total Net Revenue
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$
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30,109
|
|
|
$
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25,363
|
|
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$
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4,746
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|
|
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18.7
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%
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For the three months ended March 31, 2019,
we experienced an increase of 26.6% in net revenue in the diabetes medical biotelemetry market compared to the same period in 2018.
Medtronic revenues were up year-over-year and we continue to anticipate Medtronic revenue growth throughout 2019 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.
All other medical net revenue for the three
months ended March 31, 2019 increased 53.1% compared to the same period in 2018. The increase was driven by the addition of a new
customer in our medical coils business.
Net revenue in our hearing health business
for the three months ended March 31, 2019 decreased 0.7% compared to the same period in 2018. The modest revenue decrease during
the quarter was largely due to the impact of a customer’s product cycle in the Company’s Indirect-to-End-Consumer channel
and underperforming advertising spend in its Direct-to-End-Consumer channel.
Net revenue in our hearing health direct-to-end-consumer
business for the three months ended March 31, 2019 decreased 9.0% compared to the same period in 2018. As noted above, the decrease
was primarily due to underperforming advertising spend.
Net revenue to the professional audio device
sector decreased 3.4% for the three months ended March 31, 2019 compared to the same period in 2018. IntriCon will continue to
leverage its core technology in professional audio to support existing customers, as well as pursue related hearing health and
medical product opportunities.
Gross profit
Gross profit, both in dollars and as a percent of revenue, for
the three months ended March 31, 2019 and 2018, was as follows:
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2019
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|
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2018
|
|
|
Change
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|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
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Three Months Ended March 31
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Dollars
|
|
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of
Revenue
|
|
|
Dollars
|
|
|
of
Revenue
|
|
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Dollars
|
|
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Percent
|
|
Gross Profit
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|
$
|
8,751
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|
|
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29.1
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%
|
|
$
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8,412
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|
|
|
33.2
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%
|
|
$
|
339
|
|
|
|
4.0
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%
|
The 2019 gross profit decreased over the
comparable prior year period primarily due to the ongoing validation and qualification expense as well as excess capacity related
to the recent manufacturing expansion to meet the higher volume requirements of our existing and future customers.
Sales and Marketing, General and Administrative
and Research and Development Expenses
Sales and marketing, general and administrative and research
and development expenses for the three months ended March 31, 2019 and 2018 were as follows:
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2019
|
|
|
2018
|
|
|
Change
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
Dollars
|
|
|
of
Revenue
|
|
|
Dollars
|
|
|
of
Revenue
|
|
|
Dollars
|
|
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Percent
|
|
Sales and Marketing
|
|
$
|
3,536
|
|
|
|
11.7
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%
|
|
$
|
2,840
|
|
|
|
11.2
|
%
|
|
$
|
696
|
|
|
|
24.5
|
%
|
General and Administrative
|
|
|
3,425
|
|
|
|
11.4
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%
|
|
|
3,061
|
|
|
|
12.1
|
%
|
|
|
364
|
|
|
|
11.9
|
%
|
Research and Development
|
|
|
965
|
|
|
|
3.2
|
%
|
|
|
1,159
|
|
|
|
4.6
|
%
|
|
|
(194
|
)
|
|
|
-16.7
|
%
|
Sales and marketing expenses increased
over the prior year due to increased DTEC marketing and support costs. General and administrative expenses were greater than the
prior year period primarily due to increased other outside service and support costs. Research and development decreased over the
prior year due to a reduction in outside service and support costs.
Interest income (expense), net
Interest income (expense), net for the three months ended March
31, 2019 was $215 compared to ($188) for the comparable three-month period in 2018. This increase is due to the payoff of all of
our credit facility debt in 2018 which reduced our interest expense along with interest income in the current year on our investment
accounts.
Other expense, net
Other expense, net for the three months
ended March 31, 2019 was $134 compared to $208 for the same period in 2018. The change in other expense, net is primarily due to
the elimination of the Soundperience equity in losses as we no longer hold a partnership interest in this entity.
Income tax expense
Income tax expense for
the three months ended March 31, 2019 was $131 compared to $187 for the same period in 2018.
Liquidity and Capital Resources
As of March 31, 2019, we had $13,190 of
cash on hand. Sources of our cash for the three months ended March 31, 2019 have been from our operating and investing activities,
as described below. The Company’s cash flows from operating, investing and financing activities, as reflected in the statement
of cash flows, are summarized as follows:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
Cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
435
|
|
|
$
|
(1,255
|
)
|
Investing activities
|
|
|
4,855
|
|
|
|
(649
|
)
|
Financing activities
|
|
|
(179
|
)
|
|
|
1,823
|
|
Effect of exchange rate changes on cash
|
|
|
32
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
5,143
|
|
|
$
|
39
|
|
The most significant items that
contributed to the $435 of cash provided by operating activities was net income of $775, a decrease in accounts receivable and
other current assets and add backs for non-cash depreciation and amortization and stock-based compensation expense partially offset
by decreases in accounts payable and accrued expenses as well as increases in inventory and contract assets.
Net cash provided by investing
activities of $4,855 primarily consisted of proceeds from sale and maturity of investment securities partially offset by purchases
of machinery and equipment, investment securities and intangible assets along with our investments in partnerships.
Net cash used in financing activities
of ($179) was comprised primarily from the withholding of shares from vesting RSU awards to pay withholding taxes and the payment
of financing leases partially offset by cash received from the exercise of stock options and employee stock purchase plan shares.
The Company had the following bank arrangements:
Domestic Credit
Facilities
The Company and its domestic
subsidiaries are parties to a credit facility with CIBC Bank USA. The credit facility, as amended through March 31, 2019, provides
for a $11,000 revolving credit facility, with a $200 sub facility for letters of credit. Under the revolving credit facility, the
availability of funds depends on a borrowing base composed of stated percentages of the Company’s eligible trade receivables
and eligible inventory, and eligible equipment less a reserve. The credit facility matures on December 15, 2022.
On April 17, 2019, the Company entered into
a Thirteenth Amendment to the Loan and Security Agreement
with CIBC Bank USA to reduce our borrowing capacity
to $7,000; lessen restrictions surrounding acquisitions, business investments, distributions and disposition of assets; eliminate
the mandatory prepayment requirement with respect to proceeds from asset sales and capital and debt financings; and eliminate the
annual capital expenditure covenant.
The Company was in compliance
with all applicable covenants under the credit facility as of March 31, 2019.
Foreign Credit Facility
In addition to its domestic credit
facilities, the Company’s wholly-owned subsidiary, IntriCon, PTE LTD., has an international senior secured credit agreement
with Oversea-Chinese Banking Corporation Ltd. that provides for an asset-based line of credit. Borrowings bear interest at a rate
of .75% to 2.5% over the lender’s prevailing prime lending rate.
Capital Adequacy
We believe that funds raised
from our August 2018 public offering, funds expected to be generated from operations and funds available under our revolving credit
loan facility will be sufficient to meet our anticipated cash requirements for operating needs for at least the next 12 months.
While management believes that we will be able to meet our liquidity needs for at least the next 12 months, no assurance can be
given that we will be able to do so.
As of March 31, 2019 and December
31, 2018, the Company had a total borrowing capacity of $14,309 and $13,884, respectively, with no borrowings outstanding at each
reporting period.