UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from _____ to _____
Commission File Number:
INTRICON CORPORATION
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) | ||
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| (Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | | |
| Non-accelerated filer ☐ | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
The number of outstanding shares of the registrant’s common stock, $1.00 par value, on April 30, 2022 was
I N D E X
| Condensed Consolidated Statements of Operations |
| (In Thousands, Except Per Share Amounts) |
| Three Months Ended |
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| (unaudited) |
March 31, |
March 31, |
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| 2022 |
2021 |
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| Revenue, net |
$ | $ | ||||||
| Cost of goods sold |
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| Gross profit |
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| Operating expenses: |
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| Sales and marketing |
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| General and administrative |
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| Research and development |
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| Merger-related costs |
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| Other operating expenses |
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| Total operating expenses |
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| Operating (loss) income |
( |
) | ||||||
| Interest expense, net |
( |
) | ( |
) | ||||
| Other expense, net |
( |
) | ( |
) | ||||
| (Loss) income before income taxes |
( |
) | ||||||
| Income tax expense |
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| Net (loss) income |
( |
) | ||||||
| Less: Income (loss) allocated to non-controlling interest |
( |
) | ||||||
| Net (loss) income attributable to Intricon shareholders |
$ | ( |
) | $ | ||||
| (Loss) income per share attributable to Intricon shareholders: |
||||||||
| Basic |
$ | ( |
) | $ | ||||
| Diluted |
$ | ( |
) | $ | ||||
| Average shares outstanding: |
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| Basic |
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| Diluted |
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| (See accompanying notes to the condensed consolidated financial statements) |
| Condensed Consolidated Statements of Comprehensive Income (Loss) |
| (In Thousands) |
| Three Months Ended | ||||||||
| (unaudited) | March 31, | March 31, | ||||||
| 2022 | 2021 | |||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Unrealized foreign currency translation adjustment | ( | ) | ||||||
| Realized pension and postretirement obligations | ||||||||
| Other | ||||||||
| Comprehensive (loss) income | $ | ( | ) | $ | ||||
| (See accompanying notes to the condensed consolidated financial statements) |
| Condensed Consolidated Balance Sheets |
| (In Thousands, Except Per Share Amounts) |
| (unaudited) | March 31, | December 31, | ||||||
| 2022 | 2021 | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Short-term investment securities | ||||||||
| Accounts receivable, less provision for doubtful accounts of $ at March 31, 2022 and $ at December 31, 2021 | ||||||||
| Inventories | ||||||||
| Contract assets | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment | ||||||||
| Less: Accumulated depreciation | ||||||||
| Net property, plant and equipment | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Investment in partnerships | ||||||||
| Long-term investment securities | ||||||||
| Other assets, net | ||||||||
| Total assets | $ | $ | ||||||
| Current liabilities: | ||||||||
| Current financing leases | $ | $ | ||||||
| Current operating leases | ||||||||
| Accounts payable | ||||||||
| Accrued salaries, wages and commissions | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Noncurrent operating leases | ||||||||
| Pension and postretirement benefit obligations | ||||||||
| Deferred tax liabilities, net | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 11) | ||||||||
| Shareholders’ equity: | ||||||||
| Common stock, $ par value per share; shares authorized; and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders' equity | ||||||||
| Non-controlling interest | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
| (See accompanying notes to the condensed consolidated financial statements) |
| Condensed Consolidated Statements of Cash Flows |
| (In Thousands) |
| Three Months Ended |
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| (unaudited) |
March 31, |
March 31, |
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| 2022 |
2021 |
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| Cash flows from operating activities: |
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| Net (loss) income |
$ | ( |
) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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| Depreciation and amortization |
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| Equity in loss of partnerships |
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| Stock-based compensation |
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| Change in fair value of contingent consideration |
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| Change in allowance for doubtful accounts |
( |
) | ( |
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| Loss on disposal of assets |
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| Changes in operating assets and liabilities: |
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| Accounts receivable |
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| Inventories |
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) | ( |
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| Contract assets |
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| Other assets |
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| Accounts payable |
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| Accrued expenses |
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| Other liabilities |
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) | ( |
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| Net cash (used in) provided by operating activities |
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) | ||||||
| Cash flows from investing activities: |
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| Purchases of property, plant and equipment |
( |
) | ( |
) | ||||
| Purchase of investment securities |
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) | ||||||
| Purchases of intangible assets |
( |
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| Proceeds from maturities of investment securities |
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| Investment in partnerships |
( |
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| Net cash provided by (used in) investing activities |
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| Cash flows from financing activities: |
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| Payment of financing leases |
( |
) | ||||||
| Payments on liabilities for acquisition of intangible assets |
( |
) | ( |
) | ||||
| Exercise of stock options and employee stock purchase plan shares |
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| Withholding of common stock upon vesting of restricted stock units |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash |
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| Net (decrease) increase in cash |
( |
) | ||||||
| Cash, cash equivalents and restricted cash, beginning of period |
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| Cash, cash equivalents and restricted cash, end of period |
$ | $ | ||||||
| Non-cash investing and financing: |
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| Acquisition of property, plant and equipment in accounts payable |
$ | $ | ||||||
| (See accompanying notes to the condensed consolidated financial statements) |
| Condensed Consolidated Statements of Equity |
| (In Thousands) |
| Shareholders' Equity, Three Months Ended March 31, 2022 (unaudited) |
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| Common Stock Number of Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Non-Controlling Interest |
Total Equity | ||||||||||||||||||||||
| Balances December 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Exercise of stock options, net |
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| Withholding of common stock upon vesting of restricted stock units |
( |
) | ( |
) | ||||||||||||||||||||||||
| Shares issued under the employee stock purchase plan |
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| Stock-based compensation |
- | |||||||||||||||||||||||||||
| Net (loss) income |
- | ( |
) | ( |
) | |||||||||||||||||||||||
| Comprehensive Income |
- | |||||||||||||||||||||||||||
| Balances March 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Shareholders' Equity, Three Months Ended March 31, 2021 (unaudited) |
||||||||||||||||||||||||||||
| Common Stock Number of Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Non-Controlling Interest |
Total Equity | ||||||||||||||||||||||
| Balances December 31, 2020 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||
| Exercise of stock options, net |
( |
) | ||||||||||||||||||||||||||
| Withholding of common stock upon vesting of restricted stock units |
( |
) | ( |
) | ||||||||||||||||||||||||
| Shares issued under the employee stock purchase plan |
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| Stock-based compensation |
- | |||||||||||||||||||||||||||
| Net income (loss) |
- | ( |
) | |||||||||||||||||||||||||
| Other |
- | ( |
) | |||||||||||||||||||||||||
| Balances March 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||
| (See accompanying notes to the condensed consolidated financial statements) |
INTRI
CON CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited) (In Thousands, Except Per Share Da
ta)
| 1. | Management’s Statement |
Intricon Corporation (together with its subsidiaries referred herein as the “Company”, or “Intricon”, “we”, “us” or “our”) is an international company and joint development manufacturer (“JDM”) of micromedical components, sub-assemblies and final devices. The Company serves as a JDM partner to leading medical device original equipment manufacturers (“OEMs”) by designing, developing, engineering, manufacturing, packaging and distributing micromedical products for high growth medical markets, such as diabetes, peripheral vascular, interventional pulmonology, electrophysiology and hearing healthcare. Our mission is to improve, extend and save lives by advancing innovative micromedical technologies through joint development and manufacturing partnerships with industry leading medical device companies.
Basis of Presentation
The interim condensed consolidated financial statements of the Company presented herein have been prepared by the Company and are unaudited. They have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and with instructions to Form 10-Q and Article 10 of Regulation S-X. They reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented.
The interim condensed 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.
During the three months ended March 31, 2022, the Company operated and managed our business under segment. This is consistent with disclosures in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto for the fiscal year ended December 31, 2021, included in the Company's Annual Report on Form 10-K.
Use of Estimates
The Company makes estimates and assumptions relating to the reporting of assets and liabilities, the recording of reported amounts of revenues and expenses and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements. Actual results could differ from those estimates. Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of goodwill and intangible assets, including the operating and macroeconomic factors that may affect them. The Company uses historical financial information, internal plans and projections and industry information in making such estimates.
Summary of Significant 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, 2021. The Company follows these policies in preparation of the condensed consolidated financial statements.
| 2. | Pending Merger with Altaris Capital Partners LLC |
On February 27, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among the Company, IIN Holding Company LLC, a Delaware limited liability company ("Parent"), and IC Merger Sub Inc., a Pennsylvania corporation and wholly owned subsidiary of Parent ("Merger Sub"). Parent and Merger Sub are owned by funds affiliated with Altaris Capital Partners, LLC. The Merger Agreement provides, subject to its terms and conditions, for the acquisition of the Company by Parent through the merger of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent (the "Merger").
As a result of the Merger, each share of common stock of the Company ("Common Stock") issued and outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than Rollover Shares (as defined below) or shares of Common Stock (a) held in treasury of the Company, (b) owned by any subsidiary of the Company, or owned by Parent, Merger Sub or any other subsidiary of Parent or (c) held by a holder who is entitled to, and who has perfected, appraisal rights for such shares under Pennsylvania law) automatically will be converted into the right to receive cash in an amount of $
As permitted by the Merger Agreement, Intricon and certain members of Intricon’s management, or “Rollover Shareholders”, entered into a rollover agreement with IIN Holdings LLC, an affiliate of Parent (“IIN Holdings”), providing for the contribution, immediately prior to the effective time of the Merger, of an aggregate of
The completion of the Merger is subject to customary closing conditions, including: (i) the approval of the Merger Agreement by the Company’s shareholders; (ii) the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the approval of the Merger under the antitrust laws of other jurisdictions, as applicable; (iii) the absence of any laws or court orders making the Merger illegal or otherwise prohibiting the Merger; and (iv) other customary closing conditions, including the accuracy of the representations and warranties of each party (subject to certain materiality exceptions) and material compliance by each party with its covenants under the Merger Agreement. The parties expect the transaction to close in the second quarter of 2022, subject to the satisfaction or waiver of the closing conditions.
In connection with the negotiation and execution of the Merger Agreement, the Company has incurred legal, consulting and accounting fees of $
A special meeting of shareholders of the Company will be held at 8:00 a.m. Central Daylight Time on May 24, 2022, to approve and adopt the Merger Agreement and approve the Merger, among other matters.
| 3. | New Accounting Pronouncements |
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses Topic 326, which requires certain financial assets to be measured at amortized cost net of an allowance for estimated credit losses, such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions, and reasonable and supportable forecasts that affect the collectability of the amounts. Topic 326 is effective for interim and annual periods beginning January 1, 2022 for smaller reporting companies. This standard update did not have a material impact on our financial position, results of operations and cash flows.
| 4. | Revenue Recognition |
Revenue is measured based on consideration specified in the contract with a customer. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer. For contractual arrangements in which an enforceable right to payment exists, control of these units is deemed to transfer to the customer over time during the manufacturing process. Consequently, the transaction price is recognized as revenue over time. The transaction price for contractual arrangements without an enforceable right to payment including a reasonable margin is recognized as revenue at a point in time.
The Company’s revenue recognition policy is further 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, 2021.
During the 2021 second quarter, the Company reclassified first quarter revenue of $
Timing of revenue recognition for the three months ended March 31, 2022:
| Products and services transferred at point in time | Products and services transferred over time | Total | ||||||||||
| Diabetes | $ | $ | $ | |||||||||
| Interventional Catheters | ||||||||||||
| Other Medical | ||||||||||||
| Value Based DTEC | ||||||||||||
| Value Based ITEC | ||||||||||||
| Legacy OEM | ||||||||||||
| Professional Audio Communications | ||||||||||||
| Total Revenue, net | $ | $ | $ | |||||||||
Timing of revenue recognition for the three months ended March 31, 2021:
| Products and services transferred at point in time | Products and services transferred over time | Total | ||||||||||
| Diabetes | $ | $ | $ | |||||||||
| Interventional Catheters | ||||||||||||
| Other Medical | ||||||||||||
| Value Based DTEC | ||||||||||||
| Value Based ITEC | ||||||||||||
| Legacy OEM | ||||||||||||
| Professional Audio Communications | ||||||||||||
| Total Revenue, net | $ | $ | $ | |||||||||
Net revenue by geography is allocated based on shipment and set forth below:
| Three Months Ended | ||||||||
| Net Revenue by Geography | March 31, 2022 | March 31, 2021 | ||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| Asia | ||||||||
| All other countries | ||||||||
| Consolidated | $ | $ | ||||||
Geographic net revenue is allocated based on the shipment location of the Company’s direct OEM customer. These customers then distribute products globally.
For the three months ended March 31, 2022, and 2021, customer accounted for
customers combined accounted for
Two customers accounted for
| 5. | (Loss) Income Per Share |
The following table presents a reconciliation between basic and diluted net (loss) income per share:
| Three Months Ended | ||||||||
| March 31, 2022 | March 31, 2021 | |||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Less: Income (loss) allocated to non-controlling interest | ( | ) | ||||||
| Net (loss) income attributable to Intricon shareholders | $ | ( | ) | $ | ||||
| Basic – weighted shares outstanding | ||||||||
| Weighted shares assumed upon exercise of stock awards | ||||||||
| Diluted – weighted shares outstanding | ||||||||
| Basic (loss) income per share attributable to Intricon shareholders: | $ | ( | ) | $ | ||||
| Diluted (loss) income per share attributable to Intricon shareholders: | $ | ( | ) | $ | ||||
Net (loss) income per common share was based on the weighted average number of common shares outstanding during the periods when computing basic net income per share. Stock options are dilutive when the average market price of Company stock exceeds the exercise price of the potentially dilutive options. When dilutive, stock options are included as equivalents using the treasury stock method when computing diluted net income per share. Unvested shares represented by RSUs are also included in the dilution calculation, net of assumed proceeds and equivalent share repurchases. The Company excluded all stock awards outstanding in 2022 from the computation of the diluted loss per share because their effect would be anti-dilutive.
| 6. | Income Taxes |
Income tax expense for the three months ended March 31, 2022 was $
The following was the (loss) income before income taxes for each jurisdiction in which the Company has operations for the period:
| Three Months Ended | ||||||||
| March 31, 2022 | March 31, 2021 | |||||||
| United States | $ | ( | ) | $ | ||||
| Singapore | ||||||||
| Indonesia | ||||||||
| Germany | ||||||||
| (Loss) income before income taxes | $ | ( | ) | $ | ||||
| 7. | Selected Balance Sheet Data |
Inventories:
Inventories consisted of the following at:
| Raw materials | Work-in process | Finished products and components | Total | |||||||||||||
| March 31, 2022 | ||||||||||||||||
| Domestic | $ | $ | $ | $ | ||||||||||||
| Foreign | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2021 | ||||||||||||||||
| Domestic | $ | $ | $ | $ | ||||||||||||
| Foreign | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Property, Plant and Equipment Geographic Information:
The geographical distribution of long-lived assets net of accumulated depreciation, consisting of machinery and equipment is set forth below:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| United States | $ | $ | ||||||
| Singapore | ||||||||
| Other | ||||||||
| Consolidated | $ | $ | ||||||
Long-lived assets consist of machinery and equipment with useful lives from three to twelve years. Excluded from long-lived assets are investments in partnerships, patents, goodwill, intangible assets, operating lease right-of-use (ROU) assets and certain other assets. The Company capitalizes long-lived assets pertaining to the production of specialized parts. These assets are periodically reviewed to ensure the net realizable value from the estimated future production based on forecasted cash flows exceeds the carrying value of the assets.
Intangible Assets:
Definite-lived intangible assets consisted of the following at:
| March 31, 2022 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Customer list | $ | $ | ( | ) | $ | |||||||
| Technology intangibles | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
| December 31, 2021 | ||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Customer list | $ | $ | ( | ) | $ | |||||||
| Technology intangibles | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
The customer list was established as a part of purchase accounting related to our EMS acquisition in 2020. The estimated useful life is years.
The technology intangibles provide the Company with wireless and self-fitting hearing aid technology and are being amortized based on estimated useful lives between and years.
Investment in Partnerships:
Investment in partnerships consisted of the following:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Investment in Signison | $ | $ | ||||||
| Other | ||||||||
| Total | $ | $ | ||||||
The Company has a
Contingent Consideration Liabilities:
Contingent consideration for the Emerald Medical Services earnout liability consisted of the following:
| Carrying amount at December 31, 2020 | $ | |||
| Change in fair value | ( | ) | ||
| Less payments | ( | ) | ||
| Carrying amount at December 31, 2021 | $ | |||
| Change in fair value | ||||
| Carrying amount at March 31, 2022 | $ |
The total earnout liability is included in other accrued liabilities and other long-term liabilities proportionately to when the liability is due.
Other Accrued Liabilities:
Other accrued liabilities consisted of the following at:
| March 31, 2022 | December 31, 2021 | |||||||
| Pension and postretirement benefit obligations | $ | $ | ||||||
| Deferred revenue | ||||||||
| Current technology intangible liability | ||||||||
| Current earn-out contingent consideration liability | ||||||||
| Customer funded projects | ||||||||
| TCPA litigation accrual (Note 11) | ||||||||
| Accrued corporate expenses | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
The technology intangible liability, reflected above, relates to amounts owed in relation to the Company’s wireless and self-fitting hearing aid technologies.
The earn-out liability is contingent on certain future events and is measured at fair value based on various level 3 inputs and assumptions including forecasts, probabilities of payment and discount rates. Amounts are classified as current if expected to be paid within the next twelve months. The liability for contingent consideration is subject to fair value adjustments each reporting period that will be recognized through the condensed consolidated statement of operations.
Other Long-Term Liabilities:
Other long-term liabilities consisted of the following at:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Noncurrent technology intangible liability | $ | $ | ||||||
| Noncurrent earn-out contingent consideration liability | ||||||||
| Litigation liability | ||||||||
| Other | ||||||||
| Total | $ | $ | ||||||
As of March 31, 2022, the Company had debt under its existing credit facilities and was in compliance with all applicable covenants.
| 8. | Investment Securities |
The Company invests in commercial paper, corporate notes and bonds with original maturities of less than years. The Company classifies these investments as held to maturity based on our intent and ability to hold these investments until maturity. As a result, these investments are recorded at amortized cost, which approximates fair value, using level 2 inputs.
The maturity dates of our investments as of March 31, 2022 are as follows:
| Less than one year | 1-5 years | Total | ||||||||||
| Commercial Paper Original Maturities of 91 Days or More | $ | $ | $ | |||||||||
| Corporate Notes and Bonds | ||||||||||||
| Total Investments | $ | $ | $ | |||||||||
The maturity dates of our investments as of December 31, 2021 are as follows:
| Less than one year | 1-5 years | Total | ||||||||||
| Commercial Paper Original Maturities of 91 Days or More | $ | $ | $ | |||||||||
| Corporate Notes and Bonds | ||||||||||||
| Total Investments | $ | $ | $ | |||||||||
The Company also maintains excess funds within level 1 money market accounts included within cash and cash equivalents. Cash available in our money market accounts at March 31, 2022 and December 31, 2021 was $
| 9. | Leases |
The Company’s leases pertain primarily to engineering, manufacturing, sales and administrative facilities, with an initial term of year or more. The Company has leased facilities in Minnesota, that expires in 2022, that expires in 2023, that expires in 2027, leased facility in California that expires in 2024, leased facility in Singapore that expires in 2025, leased facility in Indonesia that expires in 2027, and leased facility in Germany that expires in 2022. Additionally, the Company has two short term leases with initial terms of less than one year. One short term leased facility is located in Illinois and the second facility is in California.
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 the condensed consolidated statement of operations. The facility leases include options to extend for terms ranging from year to years. Lease options that the Company is reasonably certain to execute are included in the determination of the ROU asset and lease liability. The Company also leases equipment that include bargain purchase options at termination. These leases have been classified as finance leases.
As of March 31, 2022, the Company has a weighted-average lease term of
The following tables summarizes lease costs by type:
| Three Months Ended | ||||||||
| March 31, 2022 | March 31, 2021 | |||||||
| Lease cost | ||||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | $ | $ | ||||||
| Interest on lease liabilities | ||||||||
| Operating lease cost | ||||||||
| Variable lease cost | ||||||||
| Total lease cost | $ | $ | ||||||
Maturities of lease liabilities are as follows as of March 31, 2022:
| Operating Leases | Financing Leases | Total | ||||||||||
| 2022 | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 and thereafter | ||||||||||||
| Total lease payments | ||||||||||||
| Less: Interest | ( | ) | ( | ) | ||||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||
| 10. | Shareholders’ Equity and Stock-based Compensation |
The Company has a 2006 Equity Incentive Plan and an Amended and Restated 2015 Equity Incentive Plan. The 2015 plan, which was approved by the shareholders on April 24, 2015, replaced the 2006 plan. New grants may not be made under the 2006 plan; however certain option grants under the 2006 plan remain exercisable as of March 31, 2022.
Under the 2015 Plan, the Company may grant stock options, stock awards, stock appreciation rights, restricted stock units (“RSUs”), performance restricted stock units (“PRSUs”) and other equity-based awards. Under all awards, the terms are fixed on the grant date. The 2015 plan was amended and restated in 2020 to reflect certain corporate governance changes and to increase the number of shares of common stock that could be awarded under the 2015 plan by
For the three months ended March 31, 2022, the Company granted a total of
The Company has also historically granted stock options under the plans. For the three months ended March 31, 2022, and 2021, the Company did grant any options. Options granted under the plans generally vest in equal, annual installments over a year period beginning on the anniversary of the date of grant and have a maximum term of
Stock award activity as of and during the three months ended March 31, 2022 was as follows:
| Outstanding Awards | ||||||||||||||||||||
| Stock Options | RSUs | Total | Stock Option Weighted-Average Exercise Price (a) | Aggregate Intrinsic Value | ||||||||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||||||||||
| Awards granted | - | - | ||||||||||||||||||
| Awards exercised or released | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Outstanding at March 31, 2022 | $ | $ | ||||||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||||||
| Available for future grant at December 31, 2021 | ||||||||||||||||||||
| Available for future grant at March 31, 2022 | ||||||||||||||||||||
| (a) The weighted average exercise price calculation does not include outstanding RSUs |
|
|
The number of shares available for future grants at March 31, 2022 does not include a total of up to
The Company recorded $
The Company also has an Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan, as amended, through March 31, 2022, provides that a maximum of
| 11. | Legal Proceedings |
Asbestos Litigation
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, or have accepted the tenders but asserted a reservation of rights or have advised the Company that they need to investigate further. In addition, some of the primary and excess insurers have gone out of business, and thus coverage is not available. There are also primary policies for years earlier than 1970 that were purchased by the Company, and coverage under those policies will be investigated. 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, most 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. As of March 31, 2022, we recorded $
TCPA Litigation
On October 9, 2019, plaintiff Mark Hoffman (“Hoffman”) filed a putative class action lawsuit against defendant Hearing Help Express, Inc. (“HHE”), a subsidiary of the Company, in the Federal District Court for the Western District of Washington (the “Court”) alleging violations of the federal Telephone Consumer Protection Act (“TCPA”). HHE’s investigation revealed third-party lead generator Triangular Media Corp. (“Triangular”) provided Hoffman’s information to HHE. Hoffman claims he did not provide the requisite prior express written consent for autodialed telemarketing calls regarding hearing aids to be placed to his cellphone. He also claims he did not provide the requisite permission for telemarketing calls to his number registered on the Do-Not-Call (“DNC”) registry. Since the initial complaint was filed, Hoffman amended his complaint several times to add additional parties, including Triangular, Triangular’s alleged owner, an alleged entity related to Triangular called LeadCreations.Com, LLC, Intricon, Inc., and Intricon Corporation. With respect to HHE, Hoffman sought to certify a class of certain automated outbound telemarketing calls HHE allegedly made without prior consent and calls made to numbers on the DNC registry, in the last four years. Hoffman also sought to hold the Company vicariously liable for all of the calls HHE made without prior consent. The potential exposure under the TCPA is $
On July 26, 2021, the Company and the other defendants entered into a Class Action Settlement and Release ("Settlement Agreement") with Hoffman for himself and on behalf of the settlement class relating to this matter. In entering into the Settlement Agreement, the Company and the other defendants are making no admission of liability. The Settlement Agreement was submitted to the Court for preliminary approval on July 28, 2021, which was granted. The Court set a fairness and final approval hearing for January 5, 2022.
Pursuant to the Settlement Agreement, among other things, (a) the Company agreed to pay total cash consideration of $
On January 5, 2022, the parties attended the Final Approval Hearing with the Court on the class settlement. The Court granted the motion for final approval of the class settlement and Plaintiff's Motion for Attorneys' Fees, Costs, and Service Payment. The deadline to file a notice of appeal was February 4, 2022; no appeal was filed by that date, the Settlement Agreement became effective and the $
Litigation Related to the Merger
Between April 14, 2022 and May 5, 2022, six lawsuits were filed against the Company and its directors: Stein v. Intricon Corporation, et al., 1-22-cv-03099-PGG in the United States District Court for the Southern District of New York; Sandoval v. Intricon Corporation, et al., 2:22-cv-01512 in the United States District Court for the Eastern District of Pennsylvania (the “Sandoval Complaint”); Waterman v. Intricon Corporation, et al., 2:22-cv-01541-GAM in the United States District Court for the Eastern District of Pennsylvania; Whitfield v. Intricon Corporation, et al., 1:22-cv-02261-EK-LB in the United States District Court for the Eastern District of New York . ; Raul v. Intricon Corporation, et al., 1:22-cv-03638 in the United States District Court for the Southern District of New York; and Finger v. Intricon Corporation, et al., 1:22-cv-03648 in the United States District Court for the Southern District of New York.
The complaints generally allege that the Company’s Preliminary Proxy Statement filed with the SEC on April 12, 2022 omitted material information that rendered it false and misleading. As a result of the alleged omissions, the lawsuits seek to hold the Company and its directors liable for violating Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder, and additionally seek to hold the Company’s directors liable as control persons pursuant to Section 20(a) of the Exchange Act. The Sandoval Complaint also alleges that the Company’s directors violated their fiduciary duties of care, loyalty and good faith, and that the Company aided and abetted the directors’ breach of their fiduciary duties. The complaints variously seek, among other relief, an injunction preventing the closing of the Merger, rescission of the Merger (in case the Merger is consummated) or awarding of rescissory damages, declaring the Merger Agreement unenforceable, and awarding of damages and an award of costs of the lawsuit, including reasonable allowance for plaintiffs’ attorneys’ and experts’ fees.
The Company believes that the lawsuits are without merit and intends to defend them vigorously.
In addition, between May 4, 2022 and May 6, 2022, the Company received three demand letters from alleged shareholders pursuant to 15 Pa.C.S. §1308 to inspect books and records of the Company relating to, among other things, the Merger Agreement and the Merger. The Company intends to review the demand letters and respond appropriately. The Company cannot determine at this time if the books and records demands will lead to litigation.
Other Litigation Matters
The Company is also involved from time to time in other lawsuits arising in the normal course of business. While it is not possible to predict with certainty the outcome of these matters, management is of the opinion that the disposition of these lawsuits and claims will not materially affect the Company’s consolidated financial position, liquidity, or results of operations.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following management discussion and analysis (“MD&A”) provides information that the Company believes is useful in better understanding the operating results, cash flows and financial condition of the Company. Quantitative information is provided about the material revenue and expense drivers as well as any other significant factors we believe are useful for understanding our results. The MD&A should be read in conjunction with both the condensed consolidated financial information and related notes included in this Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021. This discussion contains various “Non-GAAP Financial Measures” and also contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statements entitled “Non-GAAP Financial Measures” and “Forward-Looking Information and Cautionary Statements” located at the end of Item 2 of this report.
Business Overview
Intricon Corporation (together with its subsidiaries referred herein as the “Company”, or “Intricon”, “we”, “us” or “our”) is an international joint development manufacturer (“JDM”) of micromedical components, sub-assemblies and final devices. The Company serves as a JDM partner to leading medical device original equipment manufacturers (“OEMs”) by designing, developing, engineering, manufacturing, packaging and distributing micromedical products for high growth markets, such as diabetes, peripheral vascular, interventional pulmonology, electrophysiology and hearing healthcare. Our mission is to improve, extend and save lives by advancing innovative micromedical technologies through joint development and manufacturing partnerships with industry leading medical device companies.
Market Overview
Intricon serves as a JDM to leading medical device OEMs by designing, developing, engineering, manufacturing, packaging and distributing micromedical products, microelectronics, micro-mechanical assemblies, complete assemblies and software solutions. Revenue from these markets is reported on the respective diabetes, other medical, hearing health value based direct-to-end-consumer (DTEC), hearing health value based indirect-to-end-consumer (ITEC), hearing health legacy OEM, and professional audio communications 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 3 “Revenue Recognition” to the Company’s condensed consolidated financial statements included herein.
The Company manufactures microelectronics, micro-mechanical assemblies, high-precision injection-molded plastic components and complete body-worn devices for leading and emerging medical device manufacturers. Intricon currently serves this market by offering medical device manufacturers the capabilities to design, develop, engineer, manufacture, package and distribute medical devices that are easier to use, smaller, lighter and use less power. Increasingly, the medical device industry is looking to outsource the manufacturing, assembly and packaging of their products.
The Company believes several factors have come together over the last few years to enable the emergence of a US market disruptive value hearing aid. 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) and pending regulatory change to allow the sale of over-the-counter (“OTC”) hearing aids. On October 19, 2021, the FDA proposed a draft regulations to establish a new regulatory category of OTC hearing aids that when finalized, would allow hearing aids to be sold throughout the country directly to consumers in stores or online without a medical exam or a fitting by a licensed practitioner, such as an audiologist.
To best approach this market opportunity, the Company has sharpened its focus to identify potential high-profile branding partners that value Intricon’s ability to deliver superior hearing aids, self-fitting software, and customer care to the U.S. market.
The Company is committed to increasing investments to support its medical business development efforts. In early 2019, the Company hired a vice president of medical business development and in August 2021 the Company hired a vice president of research and development. The Company expanded our core competencies and diversified our revenue base with the acquisition of EMS in 2020. The Company believes it has significant opportunities to serve the emerging home care markets through its already developed core competencies and capabilities to develop devices that are more technologically advanced, smaller and lightweight.
For additional information on the Company’s markets and core technologies refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Results of Operations
Overall Results
First quarter 2022 results included the following:
| ● |
GAAP diluted net loss per share was $0.07. |
| ● |
Adjusted non-GAAP diluted net income per share was $0.24. |
| ● |
Total revenue increased 4.1% over the prior year, driven by demand growth of our Diabetes products. |
| ● |
Gross profit as a percent of revenue increased 1.0% due, in part, to increased volume and product mix. |
| ● |
Operating loss for the quarter was ($429) compared to operating income of $848 in the comparable prior period, driven by one-time merger related costs. |
Revenue, net
Below is a summary of our revenue by main markets for the three months ended March 31, 2022 and 2021:
| Change |
||||||||||||||||
| Three Months Ended March 31, |
2022 |
2021 |
Dollars |
Percent |
||||||||||||
| Diabetes |
$ | 20,323 | $ | 18,364 | $ | 1,959 | 10.7 | % | ||||||||
| Interventional Catheters |
3,271 | 3,802 | (531 | ) | -14.0 | % | ||||||||||
| Other Medical |
3,699 | 2,958 | 741 | 25.1 | % | |||||||||||
| Hearing Health Value Based DTEC |
685 | 937 | (252 | ) | -26.9 | % | ||||||||||
| Hearing Health Value Based ITEC |
1,144 | 1,301 | (157 | ) | -12.1 | % | ||||||||||
| Hearing Health Legacy OEM |
2,726 | 3,421 | (695 | ) | -20.3 | % | ||||||||||
| Professional Audio Communications |
1,212 | 985 | 227 | 23.0 | % | |||||||||||
| Total Net Revenue |
$ | 33,060 | $ | 31,768 | $ | 1,292 | 4.1 | % | ||||||||
For the three months ended March 31, 2022, we experienced an increase of 10.7%, in net revenue in the diabetes medical market compared to the same period in 2021 primarily driven by increased product demand in anticipation of future product launches.
Interventional catheters net revenues for the three months ended March 31, 2022 decreased 14.0% compared to the same period in 2021 due to supply chain constraints.
Other medical net revenue for the three months ended March 31, 2022 increased 25.1% compared to the same period in 2021. The increase was driven by commercialization of newly developed products as the Company continues to expand its surgical navigation product offering.
Net revenue in our hearing health value based DTEC business for the three months ended March 31, 2022 decreased 26.9% compared to the same period in 2021 due to the reduced investment and restructuring of this business beginning in the second quarter 2020.
Net revenue in our hearing health value based ITEC business for the three months ended March 31, 2022 decreased 12.1% compared to the same period in 2021. The decline was due to supply chain constraints of key components.
Net revenue in our hearing health legacy OEM business for the three months ended March 31, 2022 decreased 20.3% compared to the same period in 2021 due to timing of orders and supply chain constraints.
Net revenue to the professional audio communications sector for the three months ended March 31, 2022 increased 23.0% compared to the same period in 2021 due to increased product demand and easing of COVID restrictions in Singapore.
Gross Profit
Gross profit, both in dollars and as a percent of revenue, for the three months ended March 31, 2022 and 2021, was as follows:
| Three Months Ended March 31, |
2022 |
2021 |
Change |
|||||||||||||||||||||
| Percent |
Percent |
|||||||||||||||||||||||
| Dollars |
of Revenue |
Dollars |
of Revenue |
Dollars |
Percent |
|||||||||||||||||||
| Gross Profit |
$ | 8,872 | 26.8 | % | $ | 8,210 | 25.8 | % | $ | 662 | 8.1 | % | ||||||||||||
Gross profit as a percentage of revenue for the three months ended March 31, 2022 increased 1.0% from the prior period due, in part, to increased demand and product mix.
Operating Expenses
Operating expenses for the three months ended March 31, 2022 and 2021 were as follows:
| Three Months Ended March 31, |
2022 |
2021 |
Change |
|||||||||||||||||||||
| Percent |
Percent |
|||||||||||||||||||||||
| Dollars |
of Revenue |
Dollars |
of Revenue |
Dollars |
Percent |
|||||||||||||||||||
| Sales and marketing |
$ | 2,318 | 7.0 | % | $ | 1,982 | 6.2 | % | $ | 336 | 17.0 | % | ||||||||||||
| General and administrative |
4,310 | 13.0 | % | 4,052 | 12.8 | % | 258 | 6.4 | % | |||||||||||||||
| Research and development |
1,587 | 4.8 | % | 1,293 | 4.1 | % | 294 | 22.7 | % | |||||||||||||||
| Merger-related costs |
1,032 | 3.1 | % | - | 0.0 | % | 1,032 | 100.0 | % | |||||||||||||||
| Other operating expenses |
54 | 0.2 | % | 35 | 0.1 | % | 19 | 54.3 | % | |||||||||||||||
Sales and marketing expenses for the three months ended March 31, 2022, increased compared to the respective prior periods due to an increase in internal sales compensation and incentives tied to headcount and year-over-year sales improvement.
General and administrative expenses for the three months ended March 31, 2022, increased from the prior year period due to higher salaries, wages, incentives, and third-party fees.
Research and development expenses for the three months ended March 31, 2022 increased compared to the prior year period due to the expansion of developing new products.
Merger-related costs include legal, consulting and accounting fees associated with the negotiation and execution of the Merger Agreement with entities affiliated with Altaris Capital LLC in the first quarter of 2022. See note 2.
Other operating expenses relates to changes in the fair value of the contingent consideration liability.
Interest expense, net
Interest expense, net for the three months ended March 31, 2022 was $1 compared to $9 for the comparable period in 2021.
Other expense, net
Other expense, net for the three months ended March 31, 2022 was $152 compared to $77 for the same periods in 2021. The increase in expense over the prior year period was due to a reduction in funds received from the Singapore government paid to our subsidiaries for COVID-19 relief and employment credits received in 2021.
Income tax expense
Income tax expense for the three months ended March 31, 2022 was $15 compared to $90 for the same periods in 2021. The change in income tax expense relates to a decrease in estimates for foreign income taxes for the year-to-date period.
Net (Loss) Income
Net (loss) income and non-GAAP adjusted net income are as follows:
| Three Months Ended |
||||||||
| March 31, |
March 31, |
|||||||
| 2022 |
2021 |
|||||||
| Net (loss) income - GAAP attributable to Intricon |
$ | (657 | ) | $ | 714 | |||
| Identified adjustments attributable to Intricon: |
||||||||
| Depreciation (1) |
874 | 841 | ||||||
| Amortization of intangibles (2) |
528 | 497 | ||||||
| Stock-based compensation (3) |
481 | 453 | ||||||
| Other amortization (4) |
58 | 102 | ||||||
| Fair value of contingent consideration (5) |
38 | 35 | ||||||
| COVID-19 Singapore government support (6) |
- | (121 | ) | |||||
| Merger Related Costs (7) |
1,032 | - | ||||||
| Non-GAAP adjusted net income attributable to Intricon (8) |
$ | 2,354 | $ | 2,521 | ||||
| Average basic shares outstanding |
9,256 | 8,994 | ||||||
| Average diluted shares outstanding |
9,712 | 9,607 | ||||||
| Non-GAAP adjusted net income attributable to Intricon per diluted share |
$ | 0.24 | $ | 0.26 | ||||
| (1) Depreciation represents the expense of property, plant and equipment. |
| (2) These expenses represent amortization expenses of intangible assets. |
| (3) Stock-based compensation represents expenses related to awards under the Company's equity incentive plans. |
| (4) These expenses represent amortization of other assets. |
| (5) These expenses represent changes in the fair value of contingent consideration in the period for the purchase of EMS. |
| (6) The Singapore Government provided COVID-19 financial assistance to our Singapore subsidiaries during the first quarter of 2021. |
| (7) In February of 2022, the Company entered into a Merger Agreement with affiliates of Altaris Capital Partners LLC. In connection with the negotiation and execution of the Merger Agreement, the Company incurred $1,032 in legal, accounting and consulting fees. |
| (8) None of these adjustments have material income tax impacts due to the Company's net loss position as of March 31, 2022. |
Liquidity and Capital Resources
We continue to maintain adequate liquidity to operate our businesses. As of March 31, 2022, we had $5,311 of cash and cash equivalents on hand as well as $15,457 of short-term investment securities maturing within the next twelve months for a total of $20,768 of liquid capital. Sources of our cash for the three months ended March 31, 2022 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, 2022 |
March 31, 2021 |
|||||||
| Cash provided by (used in): |
||||||||
| Operating activities |
$ | (1,658 | ) | $ | 5,865 | |||
| Investing activities |
1,627 | (2,511 | ) | |||||
| Financing activities |
(311 | ) | (245 | ) | ||||
| Effect of exchange rate changes on cash |
62 | 22 | ||||||
| Net (decrease) increase in cash |
$ | (280 | ) | $ | 3,131 | |||
Net cash used in operating activities was $1,658 for the three months ended March 31, 2022, compared to $5,865 net cash provided by for the same period in 2021 primarily due to increasing inventories to meet forecasted demand as well as inflationary pressures.
Net cash provided by investing activities was $1,627 for the three months ended March 31, 2022, compared to $2,511 used in investing activities, for the same period in 2021. The variance was primarily the result of timing of purchases and maturities of the Company's investments.
Net cash used in financing activities was $311 for the three months ended March 31, 2022 compared to $245 for the same period in 2021 primarily due to payments on liabilities related to intangible assets.
The Company had the following bank arrangements at March 31, 2022:
Domestic Credit Facilities
The Company and its domestic subsidiaries are parties to a credit facility with CIBC Bank USA. The credit facility, as amended through the date of this filing, provides for a $12,000 revolving credit facility, with a $200 sub facility for letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Company’s eligible trade receivables and eligible inventory, and eligible equipment less a reserve. The credit facility matures on December 15, 2022.
The Company was in compliance with all applicable covenants under the credit facility as of March 31, 2022.
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 expected to be generated from operations, funds maintained in liquid investments and funds available under our revolving credit loan facility will be sufficient to meet our anticipated cash requirements for operating needs for at least the next 12 months. While management believes that we will be able to meet our liquidity needs for at least the next 12 months, no assurance can be given that we will be able to do so.
As of March 31, 2022, and December 31, 2021, the Company had a total borrowing capacity under its credit facilities of $14,291 and $14,294, respectively, with no borrowings outstanding at the end of each reporting period.
Summary of Significant 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, 2021. The Company follows these policies in preparation of the condensed consolidated financial statements.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operation” in Item 2, contains financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S. (GAAP). These non-GAAP measures include adjusted net income and adjusted net income per diluted share.
These non-GAAP financial measures reflect adjustments for expenses and gains that the Company believes do not reflect the Company’s core operating performance. The Company has presented these non-GAAP financial measures because the Company believes this presentation, when reconciled to the corresponding GAAP measures, provides useful information to investors in evaluating the Company’s operational performance. Management uses these non-GAAP measures internally to evaluate our performance and in making financial, operational and planning decisions, including with respect to incentive compensation. The Company believes that the presentation of these measures provides investors with greater transparency with respect to the Company's results of operations and that these measures are useful for period-to-period comparison of results and trends. The Company further believes that the use of these non-GAAP financial measures provides an additional tool for investors in comparing the Company’s financial results with the financial results of other companies.
The Company periodically reassesses the components of non-GAAP adjustments for changes in how the Company evaluates its performance, changes in how the Company makes financial and operational decisions, and considers the use of these measures by Intricon's competitors and peers to ensure the adjustments are still relevant and meaningful.
Non-GAAP financial measures should not be used as a substitute for GAAP measures, or considered in isolation, for the purpose of analyzing our operating performance. The presentation of these non-GAAP financial measures should not be construed as an inference that future results will not be affected by similar items.
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”, “scheduled”, “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 risks in connection with the Merger Agreement and the Merger, estimates of future results, the expected results and impacts of the EMS acquisition, statements regarding the effects of the COVID-19 pandemic, statements regarding the estimated costs and expenses of the restructuring and estimated annual expense savings, net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs, assumptions used to calculate future level of funding of employee benefit plans, the adequacy of insurance coverage and the impact of new accounting pronouncements and litigation. Forward-looking statements also include, without limitation, statements as to the Company's expected future results of operations and growth, strategic alliances and their benefits, government regulation, potential increases in demand for the Company’s products, the Company’s ability to meet working capital requirements, the Company's business strategy, the expected increases in operating efficiencies, anticipated trends in the Company's markets, estimates of goodwill impairments and amortization expense of other intangible assets, the effects of litigation and the amount of insurance coverage, and statements as to trends or the Company's or management's beliefs, expectations and opinions.
Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Quarterly Report on Form 10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including those described within “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and the 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
ITEM 4. Controls and Procedures
The Company’s management, with the participation of its chief executive officer and chief financial officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2022 (the “Disclosure Controls Evaluation”). Based on the Disclosure Controls Evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective to provide a reasonable level of assurance that: (i) information required to be disclosed by the Company in the reports the Company files or submits under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required to be disclosed in the reports the Company files or submits under Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure, all in accordance with Exchange Act Rule 13a-15(e).
There were no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the quarter ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
The information contained in Note 11 to the condensed consolidated financial statements in Part I of this quarterly report is incorporated by reference herein.
We are not aware of any material changes from the risk factors found in Part I, Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 except as described below.
We are subject to a number of risks and uncertainties in connection with our Merger Agreement.
These risks and uncertainties include the following:
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the inability to complete the Merger due to the failure to obtain shareholder approval or failure to satisfy the other conditions to the completion of the Merger; |
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the risk that the Merger Agreement may be terminated under certain circumstances that require us to pay Parent a termination fee of $4.0 million; |
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the outcome of any legal proceedings instituted, or that may be instituted, against us and others related to the Merger Agreement; |
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risks that the proposed Merger disrupts our current operations or affects our ability to retain or recruit key employees; |
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the effect of the announcement or pendency of the Merger on our business relationships, operating results and business generally; |
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the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger; |
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risks related to the Merger diverting management’s or employees’ attention from ongoing business operations; and |
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risks that our stock price may decline significantly if the Merger is not completed. |
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures.
Not applicable.
Not applicable.
| 101* |
The following materials from Intricon Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (unaudited); (ii) Condensed Consolidated Statements of Operations (unaudited); (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited); (iv) Condensed Consolidated Statements of Equity (unaudited); (v) Condensed Consolidated Statements of Cash Flows (unaudited); and (vi) Notes to Condensed Consolidated Financial Statements (unaudited). |
| 104* |
The cover page from the Company’s Quarterly Report on Form 10-Q as of and for the quarter ended March 31, 2022, formatted in Inline XBRL (included as Exhibit 101). |
| * |
Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| INTRICON CORPORATION |
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| (Registrant) |
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| Date: May 9, 2022 |
By: |
/s/ Scott Longval |
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| Scott Longval |
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| President and Chief Executive Officer (principal executive officer) |
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| Date: May 9, 2022 |
By: |
/s/ Annalee Lutgen |
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| Annalee Lutgen |
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| Interim Chief Financial Officer, Treasurer and Director of Finance (principal financial officer) |